National Bank of Canada Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 31, 2023

There are 14 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the National Bank of Canada's Second Quarter Results Conference Call. I would now like to turn the meeting over to Ms. Linda Boulanger, Senior Vice President of Investor Relations. Please go ahead, Ms. Boulanger.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to our Q2 presentation. Presenting this afternoon are Laurent Ferreira, President and CEO of the Bank, Marie Jean Pargenteger, Chief Financial Officer and Bill Bonnell, Chief Risk Officer. Also joining us for the Q and A session are Lucie Blanchet and Stephane Achard for Personal and Commercial Banking. Stephane is also now responsible for our international activities, namely Aba Bank Beni Giroir, Head of Wealth Management And it's Anne de Bouc, Head of Financial Markets and now responsible for Credigy.

Speaker 1

Before we begin, I refer you to Slide 2 of our presentation providing National Bank's caution regarding forward looking statements. With that, let me now turn the call over to Laurent.

Speaker 2

Yes, Linda, and thank you everyone for joining us. This morning, National Bank reported solid results for the 2nd quarter With earnings per share of $2.38 We generated a return on equity of 17.5 percent, reflecting our highly accretive business model. This performance underscores the strength of our franchise and diversity of our earnings streams. In the face of macroeconomic uncertainty and the U. S.

Speaker 2

Banking turmoil, we remain very comfortable with our strategic positioning and defensive posture. First, our capital position is strong. With a CET1 ratio of 13.3%, We have flexibility to invest in organic growth across our businesses and a buffer against potential headwinds. 2nd, Our liquidity position is robust and the bank benefits from a diversified funding profile. And 3rd, our credit portfolios remain continue to perform well, although our impaired PCLs are low.

Speaker 2

Given the uncertainty macroeconomic outlook, we continue to build reserves consistent with our conservative approach. On capital deployment, our strategy has always been guided by prudence and discipline, And that remains unchanged. We are focused on maintaining strong capital ratios, providing us with the flexibility to invest in business growth and to return capital to shareholder when appropriate. To that end, We announced a 5% dividend increase, raising the quarterly dividend to $1.02 per share. The payout ratio is now at the low end of our target range of 40% to 50%, which is where we want it to be.

Speaker 2

I will now review our business segments. Personal and Commercial Banking delivered strong performance in the 2nd quarter. PTPP earnings increased by 22% from last year, mainly reflecting margin expansion and balance sheet growth. As anticipated, we continue to see a slowdown in mortgage growth. As such, in In Commercial Banking, we continue to see strong momentum with loan growth of 3% sequentially.

Speaker 2

For the second half of the year, we expect commercial loan growth to remain healthy, but to decelerate as businesses continue to adjust to higher borrowing costs. Wealth Management also performed well. Again, this quarter, we generated strong year over year earnings growth, supported by our diversified business mix, Our large deposit base and higher interest rates. We also delivered strong asset growth, up 7% from last year, demonstrating the breadth of our franchise. Financial Markets delivered strong second quarter results in what has been a challenging environment.

Speaker 2

Corporate and Investment Banking showed strength driven by M and A and strong lending activity. Global Markets also delivered strong performance. Results in equities were robust, albeit lower at last year's record level. We're also pleased with the continued momentum in FIC and Securities Finance. The performance of our financial markets franchise demonstrates its resiliency, earnings diversification and ability to quickly adapt to market conditions.

Speaker 2

Turning to our International segment. ABA Bank's results reflect Continued momentum in balance sheet growth with loans and deposits up more than 25%. Over time, we have been strategically investing to support strong business growth and network expansion. Our investments are paying off as our client base has grown by 40% over the past year. ABA's revenue growth in the 2nd quarter decelerated, primarily reflecting current pressure Deposit margin resulting from higher rates, migration to term and a more competitive market for deposits.

Speaker 2

Looking forward, we continue to expect double digit balance sheet growth for fiscal 2023. Based on what we are seeing today, margin pressure should ease over the next few quarters. Longer term, The outlook for ABA Bank remains very attractive based on Cambodia's strong fundamentals and the reopening for tourism. I would now like to Step back and provide a broader perspective on Credigy's business model. Our franchise has demonstrated proven ability to execute in any macro environment and has shown consistent risk reward discipline.

Speaker 2

Our portfolio is high quality, well diversified and accretive to the bank's NIM and ROE. Credigy's opportunity set is driven by liquidity disruptions As much as by credit cycles. During the Q2, the Fed intervened to address concerns about systemic risks In the U. S. Banking system by injecting liquidity, thereby greatly reducing the liquidity disruption.

Speaker 2

As a result, Credigy's second quarter asset growth was modest. On the revenue side, the year over year decline reflects the asset mix evolution, which is now more secured, Longer duration and has lower LTVs. This is in line with our defensive positioning given the current landscape. Regarding the outlook for Credigy, we are pleased with the asset growth delivered in the first half of the year, which supports our double digit growth target for fiscal 2023. Credigy has a long track record of success and we remain confident in our ability to continue to generate high quality earnings in the years to come.

Speaker 2

Moving to the macroeconomic environment. The economy is adjusting to a higher rate environment and much uncertainty remains around the path of interest rates and inflation. Nonetheless, Canada, where the vast majority of our activities are focused, is structurally strong and well positioned to weather an economic slowdown. Notably, the recent turmoil in the global banking industry underscores the strength And resiliency of the Canadian banking system, our labor market remains robust and Canada's population growth fueled by immigration It's the highest among the G7 countries and can contribute to sustainable growth. To wrap up, the bank delivered a solid performance and superior ROE in the 2nd quarter amidst a challenging environment.

Speaker 2

Our strategic choices and our defensive posture with a strong balance sheet and prudent reserves We'll continue to support profitable growth and help us navigate the uncertainty. With that, I will pass it over to Marie Chantal.

Speaker 3

Thank you, Laurent, and good afternoon, everyone. My comments will start on Slide 7. The bank delivered solid financial results in Q2 despite a less constructive backdrop. Revenues increased 5% year over year. In particular, we generated solid revenue growth in P&C Banking and Wealth Management as well as Strong performance from Corporate and Investment Banking.

Speaker 3

Expenses increased 6% year over year. A significant proportion of our expense growth was driven by last year's FTE growth and wage inflation. Over the past few quarters, we've been prudently managing new hires and job vacancies. Also contributing to the increase in expenses were past and new technology investments to deliver value for client experience and efficiency. These investments reflect a greater proportion of OpEx within the expense mix.

Speaker 3

Higher costs for advertising, business development and occupancy accounted for the remainder of the increase. Variable compensation was lower in the current quarter as last year's results included a compensation adjustment reflecting the bank's strong performance. Our long standing dynamic approach to balancing business growth and investments, As demonstrated by our highly efficient businesses, continue to generate a strong all bank efficiency ratio of 52.6%. As anticipated and discussed on our last call, Operating leverage was negative in Q2 and we expect pressure to persist in Q3. We continue to be strategic and selective in managing expenses, notably related to headcount, Technology Investments and Discretionary Spending.

Speaker 3

While achieving positive operating leverage for fiscal 2023 remains Challenging, we continue to target positive operating leverage in Q4. With respect to PTPP earnings, We expect growth in fiscal 2023 to be closer to the lower end of our mid to high single digit target. In a challenging environment, our disciplined approach to cost management contributes to the resiliency of the bank. Now turning to Slide 8. Total net interest income excluding trading increased by 18% from last year with strong contributions from most businesses.

Speaker 3

For P&C Banking, net interest income was up by 20% year over year, mainly driven by deposit margin expansion and balance sheet growth. Wealth Management continued to benefit from higher interest rates and a strong deposit base of $40,000,000,000 resulting from the diversification of our underlying businesses. This led to a 50% Increase in net interest income compared to last year. For Corporate Banking, we continue to strong growth in net interest income year over year, in part driven by strong lending activity. For U.

Speaker 3

S. SFI, net interest income decreased by 3% year over year As balance sheet growth was more than offset by lower margins as discussed by Laurent earlier. The Al Bank NIM, excluding trading, was 2.09% in Q2. When looking at NIM sequentially, recall that there were 4 basis points of nonrecurring items that positively impacted Q1 NIM, including $20,000,000 of prepayment revenue at Credigy and an interest recovery on a previously impaired loan in Corporate Banking. 2nd, Treasury's performance in Q1 benefited from positive seasonal effects, which accounted for a difference of about 6 basis points of NIM between Q1 and Q2.

Speaker 3

Excluding these items, total bank NIM ex trading In addition, we expect NII to continue to grow compared to last year, albeit at a slower pace than in previous quarters. As always, we remain disciplined on both sides of the balance sheet, Balancing growth, margins and credit quality. Slide 9 highlights our balance sheet. Loans grew by 11% year over year. Growth was broad based with particular strength in Corporate Banking, reflecting growing working capital needs, acquisition financing and capital markets disruption.

Speaker 3

Commercial loans grew by 11% year over year, in part driven by continued opportunities in the Residential Insured segment. As anticipated, growth in personal mortgages is decelerating, driven by housing market conditions. Sequentially, loans grew by 3% at the All Bank level. Deposits, excluding wholesale funding, Grew 17% year over year and 1.4% quarter over quarter, demonstrating again The strength of our diversified model and focus on growing our deposit base across all business segments. Personal deposits are up 19% year over year and 2.4% quarter over quarter.

Speaker 3

Demand deposits in our retail channel, which include Wealth Management, are down approximately 1% sequentially As we experienced some migration, notably from brokerage accounts to high interest savings accounts and GICs. Term deposits continued to grow in Q2, but at a slower pace than previous quarters. Non retail deposits increased by approximately 16% year over year and 1% quarter over quarter with all segments contributing to the growth. Slide 10 presents our strong liquidity position and sound funding profile. Our core banking activities are well funded through diversified and resilient sources.

Speaker 3

The bank has a comprehensive view on deposits, which involves all business lines, and we remain disciplined around funding costs. This strategy contributes to a well diversified deposit base and to the bank's strong overall performance. With an objective of maintaining prudent liquidity metrics, the bank consistently operates at levels that are well above regulatory minimum requirements. We ended Q2 with a liquidity coverage ratio of 155% and a net stable funding ratio of 118%. Now turning to capital on Slide 11.

Speaker 3

Our CET1 ratio improved by 76 basis points to reach 13.3 percent. 2nd quarter earnings net of dividends contributed 40 basis points to our ratio, underscoring our strong internal capital generation capacity. In addition, Basel III reforms contributed 44 basis points to our ratio and a reduction in market risk RWA contributed 10 basis points. Excluding Basel III reforms and market risk, RWA increased by approximately $1,700,000,000 representing 18 basis points of CET1 ratio. Continued asset growth in Corporate and Commercial Banking Books accounted for 12 basis points, While unfavorable rating migration in non retail portfolios accounted for 6 basis points.

Speaker 3

Our capital position is strong. It provides us with flexibility to deploy capital across our segments to support growth and return capital to shareholders. In conclusion, the bank delivered Solid Q2 results supported by organic growth across our businesses, industry leading ROE, Solid balance sheet growth and good margin. Despite continued macro uncertainty With a resilient business model and our disciplined approach to cost, capital and risk management, We are well positioned for the second half of the year and beyond. I will now turn the call over to Bill.

Speaker 4

Merci, Marie Chantal, and good afternoon all. Although events in the U. S. Banking sector generated higher levels of uncertainty during the last quarter, The performance in our credit portfolios remains strong and continue to follow the trends we discussed on the last call. Strong employment and savings levels continue to help 4s adjust to the impacts of higher interest rates.

Speaker 4

This is particularly true in our home province of Quebec, where the unemployment rate remains near historical lows And consumer resiliency is strengthened by a greater proportion of 2 income households and lower debt levels. These factors continue to support the Solid credit performance you see on Slide 13. In the 2nd quarter, impaired PCLs rose to $52,000,000 or 10 basis points. Across our domestic retail and non retail portfolios, slow normalization generated impaired PCL levels We remain well below pre pandemic levels. At Credigy, impaired provisions were stable and driven by the normal seasoning of portfolios.

Speaker 4

And at ABA, performance continues to match our expectations with provisions well below the peak experienced in the second half of last year. In light of ongoing macro uncertainty, we prudently built additional reserves on performing loans in the quarter. Updates to our scenarios, Portfolio growth and some migration generated $27,000,000 or 5 basis points of performing provisions, with the majority of these taken in the non retail portfolios. Looking ahead, we believe that credit performance will continue to normalize and we expect impaired PCLs to rise over the coming quarters and into next year. However, based on the strong credit performance we've experienced year to date And on current trends and delinquencies, we have lowered our full year impaired PCL target to 10 basis points to 20 basis points and currently expect to end up in the bottom half of that range.

Speaker 4

Turning to Slide 14. Total allowances for credit losses increased by 4% to over $1,200,000,000 Performing ACLs grew to 9 $5,000,000 which is just 8% below its pandemic peak. On Slide 29 in the appendix, you'll find details Our allowance coverage ratios, in these uncertain times, we are very comfortable with this prudent level of allowances as well as with our defensive geographic and business mix. Turning to Slide 15. Our gross impaired loans ratio was Stable at 38 basis points and remains below pre pandemic levels.

Speaker 4

Net formations rose sequentially from last quarter, which had benefited from some repayments And show ongoing slow normalization trends in our domestic portfolios. Net formations in the International segment continue to match our expectations. On Slides 1617, we present the highlights of our Canadian Resil portfolio. The mix remains stable with Quebec accounting for 54% and insured mortgages accounting for 29% of total result. Average LTVs increased slightly to 58% on uninsured mortgages and 53% on HELOCs And average credit scores and delinquency rates were stable.

Speaker 4

Looking at the tail end of the distribution, we find that less than 50 basis points of the Resil portfolio is to uninsured borrowers with credit bureau scores of less than 650 and LTVs greater than 75. I'll make some comments now about our commercial real estate exposure. As you may remember, in the late cycle years prior to the pandemic, We frequently discussed on these calls the fact that we had been restraining growth in the commercial real estate sector. During the pandemic, we continued to restrain growth in the office and retail segments, but we allowed healthy growth in the residential segment, which was primarily related to CMHC insured loans to support the supply of affordable and energy efficient housing. We have been providing details of the CRE portfolio on a slide in our appendices each quarter since the end of 2020, and you'll find it this quarter on Slide 30.

Speaker 4

Our portfolio is Canadian focused with minimal U. S. Exposure. The Office segment represents around 1% of total loans And benefits from the strong underwriting practices and meaningful recourse that are typical in the Canadian market. The Retail segment is focused on essential services tenants And has decreased in size over the past 5 years.

Speaker 4

Our comfort in growing the Residential segment comes from both the strong demographic trends Supporting consistent demand for rental lodging as well as the high proportion of insured lending in this segment. Overall, we remain very comfortable with the size, Quality and mix of our CRE portfolio. Now before closing, I'll summarize by saying that we are pleased with the credit performance again this quarter and remain very comfortable with our defensive positioning, our resilient mix and our prudent level of allowances. And with that, I will turn it back to the operator for the Q and

Operator

Thank you. We will now take questions from the telephone line. We thank you for your patience. Our first question is from Meny Grauman from Scotiabank. Please go ahead.

Speaker 5

Hi, good afternoon. First question is on ABA. I'm trying to better understand the margin dynamics, what happened this quarter And the outlook going forward, Laurent, you talked about margin pressure easing as you look ahead through the rest of the year. And I'm just trying to understand, first to clarify that You still see margin pressure, but just less margin pressure going forward? And that's the first question.

Speaker 5

I believe it there just as a first question.

Speaker 6

Thanks, Manny. Good question. It's Stephane. So you're right. So Laurent alluded very clearly to the fact that there was this pressure.

Speaker 6

And at the beginning of the year, we saw some banks Fight and be more competitive on deposits and that raised pricing on deposits. And we were fortunate You saw our deposits grew by 28% or 27%, which is very strong. There's been migration as well of people going to the term Deposit side, so it's increasing. It's now up to 30% of our deposits, Term deposits are not typically very long deposits, 4, 6 months, but it's increasing. So that put a pressure on the margin itself.

Speaker 6

On a year over year basis, it will stabilize over the next, I'd say, 3 quarters, but we probably have still pressure for 1 or 2 quarters. It's tough to predict exactly where the term deposit dynamic is going to stop. I'll just And by saying that overall, the margin at EBA is extremely strong when we compare it to Canada and very accretive for National Bank as a whole.

Speaker 5

So just to understand the outlook going forward, the expectation I mean, you talked about 2 different factors. So just in terms of The migration is the expectation just that that will slow as rate hikes slower stop?

Speaker 6

Yes. As we will see a full year over year stabilization in the rate hikes, that's So first element, so we probably have another at least another quarter, perhaps 2 before that pressure eases off completely.

Speaker 5

And then just I wanted to better understand the competitive dynamics in the market and maybe just a refresh as well. We've talked about it. It's been a while in terms of ABA's market share and where that market share is right now and the outlook in terms of market Sure. Is there still more expectation of significant market share gains in Cambodia right now?

Speaker 6

Yes, the market is still very under bank. So there are opportunities for market share increases and we've seen our market share increase. Obviously, we haven't gotten the 2022 numbers, but the last assessment positions us around the 18% to 20% Range in terms of market share. And in our case, when we're growing the book and the customer base by 40% In a year, obviously, I think that is prelude to more market share.

Speaker 5

Thanks. And then just a question on capital CT1 of 13.3, Laurent, you talked about in the past you've talked about how you We're interested in doing buybacks at a lower capital ratio at 13.3%. Does that change your outlook on buybacks at all?

Speaker 2

Thanks for your question, Manny. No buybacks are not on the table right now. A couple of things To keep in mind, obviously, uncertainty, I think we've talked a lot about the uncertainty regarding The macroeconomic outlook, inflation rates,

Speaker 7

growth.

Speaker 2

Also Basel III reform The initial changes were positive, and we still have to go through some of the reforms. And There's going to be a slight reduction in CET1 once fully implemented. So look, our intention is very clear. Past couple of quarters, we want to operate above 12%. We're still with that mindset.

Speaker 2

But at this point in time, given what I just mentioned, buybacks are not on the table.

Operator

Thanks, Tom. Thank you. Following question is from Scott Chan from Canaccord Genuity. Please go ahead.

Speaker 8

Good afternoon. So just on the Credigy side, you kind of maintained your double digit loan target For this year, despite slower growth this quarter, can you maybe talk about the challenges You witnessed in the quarter in terms of liquidity based on the U. S. Banking crisis and it sounds like

Speaker 9

So you're right. We did encounter some challenges in the quarter, and you did See some very modest growth in Q2 after very healthy growth in both in Q4 last year and Q1 this year. So what we saw this quarter is supply and I think Laurent alluded to it, supply being very low

Speaker 7

Following a period of high volatility with

Speaker 9

a lot of U. S. Government support and Progyny really Their wheelhouse is liquidity situations where there are some forced sellers and you didn't have much of that in the market this quarter. Also I would say that Progyny are fundamentally very conservative in their pricing And I would say that there are more conservative than other participants right now at the moment. So that results in a gap in pricing levels.

Speaker 9

So we're picking up spots and remaining very selective in the current context. We won't sacrifice Pricing discipline for asset growth. That said, we believe that as the market normalizes over the next two quarters, we will return To mid to high single digit growth for the year in term of asset growth.

Speaker 8

That's helpful. And then maybe last question. At this point, can you quantify potential lost revenues on securities From trading with the budget, cash changes that are going to come into play?

Speaker 3

Hi, Scott. It's Marie Chantal here. So as you know, some of the elements of the budget have not been included in the tax bill yet. So The tax bill that's currently under the 3rd reading. So it's still hard at this point of time to give a precise number.

Speaker 3

Any estimates would be rough estimates. As you know, the amount of Canadian dividends has fluctuated over the years Based on market activity and client demand for equity product and Canadian shares. So in addition, as I The final form of the reform not being finalized yet, it's still early to say. And Finally, maybe just a note. Historically, any change in whether it's capital, liquidity, fiscal, regulatory Our rules have tended to impact market conditions and client demands, and our franchise tend to adapt well to those changes.

Speaker 8

Okay. Thank you very much.

Operator

Welcome. Thank you. Following question is from Paul Holden from CIBC. Please go ahead.

Speaker 10

Thank you. Good afternoon. A couple of questions for Bill. So if we look at your impaired PCL ratio, I mean, coming in lower than I would have expected, I'm assuming given the Revised guidance lower than you would have expected. So like why is that?

Speaker 10

What is it that's trending Slower than you would have expected. And then 2, to the extent you can, your impaired PCL ratio is well below What we've seen from the other Canadian banks, why do you think that is?

Speaker 4

Hi, Paul. Thanks for the question. Maybe I'll tackle the second one first. The I can't comment In detail on the other banks' portfolios, but just from a macro level on the outside, I think it's important to understand We're overweight, underweight and where we're not. So I think what we've seen from the U.

Speaker 4

S. Bank reporting and then the Canadian bank reporting U. S. Operations is that, the normalization in credit performance is happening maybe more quickly in the U. S.

Speaker 4

Then in Canada, and I guess that should be expected given the liquidity removal was faster in the U. S. And I think the With the banking sector turmoil last quarter, there's maybe credit conditions are a little bit tighter. So as you know, We're pretty small in the U. S.

Speaker 4

So that's probably one of the relative. And then on the core Canadian portfolios, I think it's what we've been talking about For quite a while in the geographic and product mix, so we did talk last quarter and we continue to see the trends this quarter that The normalization is happening faster in unsecured consumer lending cards and such, which as you know, we've got we're significantly Smaller on a relative basis than peers in that space. And then geographically, Quebec versus outside Quebec. I think I commented that in my prepared remarks, But the resiliency of the Quebec consumer with lower leverage levels, lower house prices, more dual income And a higher savings rate on the fact of that with the employment levels that you've seen in Quebec So I think that geographic difference as well as the product difference in Canada, I would assume that That's probably the difference. Now on your first question, yes, we did call out at the end of last year when we were giving our sharing For 2023 that we expected normalization of performance and higher impaired PCLs.

Speaker 4

I would repeat what I said in my prepared remarks that we do expect impaired PCLs to rise in the coming quarters and well into next year. It has been, say, the color this quarter is that it's been slower than we would have expected and particularly In the in our Quebec portfolios, so just all of those trends kind of I think describes relative and absolute expectations. Does that answer your question, Paul?

Speaker 10

It does. That's helpful. Thank you. And then maybe one for Marie, Chantal, you gave us some guidance and thoughts around expense management. Maybe you can just dig a little Deeper there in terms of what you think is required in the next coming quarters to slow Sorry, slow expense growth and get back to positive operating leverage.

Speaker 3

Yes. Hi, Paul. So maybe I'll go back to some of my remarks in terms of how we manage expenses dynamically with revenues. And I think Having operating leverage as a key levers for all of our businesses has always been in our strategy. So that definitely is an important background of how we do manage expenses.

Speaker 3

And as I mentioned, it's been a couple of quarters now that we've been very prudent in managing hirings as well as vacancies. And you can see it in our disclosure, If you look at our number of FTEs that have been stable since Q4 last year, so we've already been in action In order to be to manage that operating leverage, and we'll continue to do so in the next couple of quarters. Of course, we're also managing our investments in technology and discretionary expenses. So I think that summarizes the actions that we're taking in order to manage our operating leverage positive for Q4.

Speaker 10

Okay. And so when I hear that, just to drill in, what I'm hearing is obviously managing the FTE to flat, not managing, not expecting to manage FTE to lower?

Speaker 3

Yes.

Speaker 10

Okay, got it. Thank you.

Operator

Welcome. Thanks, Paul. Thank you. Our following question is from Mike Ryszvanovic from KBW Research. Please go ahead.

Speaker 11

Hey, good afternoon. I wanted to ask about mortgage lending in Quebec. Obviously, it's a key market for you. And I do understand that the strategy around protecting your margins, that's been talked about for several quarters now. But I'm just looking at the numbers and it looks like you've lost about 80 basis points over the last couple of years of your share in Quebec.

Speaker 11

So this is total Reso lending. And as an anchor product, I'm just wondering how sustainable like how long can you protect the margin and not maybe on pricing. Obviously, some of your peers are a lot more aggressive in your neck of the woods. What's the outlook on your Strategy, do you care about market share at or maybe I'm exaggerating the impact here, but wondering how sustainable Market share losses in RESL would be for National in Quebec going forward.

Speaker 12

Yes, it's Lucie. Thank you for the question. Obviously, it's not our strategy to buy market shares and we've been very, very disciplined on that and we continue to be very disciplined on that. If we look at the, Let's see the environment right now. The Q4 and Q1 were probably the worst in terms of competitiveness.

Speaker 12

We saw Better position in Q2. But as we look forward with the current environment, we see competitiveness To continue and even to increase in the let's say at least for Q3 with the current condition. So we are Disciplined, we are strategic. We anchor our decision on our customer strategy, where we want to engage And make sure we get the full banking relationship from the mortgage business customers. And we see the benefit As the revenue per customers for the core customers, let's say, the ones that have a solid banking relationship with us, their revenue is much higher with the Mortgage and relationship.

Speaker 12

So this is kind of how we approach it. I don't know if that answers your question.

Speaker 11

No, that's helpful. I'm just wondering, so looking ahead, You did mention you expect it to be competitive going forward. What is your margin in Canadian P&C Banking Potentially.

Speaker 12

I don't think it's just a matter of mortgage. I think it's a matter overall of business mix And you have the commercial growth going there, you have the deposits going there. So is your question about the overall margin or just

Speaker 11

Yes, just a competitive mortgage market. I don't know what spreads are doing in that line of business, but if it's going to be very competitive going forward, Does that impact your margin much in the segment?

Speaker 12

I would say overall, no, because if you look not just the Quebec market, but Overall, our position in terms of mortgage growth, we've made strategic decisions to decelerate the growth in our 3rd party channels where the margins have really been close to none, I would say, in the current context. So Those 3rd party channels are important in terms of portfolio, but they did not contribute much in terms of And it has impacted overall our mortgage growth and we are comfortable with that.

Speaker 13

Okay. Thanks for that. And then

Speaker 11

just really quickly for Laurent, maybe Excess capital, are you thinking about deploying outside of Canada potentially? I know that there's been a moratorium on that for quite some time now. Is that on your radar, I mean, at all? Sorry if you answered this already earlier in your prepared remarks, I may have missed it. But any thoughts on capital Just given the strong CET1 and what your target might potentially be

Speaker 2

Thank you for your question. The only thing that we Would consider is capital deployment through Credigy Financial Markets. So very niche, ROE accretive, but No bank acquisitions or anything like that anywhere in the world right now.

Speaker 11

Okay. Appreciate that. Thanks very much.

Operator

Thank you. Our following question is from Saurabh Movahedi from BMO Capital Markets. Please go ahead.

Speaker 13

Okay. Thank you. Maybe I'll just start just there for a second. Laurent, you mentioned several times, I think, In your prepared remarks about the prudent reserve levels and the defensive posture, but you're open to deploying Opportunistically, I suppose, capital, you said in support of growth in Financial Markets and Credigy. What I'm trying to kind of understand is what's your risk posture right now?

Speaker 13

Are you looking to take on risk? Scott, are you still looking to shy away from risk right now?

Speaker 2

Well, we never said that we would shy away from risk. Our approach is defensive, but we're not slowing down growth. But we have to be a little bit more opportunistic, I think, at this moment in time, given the uncertainty and certain turmoil in the market. But rest assured that we are obviously following closely where those pockets of opportunities are And we'll be ready to jump on it. Our focus is and remains on growth across Canada.

Speaker 2

We see opportunity to take on market share in commercial. And it's not just about balance sheet deployment. Wealth is also a growing franchise for us. So that's another area that we're going to keep focusing on. But market conditions are such that There is disruption right now in various areas as you know it.

Speaker 2

So the idea is to be ready when these Opportunities are going to be at the right price, at the right risk profile. So that's the approach we have. Sorry, I don't know if this helps you.

Speaker 13

That's very helpful. So is it safe to say that, I guess, if everyone is going to see slower activity, you expect to see Store activity, but less than others because you're better positioned, I guess, to be more opportunistic. Is that how you're is that the way to think about it?

Speaker 2

It's the way we think about it. I mean, we expect obviously and you've heard it on the call, the remarks as well, we expect normalization in Mortgage, depending on the past interest rate and inflation, we could see also a normalization in commercial loan growth. Having said that, we're we are we do see opportunities across the country to take on market share, and That's where we are right now. That's going to be the focus of the team.

Speaker 13

Okay. Maybe I can just ask Bill then. I mean, Bill, This credit cycle, let's call it, seems to be kind of evolving a little bit different than the last couple Or a few that we remember anyway, where it doesn't look like there is going to be a clean peak to the PCL for any Thank you in any one quarter and that my words not yours, but it may actually be a little bit more of a drawn out flat top Type of a trend. Is that how you're seeing it evolve based on your experience? Or do you think that there will be, I'll call it a bit of a wish to share moment where there will be a quarter where we actually see a peak, a well defined peak with then kind of, I don't know, reversals and the like following it.

Speaker 4

Thanks, Sohrab. I think another way to ask That question would be, will the Central Banks be able to pull off a soft landing, a mild recession? Will there be other disruptions in the context of heightened geopolitical, heightened uncertainties? And where will interest Straits be in 2 years' time. So I think it does highlight there is Pretty significant uncertainty and there's various paths, which I think you and I could have lots of a great discussion on What could lead to any of those past, but it is really hard to predict.

Speaker 4

With predicting business cycles, the last one before the pandemic was the longest in history. Then we had a pandemic cycle, which we hadn't seen in 100 years. What this next one will be is hard to know given all the factors. But what I Ken, what I do feel very confident in is because of our the positioning that we've talked about for quite a while now, Geographical products, capital allowances, I think that We're confident in our ability to perform well regardless of which of those paths come relatively well as which of those paths come. That's probably the point that I can be most certain about or confident about, not less confident about predicting which path Will be the one that will actually be experienced.

Speaker 4

I don't think that I don't know if that helps CSRF, but I think it's the best I've got.

Speaker 13

Okay. But it's not your risk spot like there isn't growth there that if you were willing to Yes, loosen your risk appetite a little bit that you could pick up. Yes, in other words, at the margin, is there growth that you could pick up If you were willing to actually still deliver on an impaired 15% to 25% for this year?

Speaker 4

Yes. I think about it a little differently. I think that our discipline is consistent and has been consistent. I think Our confidence in the nature of our franchise to seize opportunities quickly, where they arise, I'm very, very confident in that. And that predicting it certainly doesn't feel like a 1,009 where all pricing risk on was a lot easier and returns followed.

Speaker 4

Now it's a little more selective and it's based on the uncertainties that we talked about, about the future path. But So very confident that we have a franchise which is nimble and agile and The setup and their positioning with capital and balance sheet and liquidity and allowances will allow the franchise

Operator

Thank you. Our following question is from Darko Mihelic from RBC Capital Markets. Please go ahead.

Speaker 7

Well, Hank, thank you. Just a few questions to follow-up. And It's been a little bit difficult to get some views on this. So I'm going to ask you and hoping that you can provide maybe Some ideas, I mean, what we saw in the quarter was maybe better than expected help from the Basel reforms. But as I listen to other bank conference calls, I got this uneasy feeling that the next set of Basel reforms might actually be punitive.

Speaker 7

The fundamental review of the trading book And then the floor, and I was surprised to see some banks hit the floor. So do you have any early views on These other hits, and is this something that in particular the FRTB might be a bit of an issue for National Bank?

Speaker 3

Hi, Darko. It's Marie Chantal. Thanks for the question. I think Laurent had alluded to it very briefly a little Earlier and we're very of course, the first phase of the basal impact was quite positive for us with 44 basis points and we do Anticipate that the next phase will be negative. There's still a lot of moving parts, so It's not a good time now to give you any estimates, but definitely it will be negative for the next phase.

Speaker 7

Okay. I guess what I was hoping for was some sort of magnitude and or whether or not it changes your It might even impact your business model. So it's just too early to tell, I suppose. Is that the best part?

Speaker 2

Darko, it's Laurent. Maybe I could jump in. It does not impact our business model at all. And this is over the next 2 years. And we believe in the accretive capital generation of our franchise To be able to manage this, so it's not an issue whatsoever.

Speaker 2

And we are in a very strong capital position as you know it. And you know, you're in my remarks in terms of how we want to manage through this. So rest assured, it is not an issue for us.

Speaker 7

Okay. Thank you for that. And I'm looking at my second question is, I'm looking at Page 9 of your investor presentation. And I was just hoping for a little bit of clarity or a little bit of just a few ideas on your nonretail deposits. We have been noticing for some time that this is a very broad classification.

Speaker 7

And we have been noticing that even within Canada, you're kind of going against the trend on some of these deposits. So I'm just curious if you can maybe give us Flavor for what you may be doing differently with respect to these non retail deposits, Why you may be seeing growth, especially in the non interest bearing ones, whereas we're seeing more terming out and less Growth at the other banks and whether or not this is a fleeting kind of scenario And or maybe what would make these rather sticky for you given that they are commercial kind of deposits? Thank you.

Speaker 3

Hi, Doctor. I'll take a first pass of your question. So maybe, I'd go back to our first our diversified model where We grow deposits across all of our businesses. And when you look at our non retail deposits for this quarter, Which were up by 0.9% quarter over quarter and 16% year over year. It really came from all of our businesses.

Speaker 3

So it's very much well diversified. So I think that's what maybe supports the growth that you're seeing in our non retail deposits.

Speaker 7

I guess what I was hoping for though is, I mean, most commercial deposits everywhere else are actually declining, Suggesting that operating so either your customers are somehow different or you're doing something different. So I'm just curious as to what might be Like if all commercial and corporate generally speaking are down and corporates and commercials are actually using their operating And using their deposits, what might be different for you if it's not interest rates? I mean, if it's rates, that's a great answer. But Is there something else that you could point to that would suggest that for some reason your corporate commercial customers are behaving differently?

Speaker 6

So Darko, it's Stephane. So you're reading as to the behavior of our commercial clients It's correct. And we've seen shrinking in the working capital of Canadian businesses. And it's shown in the reduction of the operating line drawings and bit in the deposits as well, particularly this quarter, but you've got to take into account that we have a large governmental base Quantities of deposits, which are going to be more lumpy when it comes tax Receipt of taxes on residential housing and property taxes and so forth. And those tend to be while their demand, they tend to be very sticky Yes, well.

Speaker 6

So that is an important difference, I'd say, in the movement of our deposits.

Speaker 7

Okay, great. That's very helpful. Thank you very much.

Operator

Thank you. We will now take our last question from Sohrab Movahedi. Please go ahead.

Speaker 13

Actually, I just wanted to apologize. I dropped off. I wanted to apologize. I don't know what happened to my phone there. Bill, I will follow-up With any follow-up questions, but that was a technical matter.

Speaker 13

Sorry, I'm confused.

Speaker 4

It wasn't something I said, was

Speaker 7

Not yet anyway.

Speaker 4

Okay. Happy to follow-up with you later.

Operator

Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Ferreira.

Speaker 2

Well, thank you very much, and we'll see you at the end of the summer. We'll talk to you at the end of the summer. Thank you.

Operator

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

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Earnings Conference Call
National Bank of Canada Q2 2023
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