All participants, thank you for standing by. The conference is ready to begin. Good morning, ladies and gentlemen, and welcome to National Bank of Canada's first quarter results conference call. I would now like to turn the meeting over to Mrs. Linda Boulanger, Senior Vice-President of Investor Relations. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to our first quarter presentation. Presenting this morning are Laurent Ferreira, President and CEO of the bank, Ghislain Parent, Chief Financial Officer, and Bill Bonnell, Chief Risk Officer. Also joining us for the Q&A session are Stéphane Achard and Lucie Blanchet, Co-Heads of P&C Banking, Martin Gagnon, Head of Wealth Management, Denis Girouard, Head of Financial Markets, and Jean Dagenais, Senior VP, Finance. 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.
[Non-English content] Linda, and thank you everyone for joining us. Today, the bank reported strong first quarter results with pre-tax, pre-provision earnings up 14% from last year. The market and economic environments were conducive to business growth and translated into continued momentum across all business lines. Looking at our fundamentals, we are very comfortable with our current position. We generated strong asset growth while reaching a CET1 ratio of 12.7%. We have prudent credit reserves, and we delivered a return on equity of 21.7%, reflecting our balanced approach to revenue growth and cost management, our capital deployment discipline, and credit quality. Our capital deployment strategy remains unchanged. Our number one priority is to maintain strong capital ratios, allowing us to support our clients and generate solid organic growth. We're also actively returning capital to shareholders through sustainable dividends and share buybacks.
In the first quarter, we repurchased 500 million common shares, and we have 6.5 million shares remaining under our current NCIB program. Our credit quality is strong and our portfolios continue to perform well, supported by the ongoing economic recovery. We are also focused on optimizing our operational performance to maximize value creation, delivering positive operating leverage in Q1. We will maintain our usual balanced approach to investment and cost management while remaining cognizant of inflationary pressures. Turning now to our segments. P&C delivered strong results with PTPP earnings up 11% year-over-year. Our performance was driven by strong growth across the franchise. The housing market remains robust, with retail mortgage loans up 2% sequentially. We also continue to experience significant sales growth in investment products.
On the commercial side, we benefited from continued momentum across industries with 3% loan growth quarter-over-quarter. Our Wealth Management franchise continues to perform very well and delivered a strong first quarter PTPP earnings up 13% year-over-year. We saw continued momentum in full service brokerage and mutual fund sales. Client assets were up 17% year-over-year. Financial Markets delivered a record quarter with revenues of CAD 661 million. Global markets generated particularly strong results due to increased client activity and volatility. Corporate and investment banking delivered a resilient performance after coming off a record year, once again ranking as the top government debt deal maker in 2021. ABA Bank continues to perform very well, with revenues up 33%, loans up 38%, and deposits up 38% on a year-over-year basis.
Cambodia did well during the pandemic, despite the hit to tourism. Growth outlook for ABA Bank continues to be very attractive. Cambodia is a high-growth economy with favorable demographics. It is an underbanked market with strong potential. We continue to expect double-digit growth for ABA for fiscal 2022. Credigy continues to perform well, with strong portfolio performance in Q1 and a healthy investment pipeline. Revenues were up 26% sequentially. As mentioned on our last call, we expect revenues to be relatively stable in 2022, given the $26 million gain, $26 million dollar gain on the sale of a portfolio in the first quarter of last year. This translates into high single-digit revenue growth for fiscal 2022, excluding that gain. We continue to foresee double-digit asset growth for the year. I would now like to share an update on two recent changes.
First, in support of enhancing our client experience, accelerating our digital transformation and gaining efficiencies, we are bringing together our operations and technology teams under the leadership of Julie Lévesque, who has been responsible for the bank's technology sector since 2020. Second, we are proactively leveraging our collaborative models between commercial and private banking, two client segments with natural synergies. Namely, we are adopting a unique go-to-market strategy by merging the sales teams to enhance the overall client experience. Stéphane Achard, Head of Commercial Banking, and Éric Bujold, Head of our Private Banking, will now be co-responsible for this strategic initiative and will report to me. Before I conclude, let me share a few thoughts on the macro environment.
We are obviously keeping a close eye on inflation, global supply chain challenges, as well as unfolding geopolitical events which could exacerbate inflation and volatility and potentially have an impact on the global economic outlook. That being said, our current outlook for Canada and Quebec is positive. The Canadian economy benefits from strong demographics, which supports GDP and loan growth. The price of commodities are at record highs, which also indicates potential growth for the Canadian economy. Quebec remains well-positioned, with household saving rates above the national average, low unemployment, and a diversified economy. While Quebec did respond more aggressively to Omicron than other regions in Canada, most restrictions are being lifted, and any impact will have been transitory. To wrap up, we had a very strong start to the year, and all of our businesses are well-positioned to continue to perform well.
In light of our first quarter results, we are currently tracking ahead of our mid-single-digit PTPP growth guidance for the year. At this point in time, it is too early to provide an update on that front. Overall, we remain confident in our ability to generate solid PTPP growth and positive operating leverage for fiscal 2022. National Bank has a strong record for delivering superior value to its shareholders over time, and that remains a key focus for the team going forward. Before ending my remarks, I would like to say a few words on the executive changes announced this morning. After more than 10 years as our CFO, Ghislain Parent will be taking on a new role as Head of International, reporting to me.
Ghislain's contribution over the last decade has been invaluable to the bank's success, and I am very pleased to be able to count on his continued leadership. Ghislain, [Non-English content] . We also announced that Marie Chantal Gingras will become our new CFO, effective April first. Marie Chantal is a strategic leader, and she has held several roles in finance, internal audit, and P&C banking since joining the bank in 1998. I am confident that Marie-Chantal will be an outstanding addition to the executive team. With that, I will now turn it over to Ghislain.
Thank you, Laurent, and good morning, everyone. Turning to page seven, the bank delivered a very strong quarter with all segments performing well. Pre-tax, pre-provision earnings grew 14% year-over-year, and with 3%. During the quarter, the bank reversed CAD 20 million of the provisions for provincial compensatory tax on salaries. Without this reversal, PTPP earnings would be up 12%, and operating leverage would be positive by 1%. Higher expenses during the quarter were driven by a low expense level in the first quarter of last year. Higher variable compensation due to our strong performance, continued investments in talent and technology to support growth across all segments, and expenses related to our new subsidiary, Flinks. As mentioned last quarter, we expect continued pressure on costs in the context of inflation. Nevertheless, expense management remains a top priority, as demonstrated by our consistent track record.
While it may vary from quarter to quarter, we are confident to achieve positive operating leverage for fiscal 2022. Turning to page 8. Our teams are very disciplined, and some of our segments achieve best-in-class efficiency ratios. As always, we are making targeted investments aimed at growing our top line and enhancing client experience. Looking at P&C, expense growth reflected higher wages to retain and attract talent in a tight labor market. In addition, we continue to improve client experience with recent IT investments aimed at improving automation of our processes and leveraging our data. With regards to Wealth Management, expenses increased mostly due to the solid growth in full-service brokerage and mutual funds revenues, resulting in higher variable compensation. We also added resources to ensure a leading client experience in the context of above average growth.
Our Wealth Management segment efficiency ratio, below 60% for Q1, is in the low tier of the industry. Turning to Financial Markets, expense growth was mostly driven by variable compensation, reflecting strong revenue growth in global markets. In addition, our Financial Markets team continues to see opportunities to diversify our revenue streams and is investing in talent and technology accordingly. We ended the first quarter with an industry-leading efficiency ratio of 39%. With regards to International, while the segment continues to experience significant growth, it posted a low efficiency ratio of 28% in Q1 2022. To conclude on this topic, the entire team continues to manage costs actively with the objective to adapt rapidly to different growth scenarios and still be able to generate positive operating leverage for fiscal 2022. Now turning to capital on page nine.
We ended Q1 with a strong CET1 ratio of 12.7%, up 30 basis points from last quarter, positioning us well to generate strong asset growth. Our strong results, net of dividends, generated 58 basis points of capital. Excluding the impact of foreign exchange, risk-weighted assets growth amounted to 14 basis points of CET1, mainly driven by loan growth. During the quarter, we repurchased 500,000 common shares as part of our NCIB program, which reduced our CET1 ratio by 5 basis points. Now turning to page ten. Our total capital ratio stands at 16.1% this quarter. Our liquidity ratios remain strong, with a LCR ratio of 149% and a net stable funding ratio of 117%.
We are pleased with our capital and liquidity position, which allows us to support continued growth across our segments and to return capital to shareholders. With that, I'll turn the call over to Bill.
[Non-English content] , Ghislain. Good morning, everyone. I'll begin on slide 12. The strong credit performance we saw in the second half of last year continued through the first quarter. Provisions on impaired loans totaled CAD 24 million or five basis points, an increase of CAD 5 million or one basis point from last quarter. Impaired provisions remained close to cyclical lows across both retail and non-retail portfolios. On performing loan provisions, we benefited from a CAD 34 million or seven basis point release. The primary drivers in our domestic loan portfolios were updates in portfolio quality, economic scenarios, and portfolio growth. In our international sector, strong loan growth generated CAD 4 million of performing loan provisions. Looking ahead, three main factors inform our expectations for credit performance during the rest of the year. The first is that underlying economic trends have been strong.
GDP growth, employment rates, excess savings are all supportive of benign credit conditions. Second is the level of uncertainty in the future path of the economy that comes from the geopolitical risks, inflation, supply chain challenges, and impacts from the pandemic. The third factor is our bank's risk profile. Our resilient geographic footprint, our defensive business mix, our prudent provisioning, and our disciplined approach to underwriting and risk management all position our credit portfolios well in this environment of increased uncertainties. Considering these factors, we continue to expect a slow normalization of credit performance through the remainder of this year and into 2023. Given the strong performance year to date and the positive indicators in our portfolios, we've revised our target for full-year impaired provisions to between 10-20 basis points and currently expect to end up towards the lower part of that range.
As we've commented in the past, our performing provisions should be driven by changes to the macroeconomic outlook, portfolio growth, and migration. Absent a significant deterioration in the macroeconomic outlook, we would expect additional releases from our performing allowance in the coming quarters. Turning to slide 13. Our allowance on performing loans declined by CAD 32 million to CAD 847 million, which represents a strong 6 x coverage of our last 12-month impaired PCLs. This takes the cumulative release from our pandemic build to 45%. We are very comfortable with this prudent level of allowances. Total allowances for credit losses declined by CAD 83 million from last quarter to CAD 1.1 billion and continue to provide strong coverage of our loan portfolios well above pre-pandemic levels. Now on slide 14.
Gross impaired loans declined further last quarter to CAD 608 million or 32 basis points. Formations in our P&C portfolios increased quarter- over- quarter, but remained well below pre-pandemic levels. Financial markets benefited from a net repayment in the quarter. Formations at ABA increased in the quarter as loans rolled out of COVID-related moratoriums and performance on these matched our expectations. On slide 15, details of our RESL portfolio are provided. The geographic and product mix remained stable, with Quebec accounting for 54% and insured mortgages accounting for 32% of the portfolio. Employment and demographic trends remain supportive of continued strong performance in our RESL portfolio. In summary, we are very pleased with the performance of our portfolios in the first quarter.
We remain very comfortable with our portfolio's resilience, the diversification of our earnings streams, and our prudent approach to provisioning. With that, I will turn it back to the operator for the Q&A.
Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please mute your handset before making your selection. If you have a question, please press star one on your device's keypad. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. First question is from Gabriel Dechaine from National Bank. Please go ahead.
Oh, okay. Good morning. Yeah, volatility obviously helped the trading numbers this quarter. You know, given the backdrop we're in currently, I'm just wondering if there's such a thing as too much volatility and what that looks like. Is it mainly an issue of client activity falling off or, you know, maybe positioning?
Yeah. Thanks, Gabriel. It's Denis. Yeah, in fact, you answered your question. Basically-
Oh.
Basically, yeah, it's a combination of you know, above average client activity in Q1 and also our defensive position that all of you know for many years, as we keep repeating that you know, we have a flat position that we keep on when things are getting a little bit erratic out there. Also, I have to mention that on the global market, the fixed income did fairly well also because they have a very defensive position, meaning very small position in credit spread and very small position on the yield curve. All in all together, they made that quarter spectacular in terms of trading revenue.
Now, this current quarter is still early, and of course, what happened yesterday is a bit of a twist, but are we still feeling good about the you know, trading backdrop?
I'm not sure I understand what you just mentioned, Gabriel. Can you repeat?
Well, yesterday, you know, we have a quarter. We're midway through Q2, and then.
Oh.
You know, yesterday happened. I'm wondering if you know, you can make a commentary on, you know, what it's been like so far this quarter.
Well, you know, it's tough because the market is so erratic and so volatile that it's gonna be, as you can understand, tough for me to tell you what I should expect for this quarter. Things are going okay.
Okay.
It depends on what type of volatility we're gonna see also, you know. There's some that we can do a bit better. There's others that, you know, will do okay. but right now, you know, we're tracking okay, but that's the most I can say right now because, you know, the environment we're in, tomorrow can be quite different than yesterday.
Okay. I'm just switching gears to ABA, another business that's really humming along nicely and, you know, I got to ask the sustainability question. It's more of a, is there a point at which you grow your loan book to a certain size, and then that kind of spurs an investment requirement to scale up again? Or have you built this thing, because I know there was an investment phase a few years back, for a, you know, very long runway of growth?
Yes, Gabriel, this is Ghislain. Thank you for your question. With the improving economic conditions, I anticipate that ABA's expense level will return to where it was pre-pandemic.
Okay.
That the efficiency ratio will stay in the low 30s%. We do not anticipate major investments in the branch network. Inflation level, as you know, in Cambodia, was already high before the pandemic. We expect that it will stay the same after the pandemic.
Okay. Well, very fitting that you answer that question, Ghislain. Congratulations and good luck in the new role.
Thank you, Gabriel.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Hi. Thank you. Good morning. I want to ask you a question about the investments you're making in future growth, and I'd never argue that that's the wrong approach to take over time. I guess what I want to ask is why is it the right approach today, given the tight labor markets, inflationary pressures? Like, how do you think about the cost of those investments versus the potential future returns?
Well, this is Ghislain here. I can probably start with you know, an overall answer, and then I will pass it along to Lucie and maybe others. To answer your questions, of course, what we try to do essentially is you know, it's to have targeted investments. Of course, you know, we could probably do more, but because of what you just mentioned, you know, we try to make our investments and talent and IT to support growth, and we want it to be targeted. Essentially, this is what I could say for the moment. You know, to sustain, to maintain long-term growth, we have no choice to maintain some investments in IT and talent. This is why we're doing it so. Once again, we are targeting these investments where we think, you know, they will benefit the most for the bank.
Maybe I could add, Paul. It's Laurent. You know, discipline is the number one, you know, the mindset that we have when we look at, you know, investing in our businesses. When Ghislain talks about targeted investment, it's really focused in the areas that we believe we can grow. I think we've demonstrated agility over time. You know, if there is, you know, a slowdown in terms of top line revenue, well, you know, then we just reduce the pace of hiring and our IT spend, and obviously, you know, variable comp adjusts naturally. You know, if you look at, you know, at our performance through time, I think, we've demonstrated discipline.
If you look at, you know, the efficiency ratios of some of our businesses, I think, you know, our performance speaks for itself.
Yeah, for sure. Agree with the historical tracker. Not an easy question, but something I'm contemplating. Perhaps my second one is an easier one. Just wondering if you can give us an outlook on your take for residential mortgage growth through 2022. One of your competitors yesterday kind of guided to high single digit mortgage growth. Wondering if you're thinking the same or higher or lower?
Yes. Thank you for the question. It's Lucie. I would say that we are in line with that. We are comfortable with our disciplined approach between balancing volume, margin, and risk. The way we see the market right now, we are confident to perform close to high into the double digit, similar to what we achieved in Q1. We think that despite the rise in rates, the imbalance between supply and demand should continue to stimulate the real estate market during 2022.
That's great. Thank you. That's all for me.
Thank you. The next question is from Meny Grauman from Scotiabank. Please go ahead.
Hi. Good morning. Laurent, interested to ask about Ghislain's appointment, that new position, in International. Does that signal a different phase in the evolution of the International business? Like, what's the message for investors from that new role?
Nothing in terms of the strategy. I think in Q4 it was pretty clear, our focus remains on ABA and Credigy. The sector has grown enough that I think having an executive like Ghislain to be responsible for the continued growth of that sector is granted at this point. That's the story behind that. At this point in time, no changes in our strategy.
Just specifically on the moratorium in terms of new acquisitions in the international business, is there any sense that that is getting closer to changing?
Nope. Not at this point.
Okay. Thanks for that. Just a question for Bill. Bill, when you see 21% year-over-year commercial loan growth, we've seen strong loan growth now, a very strong loan growth on the commercial side for a while. Like, does it raise your blood pressure? How do you-
Thanks for the question, Meny. I've actually got low blood pressure, but, as you know, I'm paid to worry about lots of things. The loan growth that we've seen is not, has not been a cause of concern for me, though. If you look particularly, you'll see it this quarter, and I think, Stéphane alluded to it last quarter. It's very diversified. I think this quarter there were five or six sectors which were above our average portfolio growth. If you remember too, before the pandemic in 2018 and 2019, as we felt we were late in the cycle, we had been pretty disciplined at controlling the growth in the book, and particularly in some sectors.
That set us up to be able to seize opportunities, and we've got strong teams in those sectors that we grew in, both in Stéphane's business, but also in my credit shop, and we've been quite comfortable with the growth. Does that answer your question, Manny?
Yeah. Thanks a lot.
Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead.
Yeah, thanks. When I look at your balance sheet, there's a big step down in the repo balances throughout 2021, and then, you know, a sharp step back up this quarter. Can you talk about, I guess, what drove the decline in 2021 and the step back up in Q1 2022?
Maybe I could start. It's Laurent, and I'll let. You have 2021, you know, with the injection of liquidity by central banks quantitative easing, you know, the whole sector of securities financing, which includes repo, you know, the pricing went down significantly, and the demand for balance sheet went down significantly. With, you know, obviously the change in the monetary policy across the world for 2022, we've seen that shift coming. There is more demand for, I think, for balancing and financing securities. They need
Yeah. Yeah. Specifically in the equity market. We haven't seen that much in the bond side though, but in the equity market on the securities lending. Yeah, we saw an uptick. That uptick, you know, was quite interesting, but I can tell you that right now in February, we saw that thing back to where it was last year, which is kind of mind-boggling right now because it's kind of bizarre that we're seeing that. You know, things may change very, very rapidly, but it's probably a temporary situation. Yes, the first quarter, it was a nice uptick because it was pretty low, in fact, historically last year, in that particular business.
Okay, great. What about spreads in that business? Have they increased it? Well, did they increase it in Q1, and are they going back down as we look forward into Q2?
Yeah. They did increase in Q1. They came back a little bit in Q2 at the start of February, but it's too soon to say if it's gonna stay like that for a while because there's a lot of stuff in the market right now, as you know. You know.
Okay, great. My next question is just on the domestic mortgage growth. It's perhaps a little bit softer than some of your peers this quarter. Can you talk to what happened there? Like, is there some unique factors in the Quebec mortgage market, maybe increased competition, maybe that impacted
Yeah.
I don't know. Any comments there would be helpful.
Yes. Thank you. It's Lucie. I would say that we've seen originations a little softer this quarter and, probably link that with the increasing rate environment. Just as a reminder, you know, originations have reached record high in 2020 and 2021, so it's nothing that is really material at this point.
Okay, great. Thank you.
Thank you. The next question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.
Thank you. Good morning. I wanted to first touch on your performing loan allowances. You noted in your slide that there's been a cumulative release of 45% from what you built through the pandemic. I'm trying to get a sense of the timing of when you think that could completely release, and we have around the corner a return to office and a more broader reopening. The current credit environment is still fairly benign. Assuming that we don't get a deterioration in the economic outlook, when do you think your performing allowances might get back to a more normalized level?
Thanks, Nigel. It's Bill. I'll take the question, of course. I think I referred to that in the script and as you've pointed out in your question that, you know, absent a significant shock in the macro outlook, we would expect continued releases of those in the coming quarters. You've seen that over the past three or four quarters, there have been releases. We want to remain prudent, and our prudence is linked to the level of uncertainty in the market. The pandemic seems to be close to turning into an endemic phase, more back to the office.
However, this is the first time we've been through a pandemic cycle, as I think I've commented in the past, and we think that it's prudent to remain well provisioned. Does that answer your question?
Yeah, it does. It doesn't sound like you're going to accelerate that, the release, so that's good color. If I could switch gears to your trading P&L and maybe ask it in a different way. When I look at your daily trading P&L last quarter, you had elevated interest rate volatility in October, and you had some P&L losses there. When I look at January, you know, you haven't had any P&L losses in January despite more elevated interest rate volatility in that month. I think you touched on having, I guess, less exposure to the curve and spreads, but could you touch on your exposure to interest rate volatility and how that affects your P&L?
Well, the interest rate volatility is not affecting our P&L that much because, as I said, we're running very low balance sheet and fixed income right now, and we have no exposure to the market per se to interest rates. You know, we're not betting on the interest rate at all. In fact, what we're doing is we're servicing the client on the trading activity and the business that they wanna do. On the credit side, you know, we are, on purpose, we keep our CS01 very, very low either in the corporate sector or the government sectors. We just do quite a lot of volume and activities with clients, but we keep aggregate exposure to a minimum as we can right now. That's why we have a, you know, not that much exposure to movement of interest rates.
Got it. Just last question for me. You mentioned that, you know, too much volatility could be detrimental in some scenarios. If we could switch to maybe, you know, the ability to go to market for equity or debt issuance. Are you seeing any challenges there in an environment where we have a lot of volatility both in equities and interest rates?
Well, you know, volatility can take the form of many aspect in a sense that you can have intraday volatility and long-term volatility where you have a market trading down. I would say that we haven't seen yet a very long negative slope on, let's say, equity, let's say, being down 15, 20, 25%, okay. What we saw in the first quarter, it's more intraday volatility, where we can catch those movement through our vol position. The other situation, you know, we'll see when we're there, and how it can affect positively or negatively the book. Right now, you know, we're not in that situation at all. What we're seeing is just intraday volatility. In that type of environment, we're doing quite well. Because of our-
Okay.
Yeah.
Go ahead. Sorry, go ahead.
Because of our positioning that we're very, very conservative the way we trade, you know, those vol and I would say those gamma positions.
That's really helpful color. Thank you.
Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Yeah, thank you. I just wanted to also pick at a little bit at the trading results this quarter. Very strong. Maybe ultimately, is it possible that if you have CAD 150 million-CAD 200 million swing in trading revenues to the upside, can we also see something like that from quarter to quarter to the downside? And would you say that, you know, how is the positioning to prepare, I guess, to defend the downside or provide some downside protection here?
Maybe I could start, Sohrab Movahedi, it's Laurent Ferreira. You know, I've grown up in Financial Markets with Denis Girouard. The Financial Markets business is a client-driven business. When you have heightened levels of volatility, often, you know, it does drive more transactions. We did see more trading activity with our clients during the first quarter. As Denis Girouard was mentioning, we trade, we position ourselves defensively. That's the philosophy that we have, whether it's credit, whether it's equity vol, or interest rates. If you look at our past performance, we tend to do well when volatility increases. If you can go back and run all the numbers. That's the philosophy. Are we immune? No one's immune.
The way we've built the business is we want to make sure that through volatile times we can keep growing our franchise, right? That's the objective.
Yeah. You know, yeah, you're talking a lot about the trading and the volatility that we saw in the first quarter. I mentioned it earlier, you know, our client activity was way above expectation. That mean that our distribution channel in all the product that we're selling is more robust than in the past and much bigger than in the past, I would say even outside Canada. That's why we had a very good equity numbers in Q1. As long as the clients are active, you know, in different type of environment, we will do well, that's for sure.
I mean, not to belabor the point, but you had an exceptionally strong quarter because of client activity. If next quarter, for whatever reason, we have an exceptionally inactive client.
Yeah
you know, could we be back down to CAD 200 million or below from a trading revenue perspective?
CAD 200 million seems to be a big number to me, but we can see the numbers being down, with lower client activity, but not at that level. No.
Okay. That's very helpful. Bill, if I can just come to you obviously, I think in pretty good condition as far as reserves and what have you. You mentioned that pre-pandemic for obviously reasons unrelated to the pandemic, the bank had kind of started to throttle back a little bit from a maybe your risk appetite didn't allow for some of the growth that was available, and now your blood pressure is low and all that kind of good stuff. What sort of stuff are you looking for to decide when is the right time for the bank to throttle back again, if at all?
Like, what are some of the leading indicators you as an experienced risk manager are paying attention to, aside from the fact that you're well reserved, and you've got good frontline originators and what have you. What are some of the things you are paying attention to figure out when the blood pressure should maybe start going up?
Thanks. Thanks, Sohrab. I appreciate the question. I take it at a philosophical approach. What's important is the consistent discipline through the cycle, and that's the most important factor. At points in the cycle, you should expect that where yields are, you know, where growth is low and yields are low, there could be pressure in the market to stretch, and those are the times when one must remember a disciplined approach to the cycle is very important. I think that's what you saw in the pre-pandemic late cycle period. You should expect that we'll continue to be disciplined. The balance that Lucie mentioned, it's the same in commercial and Financial Markets as well.
The balance between growth and spread return and risk is always on our minds. I couldn't point you to any particular red flag or shining light that will be the factor. I'd just say that where we see some stretches and one of those, you know, the balance between those three factors, we're likely to be disciplined and prudent. Does that answer your question, Sohrab?
I think it does. Maybe if I push my luck, would you say in that point in the cycle comment, where would you say you think we are in the cycle? Early third, middle third, or the final third?
That's another very good question, Sohrab. I'll relate it to we haven't been through a pandemic cycle, so this is unlike previous cycles. There are some aspects of current conditions that seem more mid-cycle. Some seem later or mid to late, and some seem early to mid. That reflects the level of uncertainty in the forward view. I couldn't tell you exactly where we are in the cycle, but I'll remind you, as I said in my script, the underlying economic growth, the underlying conditions in employment in the economy are strong, and there is uncertainty about the path in the future. I didn't give you a direct answer.
If I was capable of telling you what inning we were in, I would, but that's kind of the balance as I see it. Does that help?
Yeah. Good enough. Thank you very much.
Okay.
Thank you. The next question is from Mike Rizvanovic from KBW. Please go ahead.
Good morning. I want to go back to Lucie on your mortgage growth and specifically the Quebec market. I do notice some pretty strong market share gains in Quebec for National, pretty much all the way throughout the pandemic. Then the last couple quarters you've actually lost a lot of that. Not sure how this quarter's gonna shake out ultimately, but clearly some of your peers have been more aggressive in the Quebec market. I'm just wondering, you know, given that it's more than half your res book overall, like, I guess, for lack of a better term, do you have to defend your turf? And if you do, in terms of client acquisition, what does that mean potentially for your margins going forward?
Yes. Thank you for the question. I think the mortgage market is always very competitive, and especially in a rising rate environment, client rates lag a little bit, and we see more market competitiveness. We've seen some of that in the last two quarters maybe, that lag is really there, and this is where getting back to what Bill said, we are very prudent in our balance between the volume, the margin and the risk. Lately, I would say that margin has been tight, for sure, in the context of rising rate environment. However, we do see much more customer engagement coming from our mortgage activity.
I think we're very happy with our strategy, which is based on our internal channels in terms of growth, and this is also something that is very, very important in our strategy. We feel confident of the approach we have on the client side. Does that answer?
Okay. Thanks for that. Yeah. That, that's helpful. Then just I guess I'm wondering also, what sort of impact is the broker channel having in the Quebec market, if any? Is it more so an impact there in terms of where the competitive pressures are sort of being exacerbated or is it your traditional channels?
75% is based on our internal channel. As you know, we made a big change on our strategy on brokers a couple of years ago, and we are back in that channel now because it's a channel that definitely customers, specifically first-time homebuyers, prefer. We are present, but our strategy is really based on our internal channel, again, for a long-term customer engagement strategy.
Would you say you've lost a little bit of this market share predominantly in the broker channel or in your branch channel?
I missed the beginning of your question. Sorry.
I was just wondering with respect to the recent market share loss in the last couple quarters, would that have come in your broker channel or your branch source originations?
Bro-broker.
Got it. Okay. Thanks for that. Appreciate it.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning. Bill, can we go back to you and focus on ABA for a moment? ABA, loans to ABA are now about a third of the company's common equity, and you're growing those loans at, I think it's around five times the growth in GDP in Cambodia. Clearly this has become a very important part of the overall business of National. Can you just remind us, how do you get comfortable with this sort of loan growth, particularly given your comments about the uncertainty? We're really not sure where we are in this cycle. How do you get comfortable with that kind of growth in this environment?
Thanks for the question, Mario. I'll start off with the macro picture and part of the rationale for the investment in ABA and Cambodia is part of the answer to your question. It's an economy that is growing, has a strong growth rate. It's an economy that is quite a young population. It's an economy that is underbanked. The relationship that you would normally find in, say, the banking growth and GDP growth in a country like Canada is it's a different relationship in a country like Cambodia. In addition to that, we have had very good execution, very good strategy, to be quite performing in that space.
The digital rollout, the execution on expanding disciplined approach and expanding the branch network, maybe Ghislain. I'll pass it over to Ghislain, but the context is quite different than an economy like Canada, where a comparison that you're making in terms of loan growth and GDP growth would probably maybe not give me high blood pressure, but would certainly generate some more concern. Ghislain, do you have any other comments?
Yeah, I would add probably, you know, the country is still on the bank compared to other countries, which is important to take into consideration. Also, we continue to grow in the same business model. We haven't changed the business model. It's just the same kind of loans. It's small loans, small SMEs. You know, the average loan balance is below $50,000, so we have a large diversification in terms of loans and throughout the country. You know, we have 80 branches throughout the country. The question is good, Mario, but at the same time, you know, we're not growing in things that we don't know. This is exactly the same business model as we grew from the beginning.
The lending is still very much tilted towards secured lending. That's true, isn't it? Loan to values, maybe you could give us an idea where loan to values are.
Yes. Well, to answer your question, yes, it's secured business. I think I don't have the number. Maybe we could come back to you on that, but it's very high.
The loan to values are very high?
No, in terms of secured, re-
Oh.
Secured, secured-
Oh, I see.
I think that the loan to value is below 50%, if I remember correctly.
Okay. Just one quick question on Credigy. Just looking at the credit performance there. There was a time, looking back, where credit, Credigy loan losses, the loan loss rate was obviously much higher than where it is now. As I think about the future, I obviously don't feel comfortable assuming that losses reach that level again. Just remind me, how has the nature of Credigy's business changed to support the notion that we're not gonna see credit losses the way we did in the past?
Yeah. Bill, well, I will start, and then, Bill.
Yeah.
I think that during the pandemic, the team showed its resilience and its capacity to change its business model. Of course, we changed completely the portfolio. The portfolio is more than 80% secured right now, whereas, you know, before the pandemic, five years ago, it was 20% secured. What you're seeing in terms of PCL essentially is the reflection of, you know, the changes that we made in the portfolio. Of course, you know, that portfolio has a short duration, so we could change our strategy, you know, very rapidly. If we think that the unsecured business, where, you know, if we have more opportunities and the environment is better for unsecured business, then we would go in the unsecured business. Of course, I mean, we will see probably more PCLs, but a greater return on the assets, though.
That covers it. Thank you for your help.
Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Hi. Good morning. Most of my questions have been asked and answered. Just have a few follow-ups. On the card balances, they were up 5% quarter-over-quarter, which was, you know, double what we saw with some of your peers so far this quarter. Just curious what you're seeing on that front. I assume this is more transaction related, relative to purchase volumes, or are you starting to see any return in the revolver side?
Yes. Thank you. It's Lucie. Definitely credit card will be part of the growth story in 2022. What we see right now is all the credit card indicators are on an upward trend. That is very positive. In Q1, I would say we had purchase volume reach an all-time high of the past three years. Definitely there is that in the increase in balances. Also we have active accounts that are growing faster than pre-pandemic, and slowly the revolving balances are starting to creep up. Definitely the business is going in the right direction.
Can you give perspective of where the revolver stands relative to where it was pre-pandemic? Like what's the pay down rates are then versus now?
The pay down continues to be high. It is at the same level than what we have witnessed during the pandemic. Definitely there is still a lot of liquidity in current accounts that is being used for that, and we see the consumers, you know, being prudent on that front.
Doug, it's Stéphane. I'll give you the view on the commercial side. Pre-pandemic levels, when the pandemic started, revolver levels went down by 800 basis points, and we've recuperated 500 of that. At this point, it's going up every quarter, but we still have, if I may say, money in the bank in terms of potential for growth because we're still 300 basis points behind pre-pandemic levels.
I thought.
Yeah.
Go ahead.
No, just to finish on the credit card, the way we see the revolving balance with the consumer, you know, being still prudent, probably the portfolio would be more up to the pre-pandemic level by the end of the year or early next year.
Okay, perfect. Then just maybe lastly, just lining up. I look at the corporate segment, and I know there's a lot of things that go in there, but if I reverse the CAD 20 million unusual item that you kind of talked about, it still seems like corporate losses were lower than normal. I'm just trying to understand, is there anything else unusual that went through corporate this quarter? Thanks.
I will let Jean answer.
Well, there is no other unusual element. If you look at it in the last three quarters, it's pretty similar. Except for it may be the expenses that were higher at the end of fiscal year 2021, which is the normal case when you have projects that are being spent, and they're mostly spent at the end of the year. Other than that, it's normal.
Okay. Appreciate the color. Thanks.
Thank you. As a reminder, you may press star one if you have a question. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Hi. Thank you. Sincere apologies if this has been asked. My phone went dead for a few minutes there during the call. So hopefully I'm not asking a duplicate question. Laurent, you mentioned during your remarks that you're making some organizational changes. You know, from the outside looking in, it's a little bit hard to understand if this is material. Like, when you're merging private banking and commercial sales teams and so on, is this material enough or big enough that we should expect maybe restructuring charges? Or, and is there any kind of revenue upside you can provide for us, or any way for us to size whether or not this is really gonna move the earnings numbers?
I appreciate it may not happen immediately, but is there anything you can offer to us in terms of materiality and what you're expecting on the earnings front from this move?
Sure, Darko. Thank you for your question. No restructuring charges. That's to answer your first question. This is an evolution of the approach that we've had with our sales team, and we've seen over the past couple of years, we've you know at the ground level, worked really hard to bring our bankers together in various business lines, and work you know a combined approach towards our clients. You know, from our perspective here, it's early days, but we definitely saw you know a lot of natural synergies between private bank and commercial. You know, when we look at the overall clients, there's clearly an overlap.
First of all, you know, we wanted to send a clear message from the top and get our teams to work even closer together. That's the objective. Obviously, you know, I'm gonna let Stéphane and Éric work on this, but the idea is, yes, to drive a lot more top line.
Okay. Thank you. My follow-up question is just on market risk. Again, similar to another bank that reported today, somehow in the middle of the volatility that we saw and very strong trading results, we don't see a change in market risk. Maybe you can just talk to that a little bit.
Thanks, Darko. I'll take it. It's Bill. I think as Denis mentioned, a lot of the volatility that we saw during the quarter was intra-day, and it didn't our VaR numbers were fairly unchanged, I think, quarter-over-quarter. The market risk capital's got a few components. There's VaR, SVaR, and interest rate specific. There's a few different components. The one this quarter was the SVaR, which was beneficial from a capital perspective, and that really just benefited from increased diversification across the risk factors this quarter. Nothing else to call out.
Okay. I guess the follow-up to that would be, you know, given the strong environment and the strong results, I guess why not pack more on? Why not increase, you know, your inventory levels and so on for higher client activity? I'm just curious as to why you wouldn't go down that path given the strong results that you were actually having during the quarter.
Darko, I think I'll, Denis may have some comments afterwards, but I'll flip that around. I think because it was driven by client business and client activity, it's activity that doesn't require taking big positions. So the more client activity, particularly when transactions happen during the day with intra-day volatility, it doesn't change your end-of-day position very much. So that's, I think we don't think about it in terms of building up more inventory to satisfy the flow if the flow is quite balanced. Denis?
Yeah. I think Bill, you have the right answer, that is, you know, with the volume picking up, you know, the more volume, the more activity you have a client, probably the less inventory you have because you can turn that very much faster. This is basically what happened in the first quarter. There was no reason to add any balance sheet or exposure to the market, considering, you know, our prudent approach to that market. We're still the same right now.
Does that answer your question, Darko?
Yeah. I think it's helpful. Just one last one I'll throw in there. Oil prices are rising. Does it change your business view? Does it change anything for you, with respect to that particular segment in the marketplace?
No. This is Laurent. It doesn't change anything, not at this point.
Okay. Great. Thanks very much.
Thank you, Darko.
Operator, do we have any more questions? No more questions, back to you, Laurent.
Well, thank you, Linda. Thank you, everyone. Have a good weekend.
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