Great. Thank you, everybody, for joining us today. Very pleased to have Marie Chantal Gingras, the CFO from National Bank, join me on stage to talk about National Bank. And just one of the things, it's interesting that the timing of this conference is always fun, right? We just had results reported last week.
Yeah.
I've got the CFO here, so there's going to be a little bit of long-term questions, and some sort of stuff that maybe I didn't quite understand as well as I wanted to from the quarter because we had five banks jammed all into a 43-day period. So it's going to be a little bit of back and forth on some really interesting recent stuff and some longer-term questions. And then please, join in. I will from time to time look out there and see if anybody's got a question that we want to dive into. So, Marie, thank you for joining us today.
Thank you, Darko. It's a pleasure to be here.
It's great. I think what we want to do is we want to start with the topic du jour in Canadian banking, which, if many of you follow Canadian banks closely, there was a or there's about to be, I guess it's not really enacted yet, a change to the dividend taxation rules in Canada. That has an impact on all banks. I think in your quarter, essentially we're talking about, for your capital markets division, about CAD 60 million per quarter is roughly the impact. It's a way to think of it. That's about CAD 240 million a year, sort of impact. So if you can maybe just walk us through, conceptually how to think about that and what steps National Bank of Canada is, is doing to sort of overcome the suppression of these revenues. Maybe that's a great place to start.
Yeah. Thanks, Darko. And, you're right in mentioning that the dividend tax legislation had an impact on our revenues and Financial Markets. So CAD 45 million this quarter when you compare year-over-year. And, going forward, we do expect about CAD 60 million per quarter for the remaining of the year. So that being said, Financial Markets started the year on strong footing with record net income of CAD 308 million. So, we were very happy with that. There was a robust activity in all segments of global markets, as well as good performance from our Rates and Commodities. So I think that's the picture for the quarter. And now I think an important element to share with you to understand the context and the next steps is that our equity strategy hasn't changed. Financial market is a client-focused business.
They are domestic leaders in structured product, in securities finance, in ETFs. So therefore, we need to hedge in order to support our client demand for equity product. So we receive dividends on those shares. And those dividends received are incidental to the business. So I think that's when you take a step back, that's the important thing to remember concerning that new legislation. Now, over the years, Financial Markets have really worked on diversifying the business. So the trading business is very diversified. They are leading; they have leading technology in trading, corporate investment banking as well as we're seeing good opportunities there, probably M&A more in the second half of the year. But really what's important to understand is the Financial Markets is a diversified business and that changes in terms of legislation won't change our strategy.
Therefore, we are very confident considering the diversification of the business and the agility of the team that Financial Markets will deliver net income, growth in 2024.
And so when we think about the dividend sort of being incidental, so essentially what we're saying is the product itself is still important. You're still out there doing these hedges, these products for clients. Is there an opportunity to also because you talk about sort of overcoming this, is there an opportunity to sort of reprice some of these so that you can make up some of the lost revenues? Or do you think that that's really the business is just there and you kind of just have to eat that CAD 240 million per year?
Well, I think the business won't change. Our strategy won't change. We're, as I said, we're diversified, agile, domestic leaders. And yes, of course the market can change a little bit in terms of pricing, and we'll seize opportunities and adapt accordingly.
So when we think about the quarter itself as a sort of a gauge for how things might. You mentioned that you had very strong rates, very strong commodity results.
Yeah.
Sort of maybe looking for M&A in the back half of the year. Now, what investors have often come back to me and have said is, you know, I'm not sure that I like the trading businesses per se. And so, should I think of the, the way you're going to compensate and grow the business as to essentially have more trading, maybe it's rates, maybe it's commodities, maybe it's equities, to help overcome this, this sort of legislation or the sort of impact. Well, ultimately, is it possible that we see more trading results in your Financial Markets business over time to compensate? And how do you think about that, within the context of that business?
I wouldn't position it that way.
Okay.
I think one aspect maybe that I didn't mention before is sustainable growth in financial market, great performance, and consistent risk profile. So juggling both at the same time within the diversification of the model, I think this is what we need to take as a takeaway here.
Ultimately, I mean, and again, National Bank has done, you know, as far as I can tell when I go back and I look, some of the least volatile results in capital markets that we've seen across the companies that I cover.
Yeah.
So if we're not looking for more volatility, but just a bit of a damage to the revenues because of this tax legislation, do we see are we eventually expanding in the cap markets business? Do you see it sort of stable over time? And is this a place where, in the business mix, you might see more capital over time? We'll talk about Credigy in a moment, which is very interesting.
Yeah.
But, in capital markets specifically, do you see this as an area of ROE improvement over the course of the next two or three years and how much can we expect?
Well, Financial Markets is a great ROE business. I think we're going to continue to focus on that and grow assets so that we can, so that it's creative to the bank. I wouldn't be able to give you a number in what to expect, but definitely something that we're interested in.
Okay. One of the things that, you know, just shifting gears quickly to Credigy because for many of you who followed National for a long time, Credigy is a very unique business.
Yeah.
We did see pretty good growth, 11% year-over-year growth. So maybe first, spend a few moments talking about Credigy for the crowd.
Yeah.
Speak to what we should be expecting in this kind of environment. I kind of think that this is the environment where we could see Credigy grow s ignificantly. So maybe you can speak to that and what opportunities you see there.
Yeah. So first of all, Credigy, the one thing I'd like to start with is that we are pleased with their ability to execute in various type of environment, macro environment. So, that's one important factor, and they're really good at that. They're a business which really is disciplined. They are laser-focused on choosing deals that are delivering strong risk-adjusted returns. So that's another important factor, characteristic of the Credigy business. They're very agile. As I said, they're able to execute in various types of environments. And they never compromise risk standards for growth. So I think that's basically the background of Credigy. Obviously, as you know, mostly structured business, as we're speaking. So to your question, in the environment where we are and where we could see, for example, falling interest rates, what would be the impact for Credigy?
Well, Credigy, the impact of falling interest rates on the portfolio actually it depends on the reason behind the falling interest rates more than the falling interest rates by itself. So let me give you an example. In a soft landing environment where rates decline are more predictable and measured, that would be a scenario where it's for Credigy neutral to slightly positive. Conversely, in an environment where rates would decline more rapidly and create volatility as the market adjusts, that would create opportunities for Credigy because of liquidity opportunities.
Okay.
And in stage.
When you mean growth, do you mean like picking up portfolios and-
Yeah.
Okay.
Exactly. Liquidity disruption is usually good for Credigy. So we're very happy with Credigy, an accretive, attractive margin to the bank. As I said, the team is very talented and they have a strong and long track record of delivering strong risk-adjusted returns in different macro environments.
Can you remind us the sort of risk-adjusted returns that we talked about, the margins, so to speak? It's a fairly high margin business.
Yeah. Credigy is a return on assets business and they delivered a between 2.5 and 3.5 ROA over time.
So, thinking about that then, if we do get rates falling later in the half of this year, I mean, we just had 11% growth.
Yeah.
So we could see significantly higher growth in the back half of the year if we start to see 50, you know, 25, 50 rate sort of, declines at the back half of the year. Is that correct? That the way we should think of it?
Well, yes, you could say that the environment presently is favorable to Credigy. As I said, they're also very disciplined and they're they will be very prudent in choosing deals that are consistent with their strategy and with their risk appetite as well.
We might come back to this later on. I have questions on capital deployment later on.
Yeah.
We might dive into that. But before we get to that then, so speaking of the discipline, let's talk a little bit about credit quality. What we are seeing and what we saw last week, we are seeing some changes in credit quality. And in Canada, i t's been very imperceptible. We've seen very small increases in delinquency. In some cases, we are still below pre-pandemic levels.
Yes, we are.
For many products. But we did see credit cards move up a little bit, I think 92 basis points in Q1, and that is higher than the pre-pandemic level of 80.
Yeah.
If you can maybe just talk a little bit about what you're seeing on the credit quality front and what we should expect going forward?
Yeah. So maybe I'll start with retail credit quality in terms of delinquencies and PCLs. So, as you know, delinquency and PCLs they're closely related to unemployment rate. So our base case economic scenario sees unemployment rate going to 7% in 2025. Usually, the first product that we see, as you've mentioned, delinquency rises and PCLs credit cards. So that's what we're experiencing at the moment. So, there's always a lag, right, between the moment where we see unemployment rate rises and when we have the impacts on our portfolio. So therefore, for credit cards, we are expecting to peak in sometime in the mid-calendar year 2025. So maybe Q2, Q3 for us. So yes, we are expecting normalization and credit losses mostly in our credit card book and unsecured.
As for mortgages, we're very confident that credit losses will not be material to our results.
Maybe just to talk about that for a little bit because in Canada, mortgages are renewing, and they are renewing at a higher rate and these higher payments are coming on. We're seeing some stress. We had a nice breakfast this morning, a discussion with Dave McKay, in which he's, you know, essentially mentioned, look, it's a big part of Canada's inflation. Rent costs and owning a home is pressuring and we're seeing changes in behaviors. You're different in your variable rate mortgage. You've already had adjustments happening. Maybe you can talk a little bit about how those customers have been behaving and what the early results have been, just for this crowd to talk about, in some cases, some 50% increase in mortgage payments and delinquency levels have barely moved. So maybe you can talk a little bit about that.
Yeah.
What you're doing and maybe project how you think that will play out.
Yeah. So in terms of delinquencies on mortgages, you're right. We have a truly variable mortgage rate at National Bank. So meaning that when interest rate rises, our payments for our clients also rises. So they have already absorbed some of the payment shock in terms of mortgages. So therefore, we saw delinquency rise a little bit faster than our fixed mortgage payments, which had a much lower payment shock. So that being said, our variable mortgages delinquency is still a little bit below pre-pandemic. And in terms of fixed rate mortgages, we're comfortably below pre-pandemic level.
And do you see that peaking more or less the same time with credit cards or do you see a bit of a lag effect? Like, how should we so we've got a good idea of how the credit card portfolio will play into 2025 with unemployment. How do you see that playing out with the mortgage rate?
It's going to take a little bit longer because, as you know, let me give you a little bit of the characteristic of our portfolio of mortgages for National Bank, which is mostly in Quebec. So it's different than the rest of Canada. So a couple of things here. What we're seeing is that our consumers that have mortgages are more resilient than non-mortgage consumers. So that's one thing that we're seeing. We're also, as you know, our portfolio is mostly in Quebec. So 55% of the mortgage portfolio is in Quebec where we have much lower payments on mortgages because of the prices of the houses; that's lower. We are also a province where we have a more important proportion of our dual income households.
Okay.
So that makes a difference in terms of the resilience of the, of the customers. We have a very low proportion of our mortgages that is in Ontario where, as you know, unemployment rate is higher and, resilience is a bit more difficult for these, for these customers. Our amortization over 30 years is very low, less than 1%. So really, all of those characteristics makes us comfortable with our portfolio of mortgages.
I guess one of the things that you should also keep in mind is if rates are coming down, these payments are coming down.
Yes.
On your variable rate mortgage book. So which is, again, an interesting dynamic in the sense that your variable rate mortgage book is very resilient holding on when rates come down. Well, actually, some of the problem kind of goes away.
Exactly.
And so we're really only worried about the fixed rate. And there your loan to value is excessive, I think.
Our loan to value is very low. Most importantly, on our fixed rate book, 12% of our mortgages will renew in the next 12 months. It's a very low proportion of our clients that will have to face higher interest rates. The payment shock is obviously lower than it is from the variable, from the variable clients. Low loan to value, high proportion of insured. As I said, a fairly low proportion of our book renewing in the next couple of months. Actually, I believe it's 50% of our book that's been renewed so far.
Is anybody renewing into a variable rate mortgage in the anticipation of falling rates?
What? No, we're seeing more clients renewing in the three-year fixed term. That's where we see certain popularity. Yeah.
So all of this to say that the pressure on the consumer is not really showing up. Maybe we'll see some peak credit card losses in 2025. So the commercial book's pretty large for National Bank. And maybe there'll be some pressure in some other areas. And we can talk about commercial real estate if you like, but it's very different in Canada. It's not but service industries, things like that, are we seeing any pressure, any early stage signs that, maybe with the consumer pulling back and spending, some commercial borrowers are being affected or is it still too early in the cycle?
It's still too early in the cycle. We're not seeing anything that's that we're worried about. Even our commercial clients still have liquidity available to face the environment. So no, it's a bit too early.
Okay. Now I'm going to look to the audience to see if there's any questions before we move off from credit quality. I thought maybe somebody might ask about commercial real estate, but okay. If not, we can move on. So one of the interesting things about the National Bank is you're well capitalized. You have a high Common Equity Tier 1 ratio.
Yeah.
You also have a buyback. But you haven't used the program. So maybe we can talk a little bit about.
Yeah.
Your capital deployment strategies and, you know, maybe this story is Credigy, but maybe you can speak to the high capital ratio and the reluctance to use the buyback.
Absolutely. So there's a couple of elements that I'd like to share on the capital strategy. But before I do so, short answer to your question is we're not using our buybacks because we see great opportunities to continue to deploy organically. And you saw that in our last quarters in terms of RWA consumption. It was quite strong, more specifically in Q1. So 51 basis points of RWA consumption. So that's why we're not doing any buybacks. And that consumption, I'd like to share that it's been a wide range of consumption. So it wasn't only Credigy or only corporate banking. So well reflecting our diversified business model. So we had good consumption in Credigy, in commercial and corporate banking. So that was a short answer. Now to your question on our strategy in terms of capital.
So we have a couple of priorities. First, maintain strong capital ratio. Second, as I said, continue to grow the business. Third, sustainable dividend growth. And lastly, provide some flexibility. And those priorities, as I presented them, are in the right order. So we're very comfortable with our 13% CET1 capital ratio. It's allowing us to navigate in the uncertain macroeconomic environment, to face the normalization in terms of credit as we spoke. So very happy with that. The buyback for us is really, it's a complement to our strategy. And we did renew the buyback last in Q4, as we did in 2022 and as we did the year before because we feel it provides us some optionality and flexibility and to continue to support growth. And yes, you're right. So far, we haven't been active on the buyback year to date.
Okay. So, just want to, you know, given everything you've said, and not that not that I'm the best modeler in the world, but, when I do model based upon some of the guidance you've provided, I end up in a place where your capital ratio will creep higher than 13%. I just have you generating more capital throughout the year. So, not that I want you here to help me with my model, and, and work out where it's going to come from, but am I missing perhaps RWA inflation? Maybe am I underestimating growth? Like, in your mind, do you see the capital ratio creeping higher throughout the year? Is it or do you think it'll be steady state around 13%?
Steady state around 13% is where we're seeing it and where we're comfortable with it.
Okay. All right. Back to the drawing board. Maybe we have to have some better growth in there. And would just out of curiosity, I mean, when I think of that, I mean, if you're saying it's sort of evenly spread throughout the organization, we're seeing it in Credigy, cap markets, commercial, and ABA Bank, presumably would also be an area of growth, although that's been a little challenged as of recently. So I think maybe that might be the one area where we would see a little less growth. Is that fair to say, or do you?
Well, in the last quarter, you're right. It was an area. It was probably the fourth segment in terms of consumption, in terms of importance.
So with that, I just want to sort of end on a on a slightly more strategic note. I've been following National Bank for an awfully long time. What I can remember throughout the 1990s, you know, late 1990s through the early 2000s, there was always a bit of an emphasis on growing outside of Quebec.
Yeah.
It's been my perception that that's still there, but over to you. Maybe you can speak a bit about the emphasis on that growth. It seems to me it's a bit more targeted and niche now. So maybe you can talk a little bit about strategically where you want to grow and how you want to grow outside of Quebec.
Yeah. So you're right, Darko. It is an important priority for us. And when I was sharing that, growing organically is an important priority for us. Well, a strategy of growing outside Quebec is an important one. So, 2023, our revenues coming from provinces outside Quebec were 30%. So, zooming in on our domestic segments, Financial Markets, as you know, is pan-Canadian. So that's settled. Where we want to focus is on the P&C, Personal and Commercial Banking, as well as Wealth Management. So, because of our different footprint outside Quebec than other Canadian banks, you're right that we do focus on certain segments or certain niches because we feel that's where we are being good at and that's where the opportunities are for us. So, for example, our commercial book, we've been growing our commercial book outside Quebec in very specific segments.
Just to give you a couple of numbers, our numbers of commercial bankers have increased by 40% over the last three years. And our book in terms of loans has increased also by 18% over the last three years. So it's definitely a strategy that's important for us. And the way we're doing it differently, maybe, because you said that you were following us for many years. And I really feel that the reason why we're having success and we're doing differently is because we're focusing on getting the right talent, the right talent in the areas where we want to grow. And that made a big difference for us in the past couple of years. So that's one important priority for us in growing outside Quebec. The other interesting opportunity is the overlap between commercial and private banking.
So as an entrepreneurial bank, we focus also on the family of the businesses. So that's an area where we are focusing on and we see great opportunities. And lastly, the wealth management business is also a segment that's pretty well diversified across Canada. As you know, we're leading in terms of custody and transactional and brokerage for Independent Network. So that's something that we'll continue to focus on as well as our full brokerage service area where we are growing in terms of number of teams outside of Quebec. So I think those would be the areas that are really our focus in terms of growing organically outside Quebec.
Okay. I got us to the ending here without, so one last check if there's any other questions in the audience, but we are right up against the end of our time. So, Marie Chantal, thank you very much for joining me today.
Thank you.
Always, always fun to talk with you. Thank you.
It was very nice. Thank you, Darko.