On that, Gabriel Dechaine?
You knew that was going to come up. Thank you. Record attendance, and we didn't need any U.S. bank failures to create some excitement, which is a nice change this year. Laurent, thanks again for, you know, taking the time to answer the questions from myself, and we'll see if the crowd has any to toss in there. I just want to start off with, I mean, tone. If I go back to earlier in the year at another conference you presented at, one of the comments I got from several investors was, "Oh, Laurent seems pretty conservative, guarded, whatever." I think it was at the time. Well, it was at the time where there's a lot of euphoria in the markets after the Powell statements late in December.
But your view was quite a bit different at the time, more conservative, which has proven to be warranted. Just wondering what you're seeing these days or thinking about the near-term business outlook.
Absolutely. So first of all, thank you very much. I think, you know, the uncertainties are still there. So one of the things, though, if you look at, maybe just world economies, you have two economies in Europe that are technically in recession right now: U.K., Germany. China's not doing too well with consumer demand. The residential real estate is also an issue. I think the markets today clearly underestimate geopolitical risks. And, you know, these tensions, I think you'll still have trade disruption, inflation surprises, which are difficult to control with monetary policy. If you come back to North America, look, the U.S., the growth is still good, although, I mean, definitely fueled by deficits. Labor market is still strong. You have some pressure because of higher rates. You have, you know, still wage pressure. U.S.
Office CRE is still a bit of a question mark. Now, the Fed signaled 3 rate cuts last week. I'm not sure what, you know, what it really means. Is it, you know, proper guidance or just pure politics, given that we are in an election year? But right now I feel like it's hard to find the reasons for rate cuts in the U.S. Canada's a bit different. We have, you know, a softer labor market at this point in time. Consumers are more affected by increases in interest rates in Canada because of the nature of our mortgages. We have more variable rate. We have a renewal cycle that is much shorter than in the U.S. I think everyone knows that. Housing is an issue in Canada. You know, we're short homes.
We're short, multi-residential, units for our current population, for the growth in our population as well. So, you know, it's, you know, a lot of moving parts still and uncertainty around, you know, how everything settles. So in terms of growth, we're predicting for the U.S. some growth, so closer to 2%. Canada's 0%.
Mm-hmm.
This, you know, you might have in terms of, you know, rate cuts, you might, the Bank of Canada might need to act before, t he U.S. Federal Reserve, which will bring, you know, a set of other issues like currency and, you know, divergence and monetary policy and everything that comes with it. Having said that, I do believe that housing and immigration is a major conundrum for the Bank of Canada. It is not modeled. More than half of the inflation today is mortgage renewal and rents. So those things are still, you know, uncertain. So I, I look, I, you know, I said what I said at the beginning of the year in terms of I think there's still a lot of uncertainty with regards to rate with regards to the economy. I think it's, you know, we're still sort of in the same zone.
I'll jump ahead to one of my questions that I was going to ask later, but it's kind of touching upon what you're, you know, the kind of the lay of the land you're presenting here. So National's got a, you know, industry near the upper end of the industry in terms of Core Tier 1 Ratio, industry high Liquidity Coverage Ratio. And, you know, you've been, you know, one expression, I guess, of conservatism on capital is you're not buying back stock, so you're retaining capital. Are there any other type of risk management overlays that you're applying?
See.
In the business, whether it's the balance sheet or just, you know, your risk appetite, anything like that?
Look, you're right. On capital and liquidity, you know, our ratios are strong. And we've kept that posture mainly because of the macro, you know, credit normalization. We went through a pandemic. We had, you know, zero PCLs. We have an evolving, also regulatory environment. But the main reason is that we continue to see opportunities to deploy capital at ROE levels that are on target. Now you ask about other approaches. When we think about the late cycle, 2018, 2019, you know, we messaged often that we were focusing on secured versus unsecured. And you look at the nature of our balance sheet, it's mainly secured. You look at ABA, Credigy, even our P&C segment is mainly secured. So that's one aspect that's, you know, if you want to call it a little bit more conservative.
The other thing is we keep talking about and you know, we've repeated often, our approach in our trading books that is more defensive, you know, not exposed to credit, and typically exposed to volatility. So when markets you know become a little bit more volatile, we tend to benefit from that as well. But you know, you used the word you're conservative or conservative mindset. You know, whether you're managing capital, liquidity, or making markets for clients, I think the most important thing are strategic choices, is you know how you deploy capital. And it's the judgment of your people, ultimately, that drives you know good performance. So I'm not sure the word conservative is the right one. I mean, we do take risks. You know, I think that the mindset of the bank is you know smart risk.
That's where we are. You know, for the time being, we think that being a little bit more on the conservative side and being opportunistic is the right approach.
Flipping the script a little bit with more of a growthy mindset, if we do get the rate cuts and let's say it's just in Canada and we get a few of them this year, you know, how do you expect your different businesses to respond? Like the early movers where maybe it's capital markets because there's pent-up, you know, capitalization demands from that, that, businesses haven't taken yet because they're worried about the macro or whatever, wealth management, things, you know, how do you see the different businesses responding?
So I do see a lift in lending, so commercial, corporate. I do see more financing activity. ECM, DCM, it's positive as well. And with that comes more trading activity, hedging activity from our clients. Rates do come down, obviously. I see a pickup in our mortgages, as well. Some relief for our clients as well because we have, you know, a third of our book is variable rate mortgages. And so they were all hit with increases in payments. So we'll, you know, that's going to bring some relief to them and, you know, probably bring some more activity. A bit of a, you know, headwinds on NII, P&C, wealth, but I think it's strongly offset by the rest. In terms of momentum, you know, we talked about Credigy, you know, in this cycle, but also with, you know, U.S. banking consolidation.
I think that continues in 2024, continues in 2025 as well. So I think that momentum, regardless of where rates go, and, you know, do we come into a more positive cycle, I think that that continues. And the other area that, you know, we've gathered some good momentum is expanding, you know, energy project finance in the U.S. I think that continues as well. And if we're into a positive cycle, I think that is another good opportunity for us to deploy capital.
Okay. And then on the, I guess the credit cycle's always top of mind. I've heard or at least the impression I get from some banks is they expect the peak losses to take place in Q4 and start to temper in 2025, which seems kind of optimistic to me because, you know, when the timing between when the rates are cut and the transmission of the benefit, there's always a lag on in both directions. So I'm just wondering how you view the credit cycle over the next two years, say.
Well, I think directionally we're going towards a peak. If you look at our mortgage book, more than 50% has been renewed. By the end of this year, it's going to be 60% in the, you know, new rate world. If you look at that book, delinquencies are up depending on the product, you know, type of clients, regions as well. So that keeps on evolving. And we still have, you know, half of our book that has to renew. When you look at commercial, corporate, our, our gross impaired loans are pretty stable at this point in time year-over-year, and delinquencies are still below pre-pandemic level. So that's going to evolve again over the next couple of quarters. So to answer your question, I think it's a bit early to call a peak.
Mm-hmm.
On credit losses at this point in time. And you're right. Like, you have to, you know, if you have economic deterioration or rate cuts, you know, the transmission towards, you know, delinquencies or actual losses, there's a lag. So, you know, I think we're definitely a little bit too early. I think we need another 12-18 months before we can see clearer here and call a peak on credit losses.
Okay. As mentioned earlier, we will have the regulator sitting here at lunch or not here, the different room, but,
Am I invited?
You.
I have a list of plans.
Of course. Well, I just have one regulatory question. I always think about unintended consequences. When regulation gets tighter and tighter and tighter, you have, you know, unexpected outcomes. I think about, you know, the non-regulated lending space.
Yes.
If there's growth there that can't be supervised. And I also think about consumers and choice being restricted. We're seeing, I mean, it's still fairly small in terms of activity, but one of your peers exited auto lending last year in Canada and the U.S. So, you know, not a huge player in history, but it's restricting choice. So, that's one another issue.
You always have to look at, you know, the unintended consequences. And on that, I mean, there's a very good relationship between our regulators and the industry. And, you know, if you look at all the stakeholders in that space, government, Bank of Canada, and OSFI, you know, I feel very comfortable with the types of conversation that we're having. Now, you know, timing versus other jurisdictions, how are they implemented here? Are we going faster than others? That is definitely a topic that we always bring up with our regulator. And I have a very good feeling, you know, that our regulator understands, like, resiliency and competitiveness and a thriving banking sector. Everything goes hand in hand. So you can't have one without the other.
Mm-hmm.
So the conversations are, you know, definitely ongoing. When you think about, you know, exiting certain businesses, and I, I, I don't know why BMO exited, you know, auto loan. But if I look at our current businesses, there, there's not one business that I want to get out of, regardless of, you know, new regulations or floor that's coming up. I mean, does it change behavior? Do you have to structure things differently? Do you have to find partners, and redistribute some of your risks possibly? But you when you when you have, you know, new, new regulation, you've got to look at your whole business plan, capital-light businesses, capital-heavy businesses. How do you price them? And, and how do you position yourself? So if I look at really what we do at the bank, there's nothing that we would change in terms of our capital allocation.
You know, you have to go back to, you know, what are the real economic decisions that drive good performance and premium ROE? But at this point in time, you know, I feel you always have to look at those consequences. And I feel very comfortable with the relationship with our.
And I guess that's, well, very relevant to National as well. Maybe it wasn't OSFI. It was the Feds and changes to the tax code. And you were pretty adamant that you're not changing anything in terms of, you know, what you're doing in the trading business. Maybe that has. Has the adjustment been made as far as.
Yes.
Pricing and structure?
Well, the adjustment, I don't know if there was a lot of adjustment towards, on the pricing itself. But you know, we've been investing for many years in our financial markets business. And you know, we felt very comfortable with this change coming up that we had. And maybe it's a coincidence that a lot of the things are working for us right now in terms of, you know, diversified revenue streams coming from our trading businesses. We've built up our corporate investment banking over the past couple of years. So we're actually very comfortable even with the change. So we had a really good quarter, Q1. It would have been a really, really good quarter if it wasn't for the tax change.
But, no, we're still very confident that we're going to be able to deliver growth this year even with this change.
Yeah. I'll pause now my questions and see if there's anything from the crowd. And I oh, there we go.
There we go.
[audio distortion]
I have to put it into the question. I'm paraphrasing. I guess kind of like a level of the playing field, Canada versus your global peers, how do you deal with that challenge?
Mm-hmm. You mentioned raising the Domestic Stability Buffer. I think, you know, the OSFI stopping back in December at 3.5 is a signal of, you know, understanding the global, you know, competitiveness of, of banks and, and making sure that the Canadian banks will remain competitive. I and, and look, you we all see what's going on in the U.S. The discussions on, on and our, our, you know, regulator is, is looking at that very closely. So far, I don't feel like we are being treated unfairly. But I do believe that if we go ahead and implement everything that, you know, Basel III and the U.S. doesn't, then, then it's not going to be fair. But I have full confidence that we'll, you know, we'll, we'll adjust, whether it's timing or, or a different approach, different measures, so.
Any other from the crowd? I'll switch to the wealth business. When you, you know, assumed your Chief Executive Officer role, I remember, you know, in list of priorities, one of the businesses that you were singling out for, you know, future growth and whatnot was the wealth business. I know a couple of years ago, the commercial banking and wealth distribution were combined. I'm wondering what other sort of changes have taken place in that business that, you know, you believe are going to.
There's two things that we did. So you just mentioned one of them is getting our commercial and wealth businesses to work more closely together, you know, and bringing a cohesive approach to our clients' business and wealth needs. If you just look, we just looked at our clients, just our clients, there's tons of opportunity there.
Mm-hmm.
We noticed also that when we approach our clients in a cohesive manner, it's better client acquisition and satisfaction goes up. So that's one thing that we did. The second thing is get our Financial Markets and our wealth to work on two things, two areas. Product manufacturing. So you think about ETF-structured products, deposits, and really get you know better products, better services faster to our investment advisors to better serve our clients. The other thing is technology. A lot of the technology that's being used in Financial Markets, whether it's trading technology, risk management tools, settlements. Look, it's the same asset class. The metrics you use for decision-making are, by and large, you know, the same.
So, you know, one of the things I told Étienne Dubuc, who's our head of Financial Markets, is, you know, on the technology front, there's you have, you know, you've got to grow your franchise, and you have to take, you know, technology decisions. But, yeah, the priorities are wealth come before you. And so we've combined essentially the decisions of, you know, what do we prioritize in wealth and Financial Markets because they're often the same tools. And so those things are, you know, it's, I think, getting, you know, providing us with a bit of a lift. Now, if you take a step back, though, we have not changed our, you know, strategy at the highest level, which is distribution first, not asset management, and, you know, focusing on open architecture for our investment advisor.
Get the best product out there for an investment advisor, regardless of who's manufacturing the product.
Is there a geographic angle to it as well? Because if I overlaid your commercial lending business in a pie graph versus your wealth,
Wealth AUM.
AUM, it's probably much more Western Canada than your commercial. So there's got to be some.
Absolutely. So wealth has grown faster outside of Quebec over the years versus our wealth business. So there's definitely something and you bring a good point here. One of the things that we are doing is putting everyone together, especially outside of Quebec, in one place. So you know, you want centers where wealth, commercial, banking, is offered. And so we're accelerating that, outside of the province. But you're right. Our commercial book is not as prevalent or as big as, you know, our wealth business.
Let's switch to ABA. You get asked about ABA a lot, I guess. It was in the news recently. But I, you know, we touched upon that if you like. But I just think, it's been a smashing success of an investment, growing from 0%-10% of the bank's earnings in a pretty short time frame. You know, maybe, you know, how, you know, how does this bank look in five years from now if, if we can look out that far ahead?
Yeah. Our focus continues to be on execution. And, you know, what's great about ABA is really the entrepreneurial culture, the execution, and risk mindset, very similar to National Bank. And so I, you know, speak to the team there, you know, at least twice a month, to go over performance, what they're doing, what they're focused on. And they're very tactical on, you know, where what's the next move, what's the next profitable move, what drives, you know, a creative ROE. So our focus is to, you know, keep on that path of making sure that we grow this bank the same way with the same philosophy that we've done with National Bank. Longer term, we'll see where, you know, it will depend on the paths, you know, the types of investment. Do we need a partner or not at the table?
But for now, we're extremely happy with, obviously, the performance. And, you know, the level of risk also that we're taking where, you know, we have on the board ex- National Bank employees. We have, you know, compliance officers involved in, you know, growing the bank as well. So we're actually very happy, you know.
The loan origination strategy hasn't really changed.
The loan origination hasn't changed. You know, still, you know, economy, microlending. We do more commercial as well. So we do have some more commercial funds between CAD 3 million and CAD 10 million. But the nature of the bank, it's still very much microlending, small businesses, absolutely.
You talked about the China slowdown earlier in your, after the first question.
Yeah.
That's still holding back a bit of the growth there, I guess.
It's holding back a little bit of the growth. And so when if there is a turnaround in China, it's going to be positive for ABA. Yes.
Yeah. I'll ask you one of these tired, old questions. And it's probably been a couple of years since I've asked you. So, well, and it has nothing to do with ABA. It has the opposite. Canada growth opportunities are more limited. So you got to expand in the U.S. And that's a problem for National Bank. I mean, you know, those aren't my words. But how do you respond to that?
Yeah. So it's not a problem for us. We still have a lot of room to grow for in Canada. So that's one thing. So organically focused on P&C, wealth, you know, there's still tons for us to do. If I look at the past three years, we've increased the amount of commercial bankers outside of Quebec by 40%. If you look at the loan growth over the same period, 13% growth in commercial lending over a three-year period. It was 18% outside of Quebec.
Okay.
You look at our client acquisition, it's twice as fast. So there's still a lot of room for us to grow. North America and in the U.S., tactically, we've got Credigy, Financial Markets. So when we deploy capital outside of Canada, we want it to be accretive. That's, you know, number one rule. You know, we're going to keep on going with that. You want to control also that capital allocation. You know, often, people ask me, "Well, Credigy, it's not a bank, so it's harder to, you know, model, predict." Yes, but, you know, you're also getting, you know, over 20% ROE on capital allocation versus, you know, low single digit for banks in the U.S.
So, we're going to remain focused on growing the bank in Canada and, you know, tactical capital allocation outside of Canada.
Well, the credit growth certainly falls under that umbrella. Last year, I believe you exceeded your loan growth targets. And this year, you're expecting the same, or?
Well, first quarter, it was more than what we expected. So that trend is definitely still there. So we do expect double-digit growth in our origination at Credigy. Given that it's an election year, it's a little bit slower than I thought it was going to be an explosion this year. But banking consolidation is taking a little bit longer in the U.S. So I think that's going to extend. That's why I said before.
Yeah, yeah.
That's going to. It's still there in 2024, but it's going to extend to 2025. If it's, you know, if it's a Biden administration, it's going to slowly pick up. If it's a Trump administration, it's going to pick up faster.
Okay. The consolidation thing.
Yes, the consolidation piece.
Yeah, yeah. Now, the Financial Markets business, you know, you're picking your spots outside of Canada, clearly.
Mm-hmm.
Is that still a lot of do you still have a lot of runway there without having to think about, you know, any changes to the efficiency ratio, which is one of the hallmarks of the bank's success over the years, is a really nice efficiency ratio in that?
There's a lot of people from Financial Markets here that are going to hit me on the head after. But, yeah, we love our efficiency ratio in our Financial Markets business. But it's not just a question of, you know, where you've invested and how you, you know, the cost of your business. It really it's also about, you know, the revenue mix, going after businesses that we understand well that are very profitable. So that won't change. In five to 10 years from now, I do see us more active outside of Canada. But I do think that our philosophy of, you know, deploying tactically and not building out platforms or, you know, buying a U.S. broker-dealer, I don't see that happening at all.
Which would probably be a relief for people to hear. You know, broader I mentioned efficiency ratio, but the broader expense management theme, the bank had positive operating leverage in Q1. And I guess, you know, simplification is one of the buzzwords around your expense management strategy at the moment. Can you delve into that a bit?
Absolutely. Back in December, we went back to the board. You know, given the macro backdrop, we, you know, reviewed our, our business plan over the next three years. We have a couple of priorities. One of them is cost management and, and simplification. You called it a buzzword, and it's but it's, it's real. It's, when you look at buzzwords of the past, you everyone talked about automation.
Yeah, yeah.
That's a bit of a mistake because you launch people and you say, "Let's automate everything." You know, banks are complex. It's, you know, an example of that is you have, you know, same product, three or four different channels, three or four different processes. Then you launch people and you start automating everything. But what you should really be doing is looking into the future and what the channel will be and what are the tools needed for, you know, distribution of this product. So first of all, let's kill two or three of these processes. Let's kill two or three of these, you know, this approach. Let's work on optimizing this channel, this process. So that's what we're doing.
You know, when I came in, we brought our operations, IT together. And I feel very good about our execution capabilities right now with our new head of technology and operations. And it's been taken very seriously. And we have, you know, Julie Lévesque, who's head of our that department, and our Chief Financial Officer, Marie-Chantal Gingras, who are leading this. So stay tuned.
Any particular areas of the bank getting extra attention, or?
I think P&C is definitely our main focus, some areas and wealth, that we think we can optimize as well. But P&C is the main focus.
Yeah. Okay. Any questions from the crowd as we get the two-minute warning ahead of us here? Yeah. Let's see if I got something else here. ABA. We already asked about that. The, you know, expense management. We'll stick with that, I guess. There's no, you know, when I go back to 2015, 2016, every bank took a couple of restructuring charges. And then we had a little wave of that in the latter part of 2023. We're not. Should we be anticipating another round in 2020? I know National didn't really take a big restructuring charges. Did a few little things, but not, not to the same degree as others. But not really on the.
Cost management is in our blood. And that's the approach I want to have with the team. So, you know, more than a year ago, when we started seeing rates go up and, you know, thinking about revenue growth, that was going to be a little bit more difficult. You know, we said, "We want to protect our talent." And so that's what we've done. You know, so being very disciplined about making sure that we keep talent. When someone leaves, you know, just natural attrition, do we rethink ways of doing things? And it's a lot of hard work. It's a lot of work for the teams in place. But in the end, it's very positive for culture, for, you know, the people that are at the bank.
And so if you look at, you know, what we've done throughout 2023 and at the beginning, also in Q1, you know, we've reduced our full-time employees at the bank just by natural attrition. We're still hiring. We're hiring every quarter.
Yeah.
But it's just, you know, managing differently. Simplification is part of that as well. So, you know, it has when you're, you know, at the top, when you think about risk management at the top, the first thing should be cost management. You know, how do you manage your costs? What kind of businesses are you getting in? And it's good for, obviously, performance, but it's also very good for the people and the culture of the bank.
Yep. I'd agree with that. I think that's, you know, that's it for our first presentation.
Well, thank you very much.
You bet.
Thank you for having me.