National Bank of Canada Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
May 27, 2026

Key Takeaways

  • Positive Sentiment: National Bank of Canada posted Q2 EPS of CAD 3.23, up 13% year over year, with ROE of 16.8% and a strong CET1 ratio of 13.54%.
  • Positive Sentiment: The bank raised its quarterly dividend by 6% to CAD 1.32 per share and continued active share repurchases, having bought back 8.8 million shares under its NCIB.
  • Positive Sentiment: Management said the CWB integration is progressing well, with CAD 215 million of cost and funding synergies already realized and the annualized target increased to CAD 300 million. Revenue synergies also continue to build, supporting the outlook.
  • Neutral Sentiment: Core businesses performed solidly, led by 18% growth in Personal & Commercial Banking net income, 18% growth in Wealth Management, and a strong quarter in Capital Markets on active client flows and favorable trading conditions.
  • Negative Sentiment: Management flagged continued margin pressure as loan growth outpaced deposits, with Q3 expected to see a slight decline in P&C NIM and deposits likely staying flat in retail amid a low-rate environment.
AI Generated. May Contain Errors.
Earnings Conference Call
National Bank of Canada Q2 2026
00:00 / 00:00

There are 17 speakers on the call.

Speaker 12

Good morning. Welcome to National Bank of Canada's second quarter results conference call. I would now like to turn the meeting over to Marianne Ratté. Please go ahead, Marie-Anne.

Speaker 8

Merci, and welcome everyone. We will begin the call with remarks from Laurent Ferreira, President and CEO, Marie-Chantal Gingras, CFO, and Jean-Sébastien Grisé, Chief Risk Officer. Our business heads are also present for the Q&A session, including Julie Lévesque, Personal Banking, Judith Ménard, Commercial and Private Banking, Nancy Paquet, Wealth Management, Étienne Dubuc, Capital Markets, and William Bonnell, International. Before we begin, please refer to slide two of our presentation for forward-looking statements and non-GAAP measures. Management will refer to adjusted results unless otherwise noted. I will now pass the call to Laurent.

Speaker 7

Merci, Marianne Ratté. Thank you everyone for joining us. In the second quarter, we delivered EPS of CAD 3.23, up 13% year-over-year. We generated a return on equity of 16.8%, while maintaining a strong CET1 ratio of 13.54%. Despite macroeconomic uncertainty, clients remained active throughout the quarter, and market conditions were favorable. This was reflected in strong growth in both our balance sheet and our fee-based businesses. We also benefited from credit performance, the realization of cost and funding synergies, and momentum in revenue synergies from CWB, as well as share buybacks. On the capital deployment front, we remain active on our NCIB. To date, we have repurchased 8.8 million shares under our program, which was upsized during Q2 to enable the purchase of up to 14.5 million shares.

Speaker 7

Our strong earnings power and capital position also support an increase in our dividend with today's announcement of a CAD 0.08 or 6% increase. This brings the quarterly dividend to CAD 1.32 per share. During the quarter, we completed the syndicated loan transaction with Laurentian Bank. Earlier this month, we received clearance from the Competition Bureau for the retail and SME portfolio transaction, which remains on track to close by year-end, subject to remaining regulatory approvals. We are committed to operating with strong capital levels and continue to target a CET1 ratio converging towards 13% by year-end of 2027. Turning now to our economic outlook. Uncertainty has increased significantly with the war in Ukraine, which has impacted the global and Canadian economies. We expect the conflict to drive inflation and higher rates as supply chains for critical goods are disrupted and reconfigured.

Speaker 7

This uncertainty could further impact business investments, which have slowed down over the past couple of years due to tariff-related uncertainty and excessive regulation. If we look beyond the near term, Canada is well-positioned to benefit from ongoing efforts to reindustrialize our economy, undertake major projects, make Canada an energy superpower, modernize our defense sector, and create champions, and invest in Arctic infrastructure to support defense, energy, and critical mineral development. On this, I want to acknowledge the leadership shown by the federal and provincial governments to rebuild Canada's economic sovereignty. Structural changes are required to adjust to the evolving economic and geopolitical landscape, and National Bank will be there to support clients and our country's economic priority. Turning now to our business segments.

Speaker 7

P&C Banking generated net income growth of 18% year-over-year, driven by strong growth in lending activity and mutual funds, as well as credit performance. Operating leverage was positive in the quarter. Personal Banking mortgage volumes was up 18% year-over-year, supported by a resilient housing market and share gains in Quebec. Personal deposits were slightly down sequentially as strong equity markets drove increased client flows into investment solutions and generally higher portfolio levels, contributing to an 8% increase in total personal savings year-over-year. In Commercial Banking, deposits were up 7% and commercial loans were up 5% year-over-year. Despite macro uncertainty, clients were active within the National Bank of Canada-originated loan portfolio, growing by 11% year-over-year. The Canadian Western Bank legacy book declined by CAD 400 million sequentially, primarily driven by commercial real estate.

Speaker 7

Our outlook for the year on commercial lending remains positive, while acknowledging that the macro context has shifted with the conflict in the Middle East and with heightened uncertainty around the path of inflation and interest rates. Net income in our Wealth Management segment increased 18% year-over-year to CAD 277 million, supported by growth across the franchise, including strong fee-based and transaction revenues. Assets under administration grew 14% over the same period to reach nearly CAD 940 billion, benefiting from resilient equity markets and strong net sales. Capital Markets generated net income of CAD 490 million. This notable performance reflects the strength of our business mix and strong execution. Trading conditions were favorable in the quarter. Our performance in global markets was primarily driven by strong client activity, including in equity structured products, originations, commodities, and rates, as well as higher market-making volumes more broadly.

Speaker 7

Record results in corporate and investment banking reflected sustained client activity across M&A, corporate banking, and ECM, as well as continued investments in our franchise. Credigy generated net income of CAD 46 million, up 15% year-over-year. Average assets were up 10% over the same period and 1% sequentially, as we continue to benefit from recurring flows from established partnerships. We remain highly disciplined in pursuing new deals given the prevailing competitive market dynamics and pricing conditions. At ABA Bank, net income increased 10% year-over-year, reflecting balance sheet growth and lower PCLs, partly offset by a higher efficiency ratio. Loans were up 12% year-over-year, while deposits grew 15% over the same period. I will now pass the call to Marie-Chantal.

Speaker 9

Thank you, Laurent, and good morning, everyone. We delivered strong results in the second quarter. Revenues increased 7% year-over-year, driven by solid performance across our segments and strong balance sheet growth. PTPP grew 5% and our businesses generated an all bank efficiency ratio of 50.4%. Expenses increased 9.5% year-over-year. Of note, Q2 2026 included CAD 15 million of litigation expenses, and Q2 2025 reflected a CAD 22 million reversal of a property tax provision. Excluding these two items, expense growth was 7.4%, in line with revenue growth. For the second half of the year, we anticipate expense growth to moderate towards the low single-digit range, positioning us to deliver positive operating leverage. Moving to slide eight. Net interest income, excluding trading, grew 7% year-over-year. Sequentially, it was down about 5%, with fewer days in the quarter accounting for over two-third of the decline.

Speaker 9

Additionally, balance sheet growth was offset by Credigy's prepayment revenue of approximately CAD 12 million recorded in Q1 and higher Treasury NII in the prior quarter. NIM in Q2 was 2.16%, down eight basis points quarter-over-quarter. As expected, NII from Treasury was lower sequentially, representing four basis points, largely offset by non-interest income. It also reflected higher prepayment activity last quarter, as well as one basis point decline in P&C NIM as loan growth outpaced deposit growth. Looking at next quarter, we expect the P&C NIM to be slightly down from Q2 levels. Deposit margin expansion is expected to be offset by commercial deposit mix. As for the all-bank NIM, we expect it should remain relatively stable next quarter. Turning to slide nine. We continued to grow both sides of the balance sheet.

Speaker 9

Loans increased 9% year-over-year and 3% quarter-over-quarter, including the addition of the Laurentian Bank syndicated loans of CAD 657 million. Deposits increased by CAD 9 million, or 3% sequentially. Personal demand deposits grew CAD 1.6 billion, or 2%, mainly driven by Wealth Management. Furthermore, our customers' appetite for investment solution has been strong given the favorable market performance that continued in Q2 and resulted in solid growth. Non-retail deposits grew CAD 7.5 billion, or 4% quarter-over-quarter, mainly driven by Commercial Banking and corporate and investment banking. Now moving to capital on slide 10. We ended the quarter with a strong CET1 ratio of 13.54%, supported by capital generation of 41 basis points. RWA growth consumed 38 basis points of capital. Credit risk of 25 basis points primarily reflected balance sheet growth with five basis points from the acquisition of the Laurentian Bank syndicated loan portfolio.

Speaker 9

Market risk, mainly driven by business growth, consumed nine basis points of capital. Share buybacks during the quarter reduced the CET1 ratio by 32 basis points. Since the launch of our current NCIB, we have repurchased 8.8 million shares, representing approximately 60% of the program. Turning to slide 11. We are making solid progress on realizing synergies from the acquisition of Canadian Western Bank. So far, we have realized CAD 215 million of cost and funding synergies, and we are on track to reach CAD 270 million by the end of fiscal 2026. We are increasing our cost and funding synergies target to CAD 300 million on an annualized basis. We have also realized CAD 33 million of revenue synergies since the beginning of fiscal 2026, mainly driven by fee income. As previously mentioned, revenue synergies should reach approximately CAD 50 million by the end of this fiscal year.

Speaker 9

We continue to target CAD 200 million-CAD 250 million in revenue synergies by the end of fiscal 2028. We delivered strong results across both quarters of the first half, supported by solid underlying performance across our businesses, ongoing cost discipline and realization of CWB synergies, with credit remaining within expectations. In addition, we continue to return capital to shareholders through dividend increases and ongoing share repurchase activity. We grew our EPS by 12% year to date. While the macroeconomic landscape continues to be uncertain, our outlook for the remainder of the year remains positive. For the second half of 2026, we expect EPS growth to be in line with our performance year to date. We also anticipate expense growth trending towards the low single-digit range, contributing to a positive operating leverage for the remainder of the year.

Speaker 9

Having generated an ROE of 16.7% year to date, alongside strong capital markets performance, we remain on track to achieve our ROE target of approximately 16% in fiscal 2026. With that, I will turn the call over to Jean-Sébastien.

Speaker 3

Merci, Marie-Chantal. Good morning, everyone. Since our last call, the Canadian economy has grown modestly while the labor market continued to weaken. The conflict in the Middle East is adding another layer of uncertainty by putting pressure on energy prices, inflation, and interest rates. That said, strategic trade diversification and accelerated nation-building projects in energy, natural resources, and infrastructure should help to support future economic activity. In this complex environment, our resilient portfolio mix, disciplined risk management, and prudent provisioning underpin our strong credit performance. Now turning to the second quarter results on slide 13. Total PCL were CAD 233 million, including the initial provision on performing loans of CAD 6 million or one basis point related to the Laurentian Bank syndicated loan portfolio. Adjusted total PCL were CAD 227 million or 30 basis points, down two basis points quarter-over-quarter.

Speaker 3

We added four basis points of adjusted performing provisions in Q2, mainly reflecting portfolio growth and unfavorable macroeconomic scenarios, which included a higher unemployment rate and more pessimistic outlooks for both equity markets and housing prices. PCL on impaired loans were CAD 192 million, or 26 basis points, down two basis points quarter-over-quarter, and within our guidance of 25-35 basis points for the full year. Personal Banking provisions were CAD 2 million higher sequentially, mainly driven by consumer credit. Commercial Banking provisions rose CAD 12 million quarter-over-quarter, mainly driven by the real estate and construction sectors. Capital Markets reported a CAD 1 million recovery related to one file. At Credigy, provisions decreased by $3 million, resulting from the normal seasoning of residential mortgages and consumer loans. At ABA, impaired provisions were down by $4 million sequentially to $13 million, reflecting lower formations.

Speaker 3

Turning to slide 14. Our total allowances for granted losses were CAD 2.6 billion, representing 5.1 times coverage of our net charge-offs. Our performing allowances were CAD 1.7 billion, demonstrating a strong performing ACL coverage ratio of 2.2 times. We have been building allowances for the past 16 quarters and continue to be comfortable with our prudent and defensive provisioning levels. Turning to slide 15. Our gross impaired loan ratio was 114 basis points, up three basis points quarter-over-quarter. Laurentian Bank syndicated loans accounted for CAD 40 million, or one basis point. GILS, excluding USSFNI, were 84 basis points, up three basis points sequentially. Net formations were 13 basis points this quarter. Excluding the Laurentian Bank portfolio, net formations were 12 basis points, up five basis points compared to last quarter. In commercial banking, net formations were 28 basis points and included one file in CRE residential insured

Speaker 3

On slide 26, we provide additional information on a few sectors of focus. Of note, we have limited exposures to U.S. non-bank financial, NAV lending, and software. In conclusion, we are pleased with the credit performance in the second quarter and first half of the year, and continue to expect impaired provisions to be within the 25-35 basis points range for the full fiscal 2026. In the current context of heightened uncertainty and softer labor market conditions, we expect further gradual increases in PCL, while our wholesale book remains subject to periodic lumpiness. However, our defensive qualities, resilient business mix, and prudent allowances position us well for the remainder of the year. With that, I will now turn the call back to the operator for the Q&A.

Speaker 12

Thank you. Thank you. Your first question comes from John Aiken with Jefferies. Your line is open.

Speaker 4

Good morning. Laurent, as we look towards you achieving the target of 13% CET1 ratio, can we assume that what we saw in the second quarter is going to be pretty much the blueprint moving forward? Where the internally generated capital remains very strong, but it's being fought off by the share repurchases, but also risk-weighted asset growth. Is this something that, not definitively, but is this something that we should be expecting moving forward in future quarters?

Speaker 3

Thank you for your question. At a high level, yes. You have sometimes period of volatility, which could impact market risk RWA. That is a factor that we have to take into consideration. I guess, at a very high level, yes, you should expect us to continue executing at these levels.

Speaker 4

Great, thank you. In terms of the risk-weighted asset growth, I don't know if this is for Marie-Chantal or not, but in terms of the expected growth, assuming that the Canadian consumer remains a little bit in trouble, I guess the density on the Commercial side is going to cause growth on that side. Is that a reasonable outlook?

Speaker 9

John, can you please repeat that question?

Speaker 4

Sorry. Yes. In terms of risk-weighted asset growth-

Speaker 9

Yes

Speaker 4

presumably the outlook is a bit stronger on Commercial and higher density is going to lead to the potentially risk-weighted asset acceleration.

Speaker 9

Yeah. In that context, that could be a good assumption.

Speaker 4

Fantastic. Thank you. I'll requeue.

Speaker 9

Yeah.

Speaker 12

Your next question comes from Matthew Lee with Canaccord Genuity. Your line is open.

Speaker 10

Hi, good morning. Thanks for taking my question. Maybe just one on P&C. Loan growth continues to be pretty strong. Deposit trends a little bit more mixed this quarter. As you think about the franchise today, is the pace and mix of core deposit growth influencing economics of new lending or the path of P&C margins? Is that going to be the main source of NIM pressure as you look into Q3 and maybe Q4?

Speaker 9

Matthew?

Speaker 10

Hi.

Speaker 9

It's Marie-Chantal. Maybe I can start with a few points on the NIM going forward and what we're seeing this quarter, and then Julie can take a moment to speak about more of the outlook in terms of loans and deposit growth for the P&C. For the NIM, let's take a moment just to look at the all-bank NIM, and then I'll go a little bit deeper in the P&C NIM. The Q2 decline of the all-bank NIM, as I explained in my remarks, is something that we had anticipated for this quarter. Recall that in Q1 we benefited from a particularly strong NII driven by ALM activities. In Q2, the treasury performance remained solid, although reported NII was lower sequentially, largely offset in non-interest income due to the accounting of some hedges, which happens from time to time.

Speaker 9

On a total revenue basis, that said treasury, as I said, had a very strong second quarter. The overall impact from treasury on the all-bank NIM represents approximately four basis points sequentially to the all-bank NIM. Additionally, we had some prepayment activity last quarter from Credigy also impacted the NIM by one basis point Q over Q, which is something that we had also mentioned. When you look at the P&C NIM decline this quarter, improved deposit margins was offset by volume mix as loan growth outpaced deposit growth. That's something that we've also shared in the past, and it's something that you're seeing when you look at our loan growth volumes as well as deposit volumes.

Speaker 9

Looking ahead, we expect the all-bank NIM to remain relatively stable in Q3 from Q2 levels, and we do expect a slight decline on the P&C NIM in Q3, driven by mix dynamics in commercial deposits, partly offset by continued repricing benefits on our core deposits.

Speaker 6

We expect the treasury NII to revert toward a midpoint between Q1 and Q2 level. That's a bit of what happened in terms of the NIMs and on the P&C NIM. This is Julie. If we talk about deposits specifically for retail, our deposit outlook remains consistent with the current market trends. The continuation of low interest rates through the end of 2026 limits the relative attractiveness of deposits and continues to drive outflows from GICs. While the market returns are expected to normalize, potentially slowing the pace of migration towards funds, the underlying dynamic is not expected to reverse. As a result, deposit growth is expected to remain flat. Judith, on the commercial side, I don't know if you want to dip in.

Speaker 5

Thanks for your question. Deposit growth on the commercial banking side remains a strategic focus, and we're really well-positioned to capitalize on a significant opportunity to grow our penetration in cash management product. Just to give you an idea on our cash management and deposit strategy, we have three pillars. The first one, we've been upgrading our online banking platform. It's almost done. Second, we're expanding our treasury management team to deepen client engagement and support deposit growth. This is in process. Third, we're enhancing our deposit solutions through more targeted offerings by client segments and industry. We're very positive on the outlook on the deposit on the commercial banking side.

Speaker 10

Okay. If I'm taking that together, for the next couple of quarters, we should continue to see loan growth outpacing deposits, and if so, we should still continue to see P&C banking NIM face some pressure.

Speaker 6

That's correct, Matthew.

Speaker 10

Okay. That's helpful. Thanks.

Speaker 12

The next question comes from Ebrahim Poonawala with Bank of America. Your line is open.

Speaker 2

Hey, good morning. I guess maybe first question, Nore, for you around, I think you said that the uncertainty on the macro side has led to a slowdown in investment spend, and then you went on to outline a lot of good things that could happen in the future. Just give us a sense of, it feels like the Quebec economy has had a delayed impact in terms of the slowdown. When you look at just the job picture locally, what's happening just from a credit standpoint, do you think that lagged effect that Quebec may be feeling will show up with somewhat higher PCLs over the coming quarters? How would you frame the year-end now in terms of just the economic activity and how that could translate into credit trends?

Speaker 7

Ebrahim, thank you for your question. Let's start with Canada in general. A general delayed reaction, labor market suffering a little bit more now across the country, Quebec as well. The uncertainty also around CUSMA and commercial tensions for our country. Those are all factors, I think, that are impacting growth and investment in businesses. It feels like we are a bit in a lull in our country in terms of in business investment. In my prepared remarks, and I've said this publicly, we are definitely encouraged by the shift in our government towards a focus on the economy. To us, that bodes really well going forward. In terms of change, you asked a question about outlook on PCL. It doesn't change our outlook, but maybe I'll ask Jean-Sébastien to comment on our outlook regarding PCL for-

Speaker 3

Yeah. We just affirmed our guidance for total bank. If you look at the retail book in Quebec versus rest of Canada, so the retail book in Quebec has outperformed for the past several years. It would be normal to see a little deterioration. I agree with you pointed out the higher unemployment. However, I would be cautious in not pointing it as a trend, as we've seen a large shift this quarter, but I would wait for a couple of quarter before we see longer-lasting trends before having a conclusion. The fundamentals of the Quebec markets remain, which is a strong saving rate, more double income families, and low housing prices. To add on top of that, I'd remind you that we have a low unsecured proportion in our total portfolio, which is where typically it would shift the first.

Speaker 3

The performing of our unsecured portfolio in Quebec is particularly good given the fact that we're over-penetrated in homeowners, which is a place where typically delinquencies and losses are lower.

Speaker 2

Got it. Thank you. As a follow-up on the capital and the buyback discussion earlier, as you think about I mean, obviously, you have a lot of excess capital, high ROE, so you're generating a lot. When you think about, is there any level of sensitivity when you look at the stock from price to earnings, price to book, or your internal return on those? I'm wondering, or is it more about you want to do X amount of buybacks and keep capital levels at a steady state, and you're, as a result, not particularly sensitive to where the stock's sitting at any given point in time? Would love to hear how you think about it.

Speaker 7

That's a great question, Ebrahim. We'll adjust from time to time. If we do see opportunities to increase the pace of our buyback because we think our stock is not performing at the same level as others. For instance, like we saw there's a period of time in January where our stock was not performing at the same level as others, and we did take advantage of that. We are a little bit dynamic in the way we manage the buyback. In terms of change in our strategy because of our stock price, there's no change in strategy. The only thing that would change our strategy is a big shift in macro. If there's a big shift in macro, where inflation is picking up and interest rates are picking up, and we think that the macro environment will deteriorate, we'll revisit. That's kind of the philosophy.

Speaker 7

We'll take advantage of price swings if we can, but our strategy is pretty steady.

Speaker 2

Excellent. Thank you.

Speaker 12

Your next question comes from Mike Rizvanovic with Scotiabank. Your line is open.

Speaker 11

Hey, good morning. I had a question for Judith. I guess a two-part question. One, just on the CWB loans coming off, I think CAD 400 million is what you flagged. It does move the needle on your year-over-year performance. 11% gets down to 5%. I guess I'm wondering how much of that is more recent? Is this just a normal part of the process of getting out of areas where you maybe are not comfortable on the risk side or for whatever other reason? Are you to the point where it's almost done at this point, or is there more potentially to go there?

Speaker 5

Okay. Thanks, Mike, for your question. I'll start by saying that as expected, our sequential commercial loan growth was consistent with the previous several quarters. There's no surprise on that. I will comment on the legacy National Bank portfolio. Despite macroeconomic uncertainty, clients remained very active throughout the quarter, and we're very happy we've delivered another quarter of double digits year-over-year growth. It is really as per our strategy, and this I want to point out, our core commercial banking grew more than real estate, and that's really focused on both mid-market and large client segments across all geographical footprint. That's the first part. If we go on the CWB side, so I want to offer three things. First, the performance of the CWB portfolio has been as expected.

Speaker 5

As mentioned in the last few calls, our teams have been focused on supporting the client experience throughout the conversion. No surprise around that. This focus has supported strong level of client retention with payout volumes remaining below pre-acquisition average. That would be the first point. The second point is integration activities have created short-term headwinds and capacity for new volume, which has not been sufficient to offset regular payment and payout. This has been particularly pronounced in the commercial real estate portfolio, as Laurent said in his remark, and which contained amortizing commercial mortgages, interim construction financing that pays out at successful project completion. The third point I want to offer is now the integration impact has clearly moderated, and our teams are well-positioned to return to generating new volume with early signs of recovery with visible improving pipeline, while we maintain pricing discipline, obviously.

Speaker 5

We're positive on the opportunities in front of us to drive growth on the CWB portfolio. What I would like to say also, is it finished, the integration? I would say that where we are right now, conversion and integration is finished, and we're going back to normal state in the next few quarters. That's what I would offer to you.

Speaker 11

Okay. Really nothing on the credit side that surprised you more recently? There's nothing related to credit?

Speaker 5

No, nothing on the credit side. I'm comfortable with what I see in front of me.

Speaker 11

Okay, perfect. Then just quickly on the 11% growth ex CWB, that's a really robust number, and I'm wondering if you could just sort of delineate between growth in Quebec, your core market, and some of the, maybe the low-hanging fruit that you're getting outside of the Quebec market as you expand. I guess in Western Canada in particular. Any color on that?

Speaker 5

Yes. On our kind of legacy NBC portfolio, our growth in Western Canada has been really high, and Ontario as well. I want to point out Ontario. Quebec is also growing at a faster pace. I would say that just to map it out, Western Canada faster, Ontario, and Quebec. That's how I would share that.

Speaker 11

Okay. Thank you for the color.

Speaker 12

Your next question comes from Sohrab Movahedi with BMO Capital Markets. Your line is open.

Speaker 14

Okay, thank you. Judith, can I just pick up there for a second? This growth, is it net new clients, or are you increasing lending with existing clients?

Speaker 5

It's mostly net new client. We're also increasing, but we're seeing some momentum with net new client, and that's been our focus.

Speaker 7

Okay, thanks. Étienne, you had talked to us about pre-tax pre-provision. Maybe if I can just get a reminder what you think your segment pre-tax pre-provision is likely to do this year now that you've got two quarters under your belt?

Speaker 16

Yeah. Hi, Sohrab. Yeah, thanks for the question. I'd say overall, we continue to feel good about the outlook, and I feel confident now about our ability to hit the top of the PTPP guidance that we had given for fiscal 2026. We've had obviously a really strong performance in both Q1 and Q2 with a lot of great deal activity and very supportive market conditions across several businesses. Also, I think the franchise is operating from a structurally stronger position today. You see it in our ability to execute for clients across market cycles with the ability to support increasingly complex financing and capital raising needs, and the increasing number of leads and the improving diversification of the revenue mix.

Speaker 16

For the balance of the year, our base case is we'll see some more typical seasonal dynamics through the summer months, and a market backdrop that may be a bit less active than what we experienced in the first half, while we still think it will be positive overall. Maybe a bit of more precise color, so we're seeing in structured products, you're going to see less volatility, we feel. Overall, investors are surprisingly resilient, and they continue calling products, and that should mean good issuance volumes. The intermediation businesses, it's really our scale and execution capabilities that continue to position us well, support client flow across different market regimes, and that's reinforced by our leadership in ETFs and options and domestic bond trading. Across our hedging solution businesses, we think we'll see continued activity tied to financing and infrastructure across rates, FX, commodities.

Speaker 16

Although part of the elevated results in Q2 may have been pulled a bit forward from later periods. At DCM, I think there could get interesting. I mean, borrowing on both the corporate and the government side. There's good financing conditions, there's resilient investor demand, and that, I think, will translate into robust issuance activity. We continue to see good pipeline in the corporate banking and the investment banking. It's well diversified across sectors, so we think M&A remains strong. Strong markets and strong investor risk appetite, I think will continue to be a good backdrop for equity new issues.

Speaker 14

Okay. That's very comprehensive. It's incredibly helpful, comprehensive. Maybe you're going to even surprise yourself and exceed the upper end. Laurent, I want to ask one last question, maybe just for you. I think last quarter when you talked about ROE outlook, you talked about either side of 16% for 2026, and you mentioned 17% or thereabout in 2027. I guess wanted to confirm that that 17% still remains the 2027 kind of yardstick. Can it benefit further based on the work you're doing in the ROE optimization in your P&C Bank, or did you have some of that benefit incorporated into the 17% type of number you were talking to us about for 2027?

Speaker 7

Thank you for your question. You're correct. Last quarter, we did provide guidance for the year. We upgraded our guidance for the year from 15% to 16% for 2026. Maybe I should correct you, but 2027, we provided a waterfall, and it was 17-plus that we guided for 2027. I think Marie-Chantal provided a really good explanation last quarter on the 17-plus, and also said that all the work that we're doing right now in terms of the next strategic plan are not included in our guidance for our ROE for 2027. Does that answer your question, Sohrab?

Speaker 14

Yeah. That's perfect. Thank you very much. Thanks for taking my question.

Speaker 16

Perfect. Thank you.

Speaker 12

Your next question comes from Doug Young with Desjardins. Your line is open.

Speaker 1

Hi. Good morning. Just maybe starting on the credit side, two things. New gross impaired loan formations. I look at it on a gross, not net. Gross loan formation did jump sequentially and I think even year-over-year, and it looked like write-offs were a little bit elevated. Just maybe you can talk a little bit about where you're seeing the pressure, like from a product or from a geography perspective on, again, new gross impaired loan formations and write-offs.

Speaker 3

Thanks for the question, Doug. It's JS. Pretty simple explanation to that, and we called it on the slide. To the majority of our formations in commercial were actually driven by one file in commercial real estate in Western Canada, and that file is insured. You've seen us grow in residential insured in the past years.

Speaker 3

I think this is one good feature of this growth is when they go wrong, you have some PCL protection on it. Although there is a large GIL associated to it, there is no PCL associated to it.

Speaker 1

Have you sized out what that was in terms of loan or in terms of formation?

Speaker 3

I can give you a little bit more detail on this. It's a little bit more than half of the commercial formations were driven by that file.

Speaker 1

Okay. How about the write-offs?

Speaker 3

The write-offs can be lumpy. There's always two sides to write-offs. The retail write-offs are more normal, driven by credit cards and by end of cycles for the other portfolios. Then we did arrive to the end of workouts for a couple of larger files in commercial. When you arrive there, what you do is you de-recognize the loan, and you have the correspondent write-offs. Obviously you're seeing a little bit more lumpiness on this quarter.

Speaker 1

It doesn't sound like in either of these two that there's anything overly concerning. Is that from your perspective?

Speaker 3

Well, I'm happy that the gross impaired loan was related to an insured file, that's for sure. No, nothing overly concerning. Like if we had removed this file, our GILs would actually have been down quarter-over-quarter. As I mentioned in my prepared remarks, I don't think we're in an environment where the level of uncertainty has reduced. We could expect still ebbs and flows for the GIL ratios going forward.

Speaker 1

Okay. That's clear. Second, just on Credigy, we do our own math and we look at the NIM or margin, and I look at the margin this quarter, and I look at it relative to what an average would've been over the last three years. It looks like it's down by a decent amount. I know that you can say from last quarter there was some prepayment that went through, but even if I look longer term, it looks like it's lower. Is there anything that's changed in the portfolio or that went through this quarter, that where there would've been a material kind of impact on NII or NIM or margin for Credigy?

Speaker 16

Hi, Doug, it's Étienne. You're right to point out a long-term slight decrease in margin. I think it's a function of we continue to prioritize secured assets. In Q2, I think two-thirds of our investment volumes were in mortgage portfolios. First lien and second lien, but a lot of first lien. That on a risk-reward basis, we really like it. That's where we see value right now. If you look at other asset classes, like in the unsecured space, we continue to see portfolios trading at prices that don't really reflect our view of the potential risks and performance. Conditions are a bit challenging there. We'd rather stick to the mortgage space for now and we'll adapt. As the macro changes or as the situation evolves, we'll pivot as Credigy has many times over its history been able to do.

Speaker 16

You're right that margins have been going down a bit, although the risk-reward, we're probably in a great position and the goal is still to deliver strong asset growth, but never jeopardize the long term to meet short-term guidance in terms of margin or asset growth.

Speaker 1

I guess what I'm reading in this, and I guess I should have looked at this, but if I looked at a risk-adjusted margin, it actually probably wouldn't be that different because your PCLs would be coming down as this mix shifts, and that speaks to the risk-reward. Is that a fair comment?

Speaker 16

Yeah, I think that's how I would look at it also, Doug.

Speaker 1

Yeah. Okay. I appreciate the color. Thank you.

Speaker 12

Once again, if you have a question, it is star one on your telephone keypad. Your next question comes from Darko Mihelic with RBC Capital Markets. Your line is open.

Operator

Hi. Thank you. I wanted to revisit the net interest margin discussion. Your outlook is very helpful for the next quarter or so. My question is a little bit more longer term, I suppose, in nature. It really revolves around the high level of liquidity you're currently carrying. I understand you have a 13% common equity fund ratio sort of target end of 2027. What would be a more normal LCR level, and is there any kind of a drag here on your margin? How fast would you sort of target to get to more normal liquidity levels?

Speaker 9

Hi, Darko. Maybe I can start then, I'll let Étienne give a bit more insights from a Capital Markets perspective. When looking at the LCR before going to the long term, I think it's worthwhile just giving a few insights on the evolution of the ratio over the past couple of quarters. The decrease in LCR that you saw this quarter, which is effectively a decrease from the previous quarter, but it's.

Speaker 9

It really came back to the usual level that we're used to seeing, and that's where we like to operate at National Bank. Nevertheless, the decrease came mainly driven by secured funding and collateral management activity. It really reflects the transaction mix and timing rather than a change in our strategy, as I mentioned, and how we manage the bank's core liquidity positioning. The level that you're seeing right now is probably where we like to operate. We like to be in a good position and seize market opportunities when we see good funding opportunities, and that's what we saw earlier in the year. Maybe, Étienne, would you like to add any?

Speaker 16

Thanks, Marie-Chantal. You said it very well. We pre-funded a lot over the last couple of quarters. The previous couple of quarters, there were some market opportunities that were interesting, and it made sense to fund and to deploy this funding in highly liquid securities within Capital Markets and treasury portfolios. Now that the conditions are normalizing, you're seeing our LCR drift back towards more of its long-term average. I think over the long term, expect us to be in the 140, 150 range, but we really like having it among the highest of the big banks. That will remain part of the strategy.

Operator

As I think about that then, it's clear that this is really a Capital Markets, and there's none of this that's actually sort of being pushed out through FTP into P&C Canada. Would that be a correct assumption?

Speaker 3

It is mostly in capital markets and treasury portfolios, but you're right. It's really opportunistic positioning in capital markets that are the bulk of this ratio.

Operator

Okay. Thank you very much for that. That's very helpful. Another question on ABA. Just wanted to sort of revisit your outlook for ABA. It looks like there's a weaker economy. The country itself has sort of lowered its economic outlook. Doesn't seem like you did anything on the performing side from PCLs. What is your outlook for ABA and should we just simply consider that the high level of growth, double-digit loans and so on, should continue, and we really shouldn't expect any difference in PCL levels either?

Speaker 15

Hey, Darko Mihelic, it's William Bonnell. I'll take that, and maybe J.S. can comment a little later on the PCLs. Yeah, for the economic outlook I described, Cambodia has faced a series of challenges over the past years, from the pandemic to the U.S. tariffs to the conflict with Thailand and now the conflict in Iran. It's weathered those headwinds relatively well, but expected GDP growth has certainly declined. I think 6% in 2024, 5% in 2025, and expected to be around 4% next year, which remains significantly below its potential growth. We've talked previously about recovery and tourism being slow. That's certainly the case now. However, the growth in exports is higher than we had expected, particularly to the U.S. Year to date, it's up about 39% from last year, and FDI remains strong.

Speaker 15

In the challenging context of headwinds in the economy, we're very happy with ABA's performance. It's continued to evolve its market-leading digital banking services, which has led to great growth in the number of clients and in low-cost deposits, which is helpful. I'd point out, Darko, that the long-term structural tailwinds in Cambodia remain in place. It's still under-banked, young population, FDI remains strong, its competitive labor cost supports manufacturing sector and exports, and so we remain pretty positive about the long-term growth potential. Does that answer your question? Maybe I'll pass it to J.S. for P&C.

Speaker 3

Yeah. On a credit perspective, recall we had two data points on ABA first, is we had guided a while back, and that still holds true, that Q4 2024 would be the higher end of what we expected going forward in terms of formations, and we still think this is true. We also repeated that we expected the impaired PCL to remain elevated for this year, which is still what we expect. Finally, to your last comment on the build, I think it's important to remember that the starting point is important, and although we built 3 basis points this quarter, we built 47 basis points last quarter, 42 the quarter prior. We have been building performing provisions at ABA to make sure we have good downside protection.

Operator

Okay. Thank you for that. Maybe just one last question to wrap up on ABA. If this current pace of growth continues, it is completely self-funding, is that correct?

Speaker 15

Yeah. As you've seen, deposit growth has been much higher than loan growth. I will caution when I think about what the impacts will be from the Iran crisis or the Iran conflict, it's mainly impacted the price, not the availability of fuel, and it is consuming a greater portion of household budgets.

Speaker 15

Than in the past. We would expect deposit saving rates and deposit growth to be lower than in the past, and that will impact it. In terms of self-funding, yes, it definitely remains to have a strong excess liquidity on the balance sheet and continues to grow deposits very strongly.

Operator

Great. Thank you very much.

Speaker 12

Your next question comes from Paul Holden with CIBC. Your line is open.

Speaker 13

Okay, thanks. Good morning. I want to go back to Étienne. You've given some helpful commentary on the outlook for the business for second half of the year. I guess I want to ask you sort of longer term, because this business has become, I think, harder to forecast. Never easy, but harder to forecast just because you have this underlying growth from client initiatives and growing product offerings, et cetera. Also very favorable market conditions, right, which have obviously benefited all banks. Trying to figure out a couple of things. One is should we actually be assuming continued growth into next year for this business, or is that just asking too much at this point?

Speaker 13

Two, if we think this business at some point has to normalize, which it probably does, what specific market conditions do you think we should be tracking to sort of get a sense of what could result in more normal run rate earnings? Thank you.

Speaker 16

Thanks, Paul. It's Étienne. Definitely, we want to keep growing the business, and we want to keep it growing at the same pace as the rest of the bank. That's definitely part of the strategy. We're putting in place a lot of initiatives both on the Global Markets and the Corporate and IB divisions to continue our growth and really to, as we've scaled domestic champions in Canada, to slowly port those capabilities in new markets. We've done it successfully both on the CIB and the Global Markets side. I'm thinking of how we operate in the Delta One space, in the structured product space, and now in the project finance and renewable energy space. We'll definitely continue to do that. As to what to track to expect slowdowns, and we've seen that, right? It's when clients get a lot more quiet.

Speaker 16

I mean, we still are a franchise that depends on client flow, client deals, giving clients advice, and so when the economic cycle reaches a point where there's a lot less activity, look for us to slow down. I mean, some of it may be when there are impacts on the markets that are negative, it creates volatility sometimes. Because we have a lot of countercyclical businesses on the trading side, that can be cushioned, but over the long term, we need clients to make money. We need clients to succeed. This is a franchise that will always track client activity and client success.

Speaker 13

Okay. To be clear on that, even though your business has outgrown the rest of the bank in the last couple of years, you still think going forward, even at the current levels, you can grow in line with the rest of the bank. That's the messaging here?

Speaker 16

That's certainly the goal, yes.

Speaker 13

Okay. Thank you for that. That's it for me.

Speaker 12

This concludes the question and answer session. I'll turn the call to Laurent Ferreira for closing remarks.

Speaker 7

Thank you, operator. Second quarter was strong, on that, I'd like to thank our teams across the country for all their efforts and excellent execution. While the macroeconomic context remains uncertain, we are really well-positioned to support our clients and continue delivering strong earnings growth and ROE. On that, thank you, and I wish everyone a great summer.

Speaker 12

This concludes today's conference call. Thank you for joining. You may now disconnect.

Powered by Quartr