National Bank. I have Laurent Ferreira here, the CEO of National Bank. And I think, Laurent, to start, we might as well start where we've been starting with the other CEOs, which is the big change in interest rate expectations and sort of how to think about things for National Bank. And in particular, I think I wanna really dig into your NIM and NII outlook for 2024, and maybe walk us through. Because you had a very good performance in NIM, frankly, on a relative basis in 2023. But if we get an aggressive rate reduction campaign happening in both countries, how should we think about that for your bank?
Absolutely. Thank you very much for having me. When you look at our rates, I think we should expect short-term rates to come down at some point. But I think right now, I think the market is a little overly optimistic with rate cuts. I think there are still risk in the market. So we are seeing a general slowdown. We are seeing core inflation coming down a bit. But you have geopolitical risk, which could impact food price, trade disruption. You have, you know, energy transition, deglobalization, you have government spending. These are all inflationary. So I think all these factors are still there, and they could impact monetary policy in 2024.
So I think at this point in time, yes, we should see some rate cuts, but I think the market is a little bit optimistic. In terms of the Canadian economy and rates in Canada, we're expecting negative GDP growth for the first two quarters, -1.1% and -1.3%, respectively. We see a rebound after that. Labor market is softer. I do expect, though, wage pressure in most sectors. You know, general cost of living, strikes, labor negotiation. You have housing pressure because of population growth, housing shortages. Now, I guess on the positive side, the pullback on longer-term rates that we've seen since mid-October could bring some relief to mortgage renewal and could possibly give a boost to investments.
So in terms of, of rates, so I think we are expecting some rate cuts in Canada in 2024. But I do believe, that a no-growth, persistent inflation scenario for the next few quarter is possible, and that would prevent, more aggressive cuts, and that would prevent earlier cuts as well, from the central bank. Longer-term rates, I think, the equilibrium is a little bit higher, given, you know, the macro geopolitical government spending. I think the equilibrium for longer-term rates is higher than what we're observing today. You asked a question about, NII. I think in terms of just pure sensitivity, so you're absolutely right. I think our performance, 2022, 2023, in terms of NII, PNC, and wealth, was really good.
I think we have reached the peak of, you know, NII expansion because of where rates are and expectations of rates coming down. You know, if you look at just our disclosure on sensitivity, 100 basis points across the curve, it's CAD 100 million approximately of NII for National Bank over a 12-month period, ex trading. And it's four basis points on our 2023 NIMs of 2.50. So I do expect... You know, we are at the peak of NII expansion. In terms of NIMs for the year, we view, we think they're gonna be pretty stable. But we're, you know, in terms of planning and growth, we're not just focused on NIMs.
You know, if rates do come down, it could be positive for loan growth, mortgage renewal, and also, you know, if we're not in a downturn, it could be also good for overall credit, which means PCLs and earnings. So, overall, I think, you know, we're in a good position, but I think we've reached a peak in terms of NII expansion.
So, that's not to say that NII will decline. Clearly, you're thinking that it'll grow, just not at the same pace as before. So if, if NII is sort of slowing, the one thing that happened in 2023 was there was a lot of volatility in markets. We had a little bit of up and down with trading. So maybe we can talk a little bit about whether or not a falling rate environment... I mean, we've, we've always been sort of coached to think that volatility helps National Bank's trading revenues. But what about falling rates? Is there anything to read into whether or not the rate environment will support or harm your outlook for trading?
Yeah, well, everything else being equal, that means you're not in a downturn, and the outlook is positive. You know, lower rates are generally good for markets. So it's positive for markets, positive for trading, ETF, futures. I think it you will see a resurgence in structured products, shorter-term products also. So there's more churning, more client activity. It's also positive for corporate activity because if there's less funding pressure, you're talking about more financing activity, you're talking about better market conditions for ECM, DCM. And all of that brings more hedging from our corporate clients, which means more derivative revenue for us. So overall, I think lower rates could turn out to be positive and create opportunities.
Having said that, and if you look at the performance of our, our Financial Markets business, I think regardless of the market, regardless of the rate cycle, I think we've been, pretty resilient and performing.
... And so maybe just picking up from there, I mean, you had a, it was a good 2023, but we left on the conference call thinking about things like the impact of dividend taxation in Canada. And you sort of left us with this view that in 2024, you should expect some growth in your capital markets business. So, what? I wonder if we can just put a little bit of color around that, because I thought, you know, from my perspective, I didn't sense that other banks really called out the taxation as an important part. So maybe you can speak to how it impacts your business, where it impacts your business, and how you're going to overcome, and why just modest growth?
Right.
There's a lot in there.
So the capital markets, so, and we have a big division on, on, you know, equity, equity derivative. It is a client business. ETF market making, structured products, our securities finance. So to hedge this position, we have to buy Canadian shares, and the Canadian dividend is non-taxable, so, you know, we've benefited from that over the years. Now, that is gone, right? So we are going to be facing higher tax in financial markets in 2024. Having said that, when we looked at our plan for 2024 across all of our businesses, our trading businesses, we saw growth. And, you know, opportunities in securities finance, we think there's a pickup in structured products. We think there's more volatility in the markets or more market-making revenues.
So in general, a bit of a headwind, but when we looked at our plan and our budget for 2024, we believe that we have a well-diversified business mix, and that we're gonna be able to deliver earnings growth in 2024.
And so just thinking, just poking away at that a little bit, does nothing need to change on the product side, pricing side? Anything there that you can also do-
Well, the pricing, we evolve-
How do you think that-
... we evolve with the market, right?
Right.
Do we change, you know, specifically National Bank? Does the market change? The market might evolve, and we'll just be very competitive.
I see.
So.
Okay. And so when you looked at your plan for 2024, again, we're all just trying to size this. Does the plan say similar growth rates as past, but then the taxation sort of eats into that, and we have very modest growth? Is that how we should think about it? Like, what kind of growth expectations should we expect from cap markets, ex-dividend, ex the tax?
Right. So, you know, we always, we always aim, you know, our, our in capital markets and financial markets in general, you know, a growth of approximately 5% per year, right? That's sort of the mindset that we always have. And, when we looked at the opportunities, obviously, you know, it, it would have been higher if we wouldn't have the higher tax rate, but we can still deliver good growth.
Okay. Oh, so you mean 5% earnings is kind of the expectation for 2024, or did I read that wrong? Sorry.
Oh, that's always the target.
That's always the target, and then... Okay, fair enough. Okay, thank you. That's great. So maybe sticking with the, or going back to, the interest rate environment. You know, one of the things that we've seen is a slowdown in mortgage growth across the board from many players. Just one bank that's maybe aggressively chasing mortgages, and we'll talk to them later. But how do you envision yourself competing in, especially in a falling rate environment? I mean, you know, we tend to think of National Bank as being mostly Quebec focused, but you have the opportunity to grow mortgages outside of Quebec. Does this? And there's this great big renewal that's about to happen in 2025 and 2026.
Do you see this as an opportunity for National Bank to grow the mortgage book, or is that not something that you're really in?
It will depend on opportunities, and discipline around growing a balance sheet is a priority for us. So volumes, yes, but credit quality and margins are also very important. And I think we've delivered healthy growth. In 2021, 2022, we had 10% and 8% growth respectively. Now, 2023, less volume, much tighter margins, so we adapt, and we became a lot more disciplined. I expect the same kind of market dynamics in 2024 for the mortgage market, so we're gonna keep the same recipe, right? And what we do is when we see the market become much tighter, our focus is proprietary channels, where we emphasize really client engagement versus product metrics. And I think it's served us well, and we're gonna keep doing that.
Okay. Now, the other thing that I wanted to touch on, with respect to the rate environment and what we've been hearing from banks, and as I say, like, there's been a lot of talk on deposit competition, both sides of the border. And in your instance, there was a bit of a clarification from OSFI on, you know, the HISA, ETFs. And so as I think about a more intense competitive environment for deposits, maybe you can share a little bit of insight into your deposit strategy and what you intend to do in 2024 to grow your deposits. And how should we think about that not only in a falling rate environment, but also longer term for National?
Before I jump in on the strategy, just on the cash ETF business, it's a great product. It's a great product for retail investors. The rates are competitive, very liquid. We have CAD 14 billion as of Q4.
Mm-hmm.
We're gonna keep supporting the product.... and it's a great product. It fits really well with our wealth management open architecture model.
Sorry, and just for some perspective, CAD 14 billion from what? Like, how long has this been in existence, and how quickly did you grow it?
Oh, I think it's been over five years.
Five years?
Yes.
From 0 to CAD 14 billion in five years. Do you see that same kind of growth rate?
Everywhere in-
No, no, do-
Oh, going forward?
Going forward with this product.
No, I, I wouldn't know. I mean, price, you know, some, because of the change, some, you know, pricing has adjusted a little bit.
Yep.
So we'll see. But it's a great retail product, and from our perspective, it's got good effective liquidity characteristics.
Mm-hmm.
Now, in terms of our deposit strategy, it starts with the business mix. Right? Having a well-diversified business mix, you know, it's not a strategy, it's not a PNC strategy, it's a bank strategy. So deposits are important in all segments across the whole bank, right? And we've always opted for optimal diversification across the bank, right? So you can't just focus on one segment, and you've got to look at, you know, your strategy overall. For instance, our wealth business. Our wealth business has shown great result in terms of gathering deposits. Retail deposits, which are often countercyclical, right? Our structured product business are deposits. Cash ETF are deposits. So you can't just look at, you know, one area.
You've got to look at the approach that we have, you know, in terms of our deposit strategy. And it's about, you know, having a funding mix that is resilient across all segments, products, clients, and maturity, right? And if you look at the past 15 years, cycles, crises, we've been right through them, right, with our model. So I think the new world, in terms of deposits, it's not just demand deposits are the thing. You have to be diversified, term, demand across various businesses, industries, products. So I think we've. Our strategy, you know, it's right at the top. It's the ALCO committee, and it's really making sure that we focus on both sides of the balance sheet in all businesses.
But I guess another way to ask it is to press you on this a little bit is, in your bank, when I look at—I'm looking at this at the all bank level. I guess maybe you can tell me if I'm looking at it incorrectly or not, but when I look at your loan to deposit ratio is higher than average.
In PNC, in PNC?
Well, all banks. So, you know, again, correct me if you think that's the incorrect way to look at it, but I've had other banks tell me: "Look, with the loan to deposit ratio as high as we are, we're gonna fix that. We're gonna really press on the deposit engine for the foreseeable future to sort of correct that." Do you see it differently, and do you think of it in a different way?
I look at the stability of deposits, and that's important. So again, being diversified is more important. Having segments that perform better, so, you know, the stickiness, for instance, of deposits in our wealth business is an important part of our strategy. And then also, yes, you do pay more for certain deposits in certain business lines, but they're stickier, right? And they're not as impacted by cycles. So to me, what's much more important is the resiliency, diversification across all your sectors versus just, you know, one ratio.
Okay. Yeah. Now, on the opposite side of the balance sheet, the one thing that we also notice is your growth in business and government loans is just commercial. It's significantly better than peers and has been for some time. And this last quarter, in fact, was much stronger. So the question naturally occurs: what are we really chasing here, or what are you really growing in 2020, in 2023—the end of 2023 and into 2024? There's a natural concern that at this point in the cycle with high rates, what are we looking at? What are we growing? So maybe you can give us some details on your commercial loan book.
Maybe talk a little bit about the kind of growth you're seeing, where you're seeing it, and why we shouldn't be concerned.
Absolutely. So on the growth, we're in a good capital position. We don't have capital constraints.
We'll get to capital in a minute.
We haven't changed our standards either.
Yeah.
All right? So if you look at our performance, our impaired loans, you know, stable year-over-year. Delinquencies in our commercial book is still below pre-pandemic level, and we've been prudent, right, in terms of reserves and all that. But what we've done, if you look at our growth, and specifically over the past 5 years, commercial real estate was a big part of it, and what we did there on insured residential, that book has LTVs in the 60s. Seventy percent of it is insured. If you look at clients that are most at risk there, you know, with debt to service ratios below 1, as a total percentage of our commercial real estate book, it's in the low single digits, very low, and it's mainly in residential.
We've also, over the past five years, reduced our exposure to office retail. They're both below 10%. We have no exposure to U.S. office. So we saw an opportunity. I think you've heard this before. You know, going into 2018, 2019, our growth was not as strong as others, and we saw an opportunity to turn the dial up. But the growth is not only real estate. We have a commercial leading franchise in Quebec, as you know it, that has performed extremely well, and we are also growing outside of Quebec. Ontario, Alberta, BC, are focuses for us, and over the past three years, we've increased the number of commercial bankers outside of Quebec by 40%. Our loan book outside of Quebec has grown by 18% versus overall 13% over the past three years.
The client acquisition rate is twice as fast in our commercial business outside of Quebec versus Quebec right now. So it's not just real estate. Real estate was a big part of it, but it's, you know, a well-diversified growth strategy, good risk profile, and it's profitable.
So, what's the secret sauce? How do you grow at 18% in Ontario, Alberta, and British Columbia without-
Well, we started from a low level.
Right. Okay.
You know, getting the right talent in place is what we're doing.
Got it. Okay. Now, one of the other areas that we've talked about, or you've talked about in the past, that you've previously suggested that, you, you maybe see some potential to deploy more capital in Credigy. And, you know, I've had the chance to speak with your folks at Credigy recently. Fascinating conversation, by the way. But maybe for this audience, you could speak to, what Credigy is focusing on and, and what you'd like to see from that business, and particularly post Basel III reforms. 'Cause it's the one thing that we see, we think about, with, with this business is gonna be... You know, I, I can absolutely think of a scenario where there's a ton of growth potential, and I can think of a scenario where there's not so much growth. So maybe you can give us a-
Absolutely
... a bit of a primer here.
Sure. 2023 was, you know, a change. We macro liquidity U.S. banking crisis, definitely. So the things that, you know, we're following is obviously banks in the U.S. selling assets faster. And the other thing is more stability in rates in general would also boost, I would say, supply. We grew assets, average assets by 13% last year. Really good. The pickup was really in the second half of the year. Deal flow as surpassed our expectation in the second half, and so far this year, it's ahead of expectation. Most of the opportunities we see are still performing loans, secured.
The team tells us that and we have the capacity to do unsecured, that unsecured assets are still too rich versus expected credit loss. But you know that the team has the capacity, and if the opportunity is there, pricing falls in line, we'll be able to jump on it. So we believe that 2024 will be as good as 2023 in terms of asset growth, if not maybe better. And you know... This is the model, right? There's an opportunity. The market is going in a direction. Banks are gonna sell assets.
We'll be there, and you know, if you look at the performance of Credigy over the past several years, it's accretive to overall bank NIMs, it's accretive to ROE, and they're gonna keep doing that.
Is accretive to ROE even in the post-Basel III world? Is it, is it more important to it?
So Credigy, Credigy is already under standardized credit approach. So most of Credigy and most of the deals that we're pursuing right now are also under a standardized credit approach. So we don't, we don't see it as a headwind for Credigy's ROE, the reforms.
But doesn't it shift and make you more susceptible to the floor if you grew Credigy at an astounding rate-
It would be-
... wouldn't that push?
It would... Well, it would actually be good 'cause they're already under-
Fair enough
... standardized, right? They're not gonna be punished for the-
Fair enough
... because of the reforms.
Yep. Got it. So, on capital then, just to sort of circle back on it, one of the interesting things is that you've, you've got a high ratio.
Mm-hmm.
The capital ratio is 13.5%. You do seem to be affected by FRTB, though.
Mm-hmm.
So maybe you can talk a little bit about that impact for us, and does it change anything for you? Does it change how you trade? Does it change-
Right now, it doesn't. Right now, it doesn't change anything. Could it change things in the future? Will depend on opportunities. But as we stand right now, we like all of our businesses, they're performing really well. We're very comfortable with them. FRTB is gonna cost us 35-40 basis points. But you know, so we have to- we have, you know, more regulatory capital-
Mm-hmm
... for our trading businesses, but it doesn't mean that they don't make sense economically. So at this point in time, we don't, we don't see any change. I've talked about this in the past. We have an approach in financial markets where we have centralized capital allocation, and what that has done for us, it has made us very agile. It has allowed us to really optimize RWA consumption and provide what we think are better returns ultimately. So being much more agile in capital allocation faster. So look, I fully trust the team to implement, you know, the new restrictions and optimize accordingly. And we'll see. We'll see how it evolves, and if there are, you know, other opportunities for us to do things differently.
You know, we threw into the mix of Financial Markets Credigy, and one of the things that I want to see more and more is they have their approach, but I want to see now Credigy in the mix of capital allocation, right? And if there are things that, for instance, and I'm just gonna throw this here, that we are saying no to in Credigy, but are actually saying yes to in capital markets in terms of, you know, same type of risk profile, but much higher return, well, it'll be up to them to, you know, reallocate capital if there are opportunities for us.
Hmm. I'll think on that. So then to follow the bouncing ball, we've got really, you know, FRTB, the impact is there. Once you've swallowed that, you're past it. Floors, not too concerned about. It'll eventually hit you, the way I think in 2026 or something, but so why not a more aggressive buyback? If you're carrying 13.5 and you're generating lots of capital-
Sure.
Why should we not think about National Bank as being much more aggressive on the buyback?
So the minimum is 11.50%.
Mm-hmm.
So that means that, you know, you would hear in general, people say, "Let's, let's-- we're gonna operate somewhere above 12%," right? After FRTB, we're slightly over 13%. Macro environment is still uncertain. Path inflation is also, you know, I think, there's uncertainty that remains there. But we also see possibility to grow organically at ROE levels that are on target, and at this point in time in this cycle, we wanna have a bigger cushion if opportunities accelerate. So I think it's too early for buybacks at this point in time. There may come a time when our capital generation is higher than our consumption, that our business mix has evolved. We'll buy back shares at that point in time.
In the meantime, you know, we wanna focus on growing our franchise, and we have opportunities, and I want to be prepared to take on more opportunities if they come our way.
Mm-hmm. Okay, great. I think I'm gonna attempt to look at the questions on Slido, and apologies for the earlier session. So, I do have one question here. You sounded a note of caution, and National's own strategists are cautious negative on real estate. Where are you most concerned, i.e., can you provide a little bit of color on the home market in Quebec?
On real estate, and-
Just basically, you have a cautious tone and you're somewhat negative on real estate. So where are you most concerned?
So-
If you can bring it back to the Quebec part.
So I'm not negative on real estate. Cautious for sure on the overall economy. Our overexposure to Quebec is actually a positive for us. When we actually look at even, you know, early-stage delinquencies, they are much less present in Quebec versus the rest of the country. House prices are, you know, much lower in Quebec and in Montreal versus Toronto and Vancouver. Households are less leveraged, so I think overall, yes, we are prudent, and as we grow our business, we want to be as well prudent, and that just gives us more firepower, you know, going forward. So not overly concerned about real estate, but definitely just remaining prudent because we still think that there are a lot of moving parts in the economy.
Okay, and I see the next question is similar to my own, so I wanted to sort of bring this back to ABA in Cambodia.
Mm-hmm.
So we've seen some elevated losses there. We've seen... You know, I try my best to do my research on Cambodia. I've seen real estate prices really fall there. So there's a couple of questions that we have on the view on ABA. First and foremost, are we at peak losses for ABA? Could we see those losses start to come back down again, or do you think we could see elevated losses for an extended period of time out of ABA?
I think the impairments are gonna remain elevated because of the macro environment. Although we do believe that net charge-off rates are going to be low. I'd like to remind everyone, our loan book, 98% of our loan book is secured.
Mm-hmm.
LTVs are in the forties, and we're gonna remain prudent, given the current cycle. So we think they're gonna remain high. Now, in terms of, you know, your question of risk and real estate in Cambodia and the news that you've heard, so couple of things there. Prices have come down, real estate. 2021, 2022 was mainly the big drop that we've seen. It was concentrated in high-end condos, single villas, areas that ABA is not really involved. We're not involved in offices. We're not involved in hotels. We're not involved in large condo projects. ABA lends to the real economy, business owners, and what we've done is we take retail business deposits. We lend to business, small business owners, right?
We take the real estate as collateral, and that real estate typically serves as the business location and the house. Right? And that real estate in Cambodia is referred to as a shophouse, a shophouse. And if you look at what's happened in that category, at most, in 2021 and 2022, it was down 10% to maybe 15%, and that's the bulk of our exposure at ABA. So I'm not. Yes, you've heard, you know, and it was in the news a lot, and generally also in Southeast Asia, but the exposure that ABA has, I'm not overly concerned with.
To be clear, I mean, that's the concern we have is that the spillover continues, but that doesn't seem-
Mm-hmm.
You don't seem to share that view, that a 10%-15% drop was sort of-
It has sta-
Okay.
That was 2021, 2022.
Right.
It's really stabilized since.
Stabilized. Okay, great. So what about the growth rate then? Let's talk about the strategy and longer-term growth rates for ABA.
So, 2024, double-digit growth. Again, loans, deposits, we had, you know, over the past couple of years, really good growth. 2023, big growth in new clients. 31%, client acquisition, that's 580,000 new clients just in 2023. I wish I could say the same thing for National Bank in Canada. So, overall, continued growth, right? Margin pressure in 2023.
Okay.
And that's mainly because of higher rates. You saw, you know, a lot of our existing clients moving to term, and a lot of the new clients that we onboarded opted for term deposit. That has put, you know, general pressure. That trend, in terms of migration, has slowed down, and when we look at our numbers between October and December, it's much more balanced in terms of demand and term deposits, but it's really too early to call it a big shift. I think we're still going to experience margin pressure in 2024 because the demand for term, you know, is still there, and our client acquisition is still very strong.
Okay, I think we're getting to the end of our session. So as usual, I want to reserve the last couple of minutes to hand over the floor to you to let everybody know what your key messages will be for 2024.
Thank you very much. Look, we're in a very strong capital position. The macro environment remains uncertain. I mentioned that. I do believe that the market is definitely getting overly optimistic, and I think we should have more rate volatility, inflation surprises, but we're really well-positioned. And I think that we're going to continue to perform regardless of the market environment and deliver premium ROE. Thank you.
Okay. With that, we'll end the session. Thank you very much.
Thank you.