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Royal Bank of Canada (NYSE:RY)
Q4 2018 Earnings Conference Call
Nov. 28, 2018 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to RBC's conference call for the fourth-quarter 2018 financial results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Dave Mun, head of investor relations. Please go ahead, Mr.

Mun.

Dave Mun -- Head of Investor Relations

Thanks, and good morning. Speaking today will be Dave McKay, president and chief executive officer; Rod Bolger, chief financial officer; and Graeme Hepworth, chief risk officer, then we'll open the call for questions. [Operator instructions] We also have with us in the room Neil McLaughlin, group head of Personal & Commercial Banking; Doug Guzman, group head, Wealth Management & Insurance; and Doug McGregor, group head, Capital Markets and Investor & Treasury Services. 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. With that, I'll turn it over to Dave.

Dave McKay -- President and Chief Executive Officer

Thanks, Dave, and good morning, everyone, and thank you for joining us in the call. This morning, we reported earnings of over $3.2 billion, wrapping up a successful year where we met or exceeded all of our medium-term financial objectives. In 2018, we delivered record revenue of $43 billion and earned over $12 billion for the first time in our history. We generated a premium return on equity of 17.6% while maintaining strong capital ratios and one of the highest debt ratings for banks globally.

We deployed capital across all of our key priorities to support our plans. And we repurchased $1.5 billion of shares and increased our dividend by 8%. We ended the year with a CET1 ratio of 11.5% or 11.3% on a pro forma basis after adjusting for expected regulatory changes in Q1. We are well-positioned to continue funding growth opportunities and to return capital to our shareholders, and Rod will touch on this shortly.

With respect to credit, our performance was strong and we maintained a consistent approach to lending through the cycle, which Graeme will expand on. While increased protectionism and geopolitical risks created market uncertainty throughout the year, our results did benefit from rising interest rates, GDP growth, a benign credit environment and U.S. tax reform. We took advantage of the strong macroeconomic environment to add over 1,000 front-line staff in Canada and the U.S.

and to invest in technology to strengthen our leading position. As you've heard me say before, this is a period of secular change for the industry and we believe our investments are building capabilities that will significantly differentiate us and enable us to deliver even more value for our clients. For example, our Borealis AI team has grown to over 60 Ph.D.-level researchers across five Canadian research centers. They are enhancing our business with new ideas -- excuse me, just going to take some water here.

Earlier this year, we introduced RBC Ventures to move beyond banking with creative solutions for Canadians. Through Ventures, we're solving common problems, including creating a personal home ecosystem with Get Digs and MoveSnap. In 2018, we acquired 300,000 new Canadian banking clients on top of 350,000 registered RBC Ventures users. With the momentum we've built, I'm confident that we'll achieve our planned growth target of adding 2.5 million customers in 2023.

More broadly, we remain focused on evolving mobile banking as our clients' digital engagement continues to hit record highs. Today, we have over 6.5 million digital users in Canadian Banking alone and our mobile banking user base is up 17% year over year. We also launched a redesign of our mobile app with a significant uplift in capability to align with our clients' increased usage. When combined, the scale of our data, technology, leadership and our talent will continue to differentiate us with our clients.

Turning to our business performance, Canadian Banking had a record year. We earned over $5 billion in 2018. We did this by expanding market share in areas, such as personal core deposits, credit cards and business lending and also by improving our efficiency ratio.  Our nine million personal banking clients' accounts generate over 2.5 billion transactions per year, which drives $350 billion in total purchase volumes, and we expect this to grow. As one of the lowest-cost providers in the country, we can leverage our costs and investment scale to create client-leading solutions.

For example, in the coming months, you will hear more about RBC InvestEase, our new robo-advisor platform. In credit cards, our partnerships and engaged membership base drove an 11% increase in purchase volume this year. And our West -- RBC-WestJet co-brand credit card showed strong year-over-year growth, with purchase volumes up 38% and cardholders up 26%. Along with the success of our Avion card, our momentum positions us well to become the largest card issuer by balances and reward points in Canada in 2019.

This year, we added 150 commercial account managers to expand our expertise while leveraging our data advantage to provide more insights for business clients. Our commercial lending portfolio was up 13%, with broad-based growth in our client base across sectors, including technology, real estate, agriculture and manufacturing. With business investments lagging GDP growth and interest rates remaining low, we expect commercial growth to remain robust. Turning to Wealth Management, we generated revenue of $11 billion this year, and for the first time, delivered earnings of over $2 billion.

Wealth Management Canada had a record year in terms of assets under care, revenue and earnings, widening our market share lead in each of these categories, as well as widening our leading share of industry investment advisors. We are the destination of choice for the industry's best IAs, and we are taking advantage of that by consistently hiring top contributors from outside RBC. In Global Asset Management, we captured over 40% of total Canadian retail net sales this year in an environment of industrywide net redemptions. Our market-leading performance also sets us apart, with close to 80% of AUM outperforming the benchmark on a three-year basis.

And we believe the diversity of our portfolio and the quality of our advice across Wealth Management are strengths in these volatile markets. These strengths will help us grow market share in 2019. Our U.S. Wealth Management business has also been growing.

This year, its contribution to consolidated pre-tax cash earnings surpassed USD 1 billion. And in Canadian dollars, our after-tax cash earnings was over $1 billion. We expanded our footprint in the U.S., adding new offices in Boston, Washington and New York, while adding teams in our home markets in California and Minnesota. We also added over 130 experienced financial advisors and 440 new colleagues at City National this year.

With our expanded jumbo mortgage platform and our new U.S. credit card suite, we expect our momentum in the U.S. will continue. As you know, Russell Goldsmith will transition from his current responsibilities as CEO of City National to become its chairman.

The business has performed exceptionally well under Russell's leadership, and with the addition of Kelly Coffey as CEO, will add to our success at City National. Her experience in leading the U.S. private banking unit at one of the largest banks in the world will be a great asset as we focus on growth in our second home market. For all of our colleagues in California, our thoughts are with those affected by the terrible wildfires.

We are helping our communities by donating to support local relief efforts and will continue to monitor the situation. Turning to Insurance, earnings were up 7% this year at $775 million. And notwithstanding higher-than-normal investment-related gains, we're expecting to grow this business in 2019. We continue to develop innovative solutions to serve our four million Insurance clients, including new partnerships to provide personalized services in our group benefits business.

I'm proud to say RBC Insurance was ranked highest in client satisfaction in 2018 by the J.D. Power home study. Investor & Treasury Services reported earnings of $741 million and ended the year with assets under administration reaching $4.3 trillion. We continue to invest heavily in client-focused technology through our advanced client experience initiative, and as a result, we experienced growth in client accounts and a record sales year in our asset services business.

We retained key clients and have a strong client pipeline which bodes well for 2019. Capital Markets had a record year with net income of $2.8 billion, driven by revenue of over $8 billion despite market uncertainty. In Corporate & Investment Banking, we continued to build on our momentum with clients, adding about 20 senior managing directors to our M&A and ECM coverage teams outside of Canada. Given our rank among the largest global investment banks by fees, we are well-positioned to continue winning new mandates with large investment-grade companies, such as T-Mobile and Walt Disney.

In Global Markets, our fixed income business produced strong results despite broad underperformance across the industry. In equities trading, we delivered our second-best year with strong performance from our equity derivatives business, which recently executed one of its largest transactions to date. Overall, I'm proud of what we accomplished in 2018 and I'm very excited about our momentum into 2019. As we head into our 150th year as a chartered bank, our commitment to build long-term relationships is as strong as ever.

And while there are always questions as to where we are in the cycle, we believe our focused growth strategy will be well supported by a solid economic backdrop. Economic prospects in North America remains solid with strong employment, steady interest rate increases and GDP growth expectations hovering around 2% in the medium term. Recent trade agreements, such as the USMCA and the Trans Pacific Partnership, will provide more avenues for Canadian businesses to drive future growth.  And we still expect to benefit from healthy consumer spending in 2019, albeit at a more moderate pace. Together, our scale, innovation and talent are our competitive advantage.

We're creating differentiated value to help more clients succeed. This positions us to outperform the industry with consistent growth and premium returns for our shareholders. I want to take this opportunity to thank all 84,000 colleagues across the bank for their continued dedication to our clients. We are proud to have been named to both the Bloomberg Gender-Equality Index and the Thomson Reuters Top 100 Diversity & Inclusion Index in 2018.

We strongly believe in our responsibility to advocate for diversity and inclusion in business and in society as a whole. This is one of the reasons why 95% of our employees told us that they're proud to be part of RBC this year. With our leadership, I remain confident in our ability to meet our medium-term financial objectives, as well as the targets set out in our last two Investor Days. And with that, I'll turn the call over to Rod.

Rod Bolger -- Chief Financial Officer

Thanks, Dave, and good morning.  I'll focus my comments on the fourth quarter and trends that we're seeing leading into 2019. Starting on Slide 7, we ended the year with record quarterly earnings of $3.25 billion, up 15% from last year. Diluted EPS of $2.20 was up 17%. And earnings grew by double digits in four of our five segments.

Revenue growth benefited from client volume growth and higher interest rates from last year. Expenses were up 5% year-over-year due to higher variable compensation due to strong performance, as well as continued investments in technology and talent to grow our business and create value for our clients. Our PCL ratio this quarter was 23 basis points, including three basis points for PCL in performing loans known as Stage 1 or Stage 2. Overall for 2018, although there have been some ins and outs, since adoption of IFRS 9, our allowances have grown in line with portfolio growth.

Our effective tax rate was 17.5%, down from 19.9% a year ago, benefiting from the impact of U.S. Tax Reform and some tax benefits. Given our anticipated earnings mix, we expect our effective tax rate to be in the 20% to 22% range in 2019. Turning to Slide 8, our CET1 ratio was 11.5%, up 40 basis points from last quarter.

The increase reflected strong capital generation as well as some model parameter changes, even as we continued to invest and grow RWA in each of our businesses. We allowed our CET1 ratio to drift up to absorb upcoming regulatory changes in Q1, which we expect will reduce our CET1 ratio in the 10 to 15 basis point range. Going forward, we expect that our CET1 ratio will remain slightly above our typical 10.5% to 11% target range to provide us more flexibility in 2019 to leverage opportunities for growth across our businesses. Moving to our business segments on Slide 9, Personal & Commercial Banking reported earnings of $1.5 billion.

Our Canadian Banking net income was up 8% year over year. And our Canadian Banking pre-tax pre-provision earnings were up 12% year over year as we continued to build Stage 1 and Stage 2 PCL in this business. Our strong revenue growth of 10% in Canadian Banking was driven by improved spreads, reflecting rate hikes, as well as solid volume growth, particularly in business lending and cards, as we gain market share in both businesses without increasing our risk appetite. We also saw higher average mutual fund AUA balances.

While housing prices remain stretched in key markets, price appreciation stabilized nationally with very modest price increases in Toronto and Vancouver. As such, residential mortgage growth was 5% year over year. Looking forward, we expect mortgage growth to be in the range of 3% to 5% for 2019. Net interest margin of 2.77% increased 12 basis points year over year and three basis points quarter over quarter, driven by higher deposit spreads.

In 2019, we expect our NIM to improve by approximately one to two basis points per quarter based on the current rate environment and competitive pricing pressures, with some volatility between quarters. And as Dave mentioned, we continue to invest in front-line staff and client solutions amid favorable macroeconomic condition. This led to expense growth of 7% year over year. For the full year, our reported operating leverage for Canadian Banking was 1.5%.

However, excluding last year's gain on sale of Moneris, operating leverage was strong at 3.1%. Looking forward to 2019, we expect full-year operating leverage to be in the 2% to 3% range, subject to some movement between quarters. Turning to Slide 10, wealth management earnings of $553 million were up 13%, driven by strong earnings in all of our businesses. Global Asset Management revenues were up 1% as higher AUM from net sales was mostly offset by lower seed capital fair value marks, largely reflecting soft market performance of emerging market securities.

Excluding these seed capital marks, GAM revenues were up 7%. Canadian Wealth Management revenue was up 11% from last year, driven by growth in fee-based assets due to net sales and continued momentum from strategic hiring of investment advisors. For the full year, we had strong operating leverage of 2.2% in our non-U.S. wealth business.

This led to 140 basis point improvement in our non-U.S. wealth efficiency ratio. We have strong momentum into 2019 and current macroeconomic indicators remain positive. However, we expect the recent market volatility to provide some downward pressure on assets in the first quarter, and we will focus on cost management levers to adjust to the market environment.

In U.S. Wealth Management including City National, revenue was up 4% year over year in U.S. dollars. Loan growth at City National continues to be strong at 13% year over year and significantly above U.S.

industry growth. Loan growth was driven by expansion in new and existing markets and the addition of 125 more client-facing colleagues compared to last year. In addition, referrals from RBC's U.S. businesses, both Capital Markets and U.S.

Wealth Management as well as cross-border from Canada, have accelerated with close to $1 billion in loans booked this past year and exceeding $2 billion since the acquisition closed three years ago. For the full-year 2019, we expect good growth in core earnings in U.S. Wealth Management, including City National, to continue, driven by double-digit loan growth. Q1, however, may be a difficult comparable, given last year's record results, including a favorable accounting adjustment.

However, we do expect deposit growth may remain slow, in line with the industry, due to rising commercial deposit betas. Moving to Insurance on Slide 11, net income of $318 million was up 20% from last year, reflecting the positive impact of contract renegotiations in our life retrocession business and high favorable investment-related experience. This was partially offset by lower favorable annual actuarial assumption updates. Our outlook for earnings growth remains positive, albeit at a lower rate than past years, given the higher-than-normal level of investment-related gains in 2018.

On Slide 12, Investor & Treasury Services earnings were unchanged from a year ago. We saw improved deposit margins and increased revenue from asset service business. However, this was offset by lower funding and liquidity revenue and our technology spend remained high. Looking back to add new clients from our strong pipeline and deepen its existing relationships.

We will also continue to execute on our strategic technology initiatives to enhance the client experience as we scale our business to support our growth ambitions. Slide 13, earnings in Capital Markets of $666 million were up 14% year over year, our highest-ever fourth quarter. In global markets, we benefited from strong equity trading in North America and equity origination in the U.S. In Corporate & Investment Banking, we saw higher advisory fees in Canada and Europe, as well as increased lending revenue in Europe and the U.S.

Looking forward to 2019, our investment banking pipeline remains strong. We expect moderate upward pressure on RWA as we phase in regulatory changes and we expect loan growth to moderate from double-digit loan growth that we saw in 2018. In conclusion, we are pleased with our performance against our financial objectives this year, as shown on Slide 14. Looking forward to Q1 '19, we expect to see some weakness year over year in our wealth and wholesale businesses, given the recent market volatility, as well as strong first quarter that we had earlier this year.

However, our above-average net sales and strong investment banking pipeline will position us well for growth throughout the year. We need to be vigilant in driving operational costs down as we want to be the lowest-cost provider of banking services in order to support our clients and grow in any environment. We fully expect to meet our medium-term objectives again in 2019, given our momentum and investments in sales staff and technologies for future growth. We expect to drive positive operating leverage across our businesses and will continue benefiting from interest rate hikes through the year.

In addition to those objectives, we've guided to several profitability and growth targets in past Investor Day as seen on this slide. Dave mentioned some of our progress earlier and we also improved efficiency ratios in our Canadian Banking and non-U.S. wealth management businesses, and we look forward to providing you these updates on an annual basis as well. And with that, I'll turn the call over to Graeme.

Graeme Hepworth -- Chief Risk Officer

Thank you, Rod, and good morning.  I'll start with some general comments before getting into our Q4 PCL performance.  As Dave mentioned, the macroeconomic environment on both sides of the border remains favorable. We continue to see unemployment rates near multi-decade lows, steady inflation and solid GDP growth in Canada and the United States. As well, the conclusion of the NAFTA negotiations in Q4 has helped remove a significant point of economic uncertainty across North America. Despite the positive baseline outlook, we do see elevated external risks.

Most notably, global trade tensions, rising interest rates and weakening oil prices present potential downside risks for our current macroeconomic outlook. As always, we are maintaining a prudent risk management approach and closely monitoring these developments. Overall, our PCL ratio continues to reflect the high credit quality of our portfolio, as seen on Slides 16 and 17. Total PCL for the year increased, mainly due to the reduction of IFRS 9 on November 1, 2017, as well as higher provisions in Personal & Commercial Banking.

This quarter, lower PCL in our loan portfolios was more than offset by higher PCL in securities. Increase in PCL in securities this quarter relates to writedowns following the restructuring of the Barbados government debt. In Personal & Commercial Banking, PCL on impaired loans was nearly flat to last quarter as lower PCL in our Caribbean banking lending portfolios was largely offset by higher PCL in our Canadian commercial lending, residential mortgage and personal lending portfolios. In wealth management, PCL on impaired loans increased to $7 million, mainly due to a greater amount of loans returning to performing status last quarter.

In capital markets, PCL on impaired loans increased to $15 million as we took provisions across several accounts this quarter compared to a higher level of recoveries last quarter. For the year, credit conditions have been stable with overall allowances on performing loans increasing in line with portfolio growth as expected. In Q4, we increased allowances for our performing loans to not only reflect portfolio growth in our Canadian Banking and Capital Markets portfolio, but also the heightened macroeconomic risks I referenced earlier. This was offset to some degree by a reduction in allowances in our Caribbean banking portfolio due to model and parameter updates, as well as better-than-expected performance in regions impacted by last year's hurricanes.

Turning to Slide 18, gross impaired loans reached a low of $2.2 billion this quarter, driven by loans returning to performing status, sale of loans, repayments and low new formations, mainly in our wholesale loan portfolio. Our gross impaired loan ratio of 37 basis points was down three basis points from last quarter. Let me now comment on key trends impacting certain of our portfolios. For our Canadian consumer portfolios, we continue to be mindful of the increasing risks associated with the rising rate environment, given the relatively high levels of consumer debt in Canada.

Regulatory changes, including OSFI's B20, have both served to bring better balance to the housing market, as well as ensuring consumers are more resilient to future interest rate increases. Overall, we continue to deploy strong and consistent underwriting standards to give us confidence that our portfolio will be resilient throughout the credit cycle. Lastly, on energy, I just wanted to provide a few comments on our oil and gas exposure in light of the recent decline in market prices. Credit trends in our oil and gas portfolio remained stable, with our exposure to this sector being low at 1% of our total loans outstanding.

Our exposure to Canadian heavy oil companies, those most impacted by the crude price differential, represents 0.2% of total loans outstanding. The majority of those companies are investment-grade with a breadth and sophistication of operations that helps mitigate the effects of this price differential. Overall, we are pleased with the credit performance of our portfolios for fiscal 2018. Looking forward to 2019, we expect PCL on impaired loans to be in the range of 20 to 25 basis points, consistent with the strong macroeconomic fundamentals we are currently experiencing.

We expect PCL in performing loans to grow in line with our portfolio growth or approximately three basis points assuming a stable macroeconomic environment. With the recent declines in both oil prices and equity markets, we would expect provisions on performing loans to exceed the run rate associated with portfolio growth in Q1 as it currently stands. However, as we have guided over the past years, Stage 1 and 2 will add more volatility with the potential for higher PCL in any given quarter. Over time, we would expect our total PCL ratio to move up as the economic cycle progresses and interest rates rise to more normal levels.

With that, operator, let's open the lines for question-and-answer.

Questions and Answers:

Operator

Thank you. We will now take questions from the telephone lines. [Operator instructions] The first question is from Ebrahim Poonawala from BoA Merrill Lynch, Bank of America. Please, go ahead.

Your line is open.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Yes, hi. So I had a question on City National in the U.S., Rod. I appreciate your comments around deposit betas rightsizing and pricing competition in the U.S. getting harder on deposits.

Having said that, I would think that given the overlay of RBC to the City National franchise and your national expansion in the U.S., you would have seen better deposit growth as you add new client relationships, enter new markets. Like, if you could help us understand in terms of why we are not seeing that and what that means as you think about the loan-to-deposit ratio at City National and the margin outlook.

Dave McKay -- President and Chief Executive Officer

Sure, thanks, Ebrahim. This is Dave. I'll start and then I'll ask Rod to jump in with additional color. So there's a number of dimensions.

And first and foremost, at the industry level you are seeing, particularly in the affluent and high net worth markets, a shift from bank deposits into other investments to seek yield. And as we expected and if you look at the results across the industry, you're seeing very similar trends of slower growth and asset shifts. So I think that is obviously one factor. The second factor is the business hasn't been as focused on deposits as it has been on the lending side.

I know the balance sheet has been long deposits for quite some time, and we've been leveraging those long deposits to grow our asset base, and you've seen us emphasize maybe margin at the expense of growth for some time. And I think we'll rebalance that a little bit going forward, so I think you can expect us to see a little bit more emphasis on deposits and growing deposits, and that's enhanced by the acquisition of capabilities like Exactuals, which is a payments capability in the entertainment industry that allows us to be a deposit taker as we feed those funds out to the various constituents through the payments system. So I think a number of initiatives going forward, maybe a little bit of a lack of focus, given our long deposit strategy; and our overall industry trend, as I said, of a shift in deposits, particularly on high net worth customers. So we feel good about the franchise going forward with the renewed focus.

And an expansion of our business into new markets, such as Washington and New York, we think, are also deposit-taking capabilities.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

That's helpful. And just tied to that, any of updated thoughts on additional U.S. M&A, particularly on the bank side? Or is that still unlikely?

Dave McKay -- President and Chief Executive Officer

No. Certainly, as we look at tuck-in geographic expansion of our existing model, we certainly are watching and looking at various enterprises that we think would be a cultural and business fit that would create shareholder value. And as I said before, we are looking at playbooks, but there's nothing imminent. And we have so much organic growth opportunity in front of us with the expansions in the markets I mentioned, Boston, Washington and New York, Minneapolis.

In foot-printing, California, we're still a small market share player. We've got a lot of opportunity to grow organically. So if it fits and it's the right price that can drive a shareholder return, we'll consider it. But right now, we're focused on organic growth in the marketplace and assets are still pretty expensive.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you very much.

Operator

Thank you. The next question is from Meny Grauman from Cormark Securities. Please, go ahead.

Meny Grauman -- Cormark Securities -- Analyst

Hi, good morning. First question is just following up somewhat on the M&A question. I think, Rod, you talked about keeping capital levels elevated to take advantage of growth opportunities. I'm wondering if you can just expand on that.

Is that primarily organic growth opportunities? Or were you referring to M&A?

Rod Bolger -- Chief Financial Officer

No. It was primarily organic growth opportunities. And keep our optionality, if the economy does take a downturn, which we don't expect, which we expect to continue to grow. But it's basically giving us discretion at this point.

And if there was an M&A that met the criteria that Dave outlined, then we'd also be well-positioned for that. But that's not the primary driver.

Dave McKay -- President and Chief Executive Officer

This is Dave. I'll just take that. We continue to target 10.5% as our target ratio. We view anything above that as discretionary capital.

And I think we've proven that we're disciplined allocators of capital and we will make the right choices with that. And that capital ratio at 11.5% this quarter gives us flexibility to do different things: Grow organically, ahead of -- if there's any cycle coming, that flexibility and returning capital to shareholders we talked about before. So it's nice to have that flexibility. But our capital targets and strategy hasn't changed.

Meny Grauman -- Cormark Securities -- Analyst

OK. And just in terms of understanding the current oil price environment and how that is likely to impact the PCL ratio going forward, I think it would be helpful just to understand how formulaic this all is. Like, prices have dropped quite dramatically, so next quarter, is it just simply updating those prices? And just by definition, you're going to have to add provisions because of that? Or how much discretion do you have in all of this?

Graeme Hepworth -- Chief Risk Officer

Yes, this is Graeme. I'll take that. As you saw at our disclosure there now, we run a number of scenarios. And our pessimistic scenarios already do account, to some degree, a decline in oil and gas prices.

And so our current PCL and the current provisions we have against our performing loan portfolio would already, to some degree, account for the oil and gas type of concerns. Now as that moves into more of a base case or parts of those downsides move more into our base case, we would expect that to add some incremental losses, as I alluded to in my speech. But we think that will be marginal and that would show up more in Q1. So I mean, a lot of this has happened over the last few weeks, so it wasn't fully reflected in the Q4 numbers.

But certainly, because of the way we approach it with the multiple scenarios, it is already at this point partially baked in.

Meny Grauman -- Cormark Securities -- Analyst

Thank you.

Operator

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

Mario Mendonca -- TD Securities -- Analyst

State business specifically. There's been fairly meaningful growth there in Canada, seven...

Dave McKay -- President and Chief Executive Officer

Could you restart? We didn't catch the first part of your sentence.

Mario Mendonca -- TD Securities -- Analyst

Sure. I was referring to commercial real estate growth or commercial real estate generally. There's something like $51.6 billion in commercial real estate construction lending, $36 billion of that is in Canada, and the growth there has been fairly meaningful. Now I'm really -- I'm going at it from this perspective simply because, in historical cycles, commercial real estate almost always accounts for the lion's share of the increase in nonperforming loans when things do soften.

So maybe this is for Graeme. Is there some reason why it might be different this time? Because you seem to have a lot of confidence in the sector, given the kind of growth that you're layering on.

Neil McLaughlin -- Group Head of Personal & Commercial Banking

Mario, it's Neil. I'll start. In terms of development loans, it's actually a fairly small chunk of our overall commercial book. We actually see a lot more growth in our commercial mortgage book in terms of real estate.

And it's -- we've mentioned before, it's an asset class that's performed very well for us, and we like the risk. In terms of development loans, it actually hasn't grown, even on average, the average rate our commercial book has grown. We're starting to see projects get out of the ground, and our strategy has been to grow that with our best clients. And is predominantly in the Toronto market, in the Vancouver market.

And it's in the little under -- around a $3 billion portfolio for us. So we haven't really taken on new clients over the last one year and a half.

Mario Mendonca -- TD Securities -- Analyst

So just to be clear. Of the $36 billion or so in Canada, you'd say only 10% of that or so is construction, the rest would be commercial real estate -- or mortgages, rather?

Neil McLaughlin -- Group Head of Personal & Commercial Banking

In the retail portfolio, yes.

Graeme Hepworth -- Chief Risk Officer

Yes. I would just comment overall. I would say commercial real estate, I think that's -- your comment about the risk in so that -- I mean, our commercial real estate is a much more globally diversified portfolio than it's ever been. Certainly, the addition of City National adds more diversification there.

Capital Markets activity in that space is much more international in nature. And as Neil said, I think in all of that, the construction financing piece, which I would say has historically been the riskier piece, has not been the biggest source of growth. It's been much more of a shift into commercial mortgages, that's true with CNB as well. And so I think that's what gives us more comfort from a risk perspective as to why that growth has been very reasonable and hasn't really shifted our risk profile materially.

Certainly, commercial real estate is a concentration, and so we constantly are stress-testing that and making sure that, that works inside of our risk appetite. And I think today, we continue to be supportive of that growth.

Mario Mendonca -- TD Securities -- Analyst

OK. So just tying that in then from a credit perspective. You're guiding to -- or you offered 20 to 25 basis points, then we'll add three basis points to that for the performing. So you're talking about a very good credit environment outlook for 2019...

Graeme Hepworth -- Chief Risk Officer

Just to be clear, the three basis points is additive to the 20 to 25.

Mario Mendonca -- TD Securities -- Analyst

Yes. That's what I was -- sorry, I understood it to be additive. Now what I want to ask is, when you look at your commercial, like, commercial and wholesale, so everything non-consumer. There were losses there about $147 million in the quarter -- or sorry, in the year, PCLs, on a balance of approaching $200 billion.

So we're looking at something like seven to eight basis points of credit loss in your commercial and wholesale. In offering that outlook for 2019, are you essentially saying then that losses in commercial could very well remain in the sort of eight to 10 basis points in 2019?

Graeme Hepworth -- Chief Risk Officer

Yes. I think again, for differentiating, certainly in the near term, we expect a relatively benign credit environment. And so wholesale certainly always provides the most significant point of uncertainty in any given quarter. A handful of loans can change that.

But I think overall in the near term, we continue to expect a fairly consistent trend on the commercial side. I think as I said in my comments, the further that we look out there, I think we do expect that to increase gradually over time. And certainly, uncertainty gets larger the further you look out. But in the near term, the fundamentals continue to be strong and fairly supportive there.

Mario Mendonca -- TD Securities -- Analyst

So I wouldn't be overstating it to say your guidance is consistent with, call it, 10 basis points of credit loss in commercial and wholesale. That wouldn't -- I wouldn't be overstating matters in saying that.

Graeme Hepworth -- Chief Risk Officer

Again, I'm focused on the overall there. We'll have to circle back to you on that one.

Dave McKay -- President and Chief Executive Officer

We'll circle on that back for you. Why don't we move on to the next question and requeue Mario, if you like.

Mario Mendonca -- TD Securities -- Analyst

I'm done. Thanks.

Operator

Thank you. The next question is from John Aiken from Barclays. Please, go ahead.

John Aiken -- Barclays -- Analyst

Good morning. Certainly not complaining with the operating leverage that was generated within the Canadian P&C., but it does look like the efficiency ratio has inflated as we progress through the year. And when I look back, the similar situation happened in 2017 as well. Is this something where, basically, you take a more conservative stance in the beginning of the year.

And then as revenues unfold, you actually then are a little bit more active on your project spend? Or am I misreading exactly what's happening here, and this is just an ongoing evolution that will occur?

Neil McLaughlin -- Group Head of Personal & Commercial Banking

Thanks, John. It's Neil. No, in terms of our efficiency ratio, there is some seasonality to the expense line. So we do -- this is kind of a trend we see each year, when we do have more expenses that come into Q4.

I think in terms of the appetite, in terms of spending -- I mean, obviously, we're looking on what's our revenue growth, and we take that into consideration as we really manage our costs. But I would -- we haven't shifted at all from our goals around sub 40% efficiency ratio and would really chalk it up to seasonality.

John Aiken -- Barclays -- Analyst

OK. So then I guess, Neil, to paraphrase. Given the fact that the fourth quarter and the third-quarter efficiency ratios were above the annual, and yet, you're trending down toward the sub-40%, can we assume then that we might see another step-function in Q1 on some moderation to offset the latter part of the year, even if it's just the fourth quarter?

Neil McLaughlin -- Group Head of Personal & Commercial Banking

Yes, I think that's fair.

John Aiken -- Barclays -- Analyst

Great. Thank you very much. I'll requeue.

Neil McLaughlin -- Group Head of Personal & Commercial Banking

Thank you.

Operator

Thank you. The next question is from Steve Theriault from Eight Capital. Please, go ahead.

Steve Theriault -- Eight Capital -- Analyst

Thanks. A couple for me. I just want to go back to the U.S. margin for a second.

Dave, you talked about having gotten margin maybe to some extent at the expense of growth and maybe flipping that script somewhat. And Rod, last quarter, you talked pretty constructively about the U.S. NIM. And we got a rate hike toward the end of September, I think it was.

And so the margin didn't move this quarter. So to me, that's a bit surprising despite what U.S. comps did. But maybe you could give us a sense, an idea, of what we should expect in terms of NIM upside in the event of future rate hikes and how that balances with deposit growth.

Rod Bolger -- Chief Financial Officer

Sure, I can take that. I mean, just be careful on a quarter-over-quarter basis. I mean, you even saw it in Canadian Banking, we were flat last quarter, up three basis points this quarter but up 12 basis points both quarters year over year. I think City National, you'll see continued upward trends.

Overall, we were up 40-something basis points year over year in Q4. With a couple of Fed increases being priced in by the market, two to three of them, you should expect five to 10 basis points of improvement per quarter. Next year, I would think there might be some volatility to that. One quarter might be below that, one quarter might be above that.

And certainly, the deposit betas that we talked about earlier will factor into that and may slow that growth rate down a bit, which you'd expect. As NIM gets higher, competition increases, and that's natural and consistent with past cycles.

Steve Theriault -- Eight Capital -- Analyst

OK, that's helpful. And then if I could for -- likely for Neil. Last quarter, you mentioned an increase in mortgage renewal rates as a positive driver. Are you seeing that hold consistently? Are you seeing more upside from renewal rates? They still -- I think you said -- are they still around the 92% range? And could that increment higher if rates continue to tick higher and renewals get a little trickier for customers?

Neil McLaughlin -- Group Head of Personal & Commercial Banking

Yes. The renewal rates are still in that zone. They've come off a little bit, but we're still in the 90% range. In terms of the outlook, it's a real focus for us.

Obviously, retaining those mortgages after we spend the cost to acquire them. I think we've probably seen most of the uplift in terms of -- we've talked in the past about the B20 impact. I think that's probably mostly baked in. But there's still -- we still feel very good about our renewal rates compared to our competition.

Steve Theriault -- Eight Capital -- Analyst

So if it's still in the low 90s, what would the renewal rate run rate have been, like, a year ago, two years ago, like, before B20 was implemented?

Neil McLaughlin -- Group Head of Personal & Commercial Banking

It would be in the 88%, 87% range.

Steve Theriault -- Eight Capital -- Analyst

Yes. OK. Thanks for that.

Operator

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please, go ahead.

Gabriel Dechaine -- National Bank Financial -- Analyst

Merci. My first question is for Doug, actually, on the Capital Markets outlook. Just kind of high-level here. Total trading revenues for the year were up a bit, but we're definitely seeing some weakness in FIC.

Advisory revenues were down a little bit versus 2017, kind of a wash with the trading. The loan growth, if I understand correctly, the loan growth that you got in this business is going to moderate a bit in the year ahead. You're not going to have the same tax uplift this year from the U.S. and PCLs will probably stay flat or so.

Just wondering, do you expect -- where do you expect the momentum next year? And how do you expect the business to grow relative to the bank's overall target?

Doug McGregor -- Group Head, Capital Markets and Investor & Treasury Services

Why don't I start with the tax? I mean, the tax uplift, I don't see any reason why that's going to change going forward. And so most of our revenues in the U.S. As you know, we have a lower tax rate there. And we have various investment structures in our portfolios that I think will persist.

So I think that the tax improvement isn't going to go away any time soon. In terms of the business, in the investment bank, I would say that Canada has been difficult. And to the extent that we see any improvement in that going forward, that will be quite helpful. I mean, there just has been very muted capital raising and M&A activity this year, and the situation in the oil patch has made financing more difficult.

So we're hopeful, some improvement going forward. But really, our focus is in Canada and Europe, where we're seeing significant gains. And Dave mentioned in his conversation that we've hired, I think, a dozen senior investment bankers in the U.S. over the last six months that are just coming on to the platform.

And we expect productivity improvements with them. Our brand is getting better there. And in terms of the loan book, we expect that we are going to see some leverage in terms of fee revenue from some of the loans we've put out this year. And Dave mentioned a couple of the large investment-grade underwritings that we have in our books right now that will generate significant fees.

I mean, we've got good momentum, we'll carry on.

Gabriel Dechaine -- National Bank Financial -- Analyst

And the trading? Did I miss that?

Doug McGregor -- Group Head, Capital Markets and Investor & Treasury Services

Yes, the trading. I mean, we're just -- I think we're just getting better and better on the equity side, frankly. And you're seeing a little bit of an uptick in BAR. But that's in our listed and over-the-counter options business and in our structured equity solutions business, and they're performing very nicely.

Fixed Income, I think rates globally has been a little bit difficult. We're really quite focused on credit. We've had a bit of a softer credit market in the last quarter, but I think we're confident that we'll grow that revenue as well.

Gabriel Dechaine -- National Bank Financial -- Analyst

And then my next question is for...

Dave Mun -- Head of Investor Relations

Gabriel, we ask you to requeue. So we go -- yes, thanks.

Gabriel Dechaine -- National Bank Financial -- Analyst

Yes, thanks.

Operator

Thank you. The next question is from Sumit Malhotra from Scotia Capital. Please, go ahead.

Sumit Malhotra -- Scotia Capital -- Analyst

Thanks. Good morning. I'm going to start with Graeme, please, and just to get a little bit more color on energy. First off, on your slide in the presentation, Slide 21, you gave us a breakdown of how much of the Canadian heavy oil portfolio is investment-grade versus non-investment grade.

Do you have that number on a total E&P basis? Because I wanted to compare it to where you were a couple of years ago when we were talking about this issue.

Graeme Hepworth -- Chief Risk Officer

I don't know if I have the number -- maybe I'll have to come back to you on that number. We just...

Sumit Malhotra -- Scotia Capital -- Analyst

Has it changed materially, in your view, from where we were in 2015, 2016? Or we can come back it, if you want.

Graeme Hepworth -- Chief Risk Officer

Yes. Let me come back to you on that. I mean, I just want to make sure I have the right numbers for you.

Sumit Malhotra -- Scotia Capital -- Analyst

OK. And the way I'd -- I guess, the next part of this and thinking about how provisioning changes under IFRS 9. So when we look back at Royal's credit performance for the energy book in that period, on the producer portfolio specifically, you ended up taking in '15 and '16 something like $350 million of provisions, 5% cumulative. Under IFRS 9, do we see that very quickly and upfront as you adjust expectations for what happens in Stage 1 and Stage 2? Or has there been enough strengthening of balance sheets in the oil patch that you don't think the level of provision required is going to be nearly to that level?

Graeme Hepworth -- Chief Risk Officer

Yes. I mean, let's go through the different part there, and just to tie into my remarks earlier. Like, as we showed in our disclosure here, like, the direct exposure to the kind of acute levels we're seeing in the Western Canadian select prices is a pretty small, pretty manageable exposure, largely investment-grade. So we don't see that as a real acute concern at this point.

We are seeing overall price levels down, oil and gas. Although I would say that's not anywhere near as acute as we saw in 2016. Additionally, our book is quite a bit smaller than it was in 2016, and I would say it's arguably of better quality. And so when I say better quality, we have seen our clients de-risking significantly, borrowing bases that, I think, were very effective through the last downturn.

I think as everything become more robust. So I think we head into this in a much better manner. And that does lead in to kind of the IFRS 9 part of it. And as you said, I think historically, that would've been -- we wouldn't have seen the losses accrue until we saw the impairments.

Now those do get pulled forward in the IFRS 9 world. So the mix of our book, the quality that's reflected in our ratings does translate through into our IFRS 9 models. As I said earlier, we've -- so we've already printed in for that in part. We've put it in in part because we do look at multiple scenarios there.

We do weight those different scenarios. And a couple of scenarios do consider decreases in oil and gas prices. As that shifts to our -- to at least, the kind of -- the commodity pricing shifts into our baseline, we would see some incremental. And that does pick up also the indirect side, like our consumer exposure and commercial exposure we would see in Alberta.

So that's why I said earlier, yes, it will come in through Stage 1 and 2 initially and then translate over to Stage 3 through time.

Sumit Malhotra -- Scotia Capital -- Analyst

That's very helpful. Thanks for that color.

Operator

Thank you. The next question is from Robert Sedran from CIBC Capital Markets. Please, go ahead.

Robert Sedran -- CIBC Capital Markets -- Analyst

Hi, good morning. Wanted to ask about the insurance business. So I guess first, Rod, the positive impact of life retrocession contract negotiations, that sounds like a nonrecurring kind of benefit. Is that the largest mover this quarter, and am I correct?

Doug Guzman -- Group Head, Wealth Management and Insurance

It's Doug Guzman on, I'll take that. So there's -- as you know, there's a number of moving pieces in the business. There's this quarter, the life retro. There's every Q4, the actuarial adjustments.

There's the investment-related gains, which feature this year as well as longevity reinsurance or the annuities. The life retro, this is obviously where we take risk of mortality off of primary insurers. That's been uneconomic for the industry for a period. And so this year, we and many others, we have the ability to reprice that.

And that creates a release of reserves this quarter -- or this year. And then what it does is restores our run rate profitability to the business for next year. So I wouldn't anticipate that to fall off materially year to year. More importantly, what I encourage you to do this focus on the whole segment.

Because with those big pieces that move around from quarter to quarter and year to year, I think both Dave and Rod said we'd anticipate to grow the business from here. Investments were a positive this year and life retro was a positive this year, which might be lower next year. But our annuities offer opportunity, we believe; we believe our investment boat, which is extremely conservatively set up with kind of 2% to 3% non-fixed income compared to much higher for others offer continuing opportunity to release reserves in the core business. And claims was a little weaker than we'd expect this year.

So I think as you wrap the whole thing up, we expect to grow from here. But of the two that are cited in the public disclosure, the life retro piece was a smaller positive than was the investment activity.

Robert Sedran -- CIBC Capital Markets -- Analyst

That's actually kind of where I wanted to go because the slide every quarter seems to reference the volatile items that sort of explain the most volatile business that you guys seem to have. And you talk about full year growth and there's less on the slide, there's often less in the disclosure, but where that growth is going to come from? So is this just about making the operation better and tighter? Or is it actually about top line growth and new business being added to the mix?

Doug Guzman -- Group Head, Wealth Management and Insurance

It's both, right? So the -- so first of all, the investments out of the portfolio is part of the business. But we've talked about, in home and auto, an ability to serve more clients with a broader product range. We believe that's an opportunity over time. Disability claims throughout the year, for many, have been a little weaker than we thought.

That should regress to the mean. We're taking action to get people back to work, so that's a core operational business, if you will. Credit there is slow growth. That's a client-facing business, obviously.

Slow growth. Isn't helped by digital distribution, but we expect that to show growth over a year. And then if you start with a conservative posture on your investment portfolio, and each fourth quarter, we have tended to show you releases on the actuarial assumptions, which would suggest that the reserving is not aggressive to begin with. You should expect to see improvements kind of with the passage of time on both those investments and actuarial adjustments, line items, in addition to the core business growth.

I mean, I guess, just one other thought. The release of actuarial -- reserve release or reserve actuarial adjustments, in essence, is the release of profitability, of business that has been written in the past, right? Because you're adjusting your assumptions for experience. And so view it not as anomalous or separated from the business, but view it as the delivery of profit that's previously been -- product that's previously been written.

Dave McKay -- President and Chief Executive Officer

And we do have an ability to go a little beyond 9%, stated on the Q.

Rod Bolger -- Chief Financial Officer

Yes, and Graeme.

Graeme Hepworth -- Chief Risk Officer

Yes, maybe I'll just jump in. I just wanted to follow-up on Sumit's question there. I just -- I was looking up some of the details there on the investment-grade -- on investment-grade mix. So again, caveat it with we just don't think, kind of in aggregate, we're nearly at the same severity as we were in 2016.

The investment-grade, non-investment-grade mix for our energy book is about the same as it was three years ago. It is a smaller book, though, at the same time.

Operator

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please, go ahead.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Thanks. Just -- Graeme, just to confirm, I think a couple of years ago, you were about 80% to 85% non-investment grade. Is that the ratio you're talking about?

Graeme Hepworth -- Chief Risk Officer

Non-investment grade? No.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Yes. So can you tell us what the mix is then?

Graeme Hepworth -- Chief Risk Officer

Well, for overall energy book, it's about 50/50 investment-grade, non-investment grade. Yes. And as I said earlier, I mean, the investment-grade side tends to be your larger, more diversified integrated operators. And the non-investment-grade side is tends to be well secured and borrowing base structures as we referred to earlier.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Sorry, I just -- I must have written it down wrong because it felt like it was a larger proportion, non-investment grade, a couple of years ago. But I just wanted to get from Neil. Neil, I think -- or Rod, for that matter, you were talking about one to two basis points, let's say -- or four to eight basis points, I guess, over the full year; one to two basis points per quarter, NIM expansion in Canada. And I wonder if you could just talk us through where you see that expansion coming from.

What would be the drivers of that?

Rod Bolger -- Chief Financial Officer

Well, most -- it's Rod. I'll start and Neil can jump in. But I mean, most of it is structurally inherent in our book right now because from the past, Bank of Canada increases that have happened because we've gotten, the deposit beta is kind of baked into the book. And now our mortgage book is repricing.

So it's not as dependent on future rate increases as you might otherwise expect. We've talked in the past, we showed at Investor Day, that we get a nice, even flow over five years from interest rate increases. And that's what most of that would flow from. So if you look at it from an FTP standpoint, it's higher deposit spreads.

If you look at it from an economic standpoint, it is higher mortgage rates accompanied by deposit beta.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

That's perfect. Thank you.

Operator

Thank you. Your next question is from Scott Chan from Canaccord Genuity. Please, go ahead.

Scott Chan -- Canaccord Genuity -- Analyst

Hi, good morning. Doug, just going back to the insurance side. You talked about the growth in the investment portfolio and majority being fixed income. What's the other 2% to 3% makeup of that portfolio right now?

Doug McGregor -- Group Head, Capital Markets and Investor & Treasury Services

Yes. So it's not necessarily the growth of the portfolio or the positioning of the portfolio. So the rest would be fixed income, which is obviously a natural match to the long-duration liabilities on the insurance side.

Scott Chan -- Canaccord Genuity -- Analyst

OK. And the other 2% to 3% is just, I guess, a whole gamut of stuff? It's not...

Doug McGregor -- Group Head, Capital Markets and Investor & Treasury Services

Yes. I mean, equities, there's a little bit of real estate, there's U.S. equities which offer some diversification. But the point really is that, that proportion is very small relative to others in the industry.

Scott Chan -- Canaccord Genuity -- Analyst

Agreed. And maybe just turning over to the Canadian side. Appreciate the guidance on the resi growth, but if you look at the other categories like HELOCs and other personal, which I think is mostly investment loans, was kind of flat throughout '18. What do you see within those buckets heading into '19 in the face of deleveraging and potentially higher rates?

Neil McLaughlin -- Group Head of Personal & Commercial Banking

Thanks for the question, it's Neil. Yes, we've seen some -- we've actually had our HELOC product shrinking as we see some flow of clients at renewal looking to lock that in, in our residential mortgage. That's starting to slow. So we're -- the outlook in there, we've been sort of negative 2%.

Probably start to see that come back to flat and then some slow growth over time. In terms of personal lending, there's really two segments there, it's our auto book and then it's our direct consumer loan, the loans that we originate through our branches. Our auto book is up about 6%, competitive, but we've been doing a lot of work there to really provide growth. And that's something we feel is sustainable.

In terms of the consumer lending, we've commented in the past, we have by far the largest market share, have -- I think really making sure we're balancing opportunity to lend more with making sure we feel good about the risk and we're not over-levering our customers. We've started to move back to -- starting to see growth again in terms of month over month in that book. Right now, we're about flat, and we'll start to see low single-digit growth as an outlook for 2019.

Dave Mun -- Head of Investor Relations

We'll take another call. I know we're a bit over, but there's a few people in the queue that haven't had a chance, so.

Operator

Perfect. Thank you. Next question from Doug Young from Desjardins. Please, go ahead.

Doug Young -- Desjardins Capital Markets -- Analyst

Good morning. I'll try to do this quick. Just back to City National, I mean, you covered off the NIMs nicely and the deposits and the loans. But when I look at the quarter sequentially, it looked like there was a bit a -- or quite a decent pull back in earning sequentially.

And I know year over year, it looks quite good still. I think there was some tax benefits in the quarter. So -- and I know you've hired some additional front-line staff. Is there anything else that's dragging down the profitability in the expense side that could continue into next year? How should we think of -- because the tax benefits are in there, but the year-over-year comparison goes away next year.

Is there anything else that could drag the evolution of earnings at City National as we think out over the next year?

Dave McKay -- President and Chief Executive Officer

I think as you look at this business, and have seen in the comments I made and Rod made are certainly around investing for medium- and longer-term growth. We're opening new centers, we're hiring private bankers, we're hiring commercial bankers, we're ramping up our back office capability on the jumbo mortgage side, which was a big of part of our acquisition strategy. So every business goes through step ups in investment to create future growth. And I think we're able, for the first couple of years, to run off the existing platform.

And now there's been a bit of a step-up, as I've talked about over the last year, to create the capacity for another growth spurt and acquisition spurt. So you're seeing a little bit of that kind of roll into Q4 as we've hired, as you heard, hundreds of front-line staff to create opportunities in New York, in Boston, in Washington and in markets. So there's a bit of a step-up there that it takes a private banker a good year; commercial banker, a good year to two years to get going. So we're into our third year now of doing this.

So we're going to start to see that traction. So I think it's a little bit of that for sure. Well, there's a bit of the business trying to adjust to higher regulatory expectations with CCAR in the U.S. versus what they've had before as we've absorbed that cost increase.

We call it a dis-synergy in the acquisition. So I think what you're looking at predominately now is the posturing for growth. And we're very excited about the run rate going forward. And us Rod referenced, it'll be supported by some margin increase from, we expect, anywhere from two to four rate increases coming at us in the United States, and the business is well-positioned to do that.

So we sense a very strong market with tailwinds to go forward -- going forward to invest in. And I think that's what you're reflecting in Q4.

Doug Young -- Desjardins Capital Markets -- Analyst

And so it doesn't feel like you expect there to be a lag in earnings growth next year, and then to pick up again in 2020 as some of these individuals and regions get up to speed. It sounds like you think it's -- you're set up well to continue the momentum. Is that a fair characterization?

Dave McKay -- President and Chief Executive Officer

Yes. I don't expect us to do 47% as you normalize for the tax increases. We're back to the original discussion we had when we acquired City National, double-digit growth. And it could be lumpy quarter to quarter as we talked about.

But would look at a year, we have 15% loan growth and we're going to try to do better on the deposit side. We have margin increases. We've invested already and stepping up our cost base. So we're going to -- hopefully, that can hold and will create solid earnings growth as we talked about.

Dave Mun -- Head of Investor Relations

We have time for maybe more, and that will be it.

Operator

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

Mario Mendonca -- TD Securities -- Analyst

My questions are asked and answered.

Dave McKay -- President and Chief Executive Officer

OK. One more.

Dave Mun -- Head of Investor Relations

OK. We'll take one more, then. There's one more in the queue, I think.

Operator

Thank you. It is from -- the next question, Nigel D'Souza from Veritas Investment. Please, go ahead.

Nigel DSouza -- Veritas Investment -- Analyst

Thank you. Good morning. I wanted to circle back on your residential mortgage growth outlook for F '19, that 3% to 5% range that you mentioned. And at the high end of the range, that's a marginal step down from F '18.

So where do you expect to be in that range, at the lower end or the higher end? And what are the underlying assumptions for real estate? Are you expecting both prices and volumes to move higher in 2019?

Neil McLaughlin -- Group Head of Personal & Commercial Banking

Thanks for the question, it's Neil. I mean, I think the range we've given just gives a sense. There is some uncertainty in the market, obviously. The assumptions in there is that we see about a 3% increase in home sales and a very moderate increase in home prices of 1%.

That said, if we look at 2018 as a comparator and just the uncertainty there, we started -- we had a pull-forward effect, pulled a bunch of volume forward. And then from kind of May on, we've been slowing. So we're trying to provide this outlook coming through a fairly choppy year. In terms of where do we see it, Ontario, particularly GTA, is stronger.

We're really stronger in the East. And we're seeing weakening volumes, kind of Manitoba West, if that gives you a sense of the mix.

Nigel DSouza -- Veritas Investment -- Analyst

OK. So for now, I think we'll just take the midpoint of that range. Appreciate the color.

Dave McKay -- President and Chief Executive Officer

So why don't I wrap up.Thanks everyone for joining the call today. I think from the themes from all the questions, in the responses you heard from the business leaders, we've got a lot of momentum and we've invested in growth. You've seen that in our revenue line. We feel we're operating in good economic conditions.

We still feel there's tailwinds on margin from rates in both our Canadian and U.S. businesses. We feel we're in a strong credit environment. And going into 2019, having invested in growth and technology and front-line people, as you've heard, we're feeling good about the outlook for the economy and for the bank.

So I think that's kind of the themes that we wanted to communicate and came out, I hope, with your questions. So thank you, and we'll see you again in Q1.

Operator

[Operator signoff]

Duration: 68 minutes

Call Participants:

Dave Mun -- Head of Investor Relations

Dave McKay -- President and Chief Executive Officer

Rod Bolger -- Chief Financial Officer

Graeme Hepworth -- Chief Risk Officer

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Meny Grauman -- Cormark Securities -- Analyst

Mario Mendonca -- TD Securities -- Analyst

Neil McLaughlin -- Group Head of Personal & Commercial Banking

John Aiken -- Barclays -- Analyst

Steve Theriault -- Eight Capital -- Analyst

Gabriel Dechaine -- National Bank Financial -- Analyst

Doug McGregor -- Group Head, Capital Markets and Investor & Treasury Services

Sumit Malhotra -- Scotia Capital -- Analyst

Robert Sedran -- CIBC Capital Markets -- Analyst

Doug Guzman -- Group Head, Wealth Management and Insurance

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Scott Chan -- Canaccord Genuity -- Analyst

Doug Young -- Desjardins Capital Markets -- Analyst

Nigel DSouza -- Veritas Investment -- Analyst

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