Thank you.
Laurent, it's good to see you.
Good to see you. Thank you for having me.
In Toronto, yeah, it's our pleasure. Always great having the opportunity to sit down with you. I thought we'd start off the conversation with a topic that I think is really front and center. It's come up a lot today, a big focus, obviously, during the earnings season that just passed. And it's really related to both a more challenging revenue environment-
Mm-hmm
In Canada, and then the expense control that's required in order to adjust to that revenue environment. So maybe first, you know, speaking from an expense perspective, National Bank delivered three quarters in a row of negative operating leverage. You know, expenses looked good, but there was negative operating leverage, and we've seen a little bit of a pattern there. So the question is, does this mean that you need to take more aggressive expense actions? How do you view this environment here, specifically from your posturing on expenses, and how do you get confidence that you've kind of struck that you're striking the right balance when it comes to expenses?
Well, thank you very much for your question. So the backdrop, the macro backdrop is definitely less certain at this point in time. I think, you know, the economy has to adjust to higher rates, essentially. But if I look at our performance so far this year, you know, I'm quite pleased. We've had 5% growth in revenue. Our balance sheet also grew nicely. We've increased our loans on a year-over-year basis by 9%, our deposits by 13%. So I think we, you know, in terms of execution, we're doing fine. Now, you are absolutely right. Our operating leverage was negative for the first three quarters, and that's basically inflation pressure on expenses across the bank and, you know, a less constructive macroeconomic background when it comes to revenue.
Now, the team, so but before I go there, yeah, it's not specific to National Bank. This is, you know, overall industry, so. But I think if you look at our performance relative to peers, I think we're doing well on that front. So going back to the team, and what we're doing, we've been really focused on really, you know, slowing down new hires, manage vacancies, reduce discretionary spend. At the same time, we've taken a look at our IT investments and really try to prioritize as much as possible, investing on simplification of a lot of our processes and make sure that in the next year or so, that we're really investing on actually reducing costs for the bank.
So, you know, when I look at where the team's focus is, I think we're at the right place. In terms of taking a more, you know, more aggressive actions, so for write-offs on intangible or real estate, we haven't taken a decision yet. As for our people, we are much more focused on protecting our talent base, and any large layoffs are not being contemplated at this point in time. So a bit of an uncertain, you know, environment. But if you look beyond that, you know, on the revenue side, we're focused on our strategy. We want to grow, you know, all of our businesses. We believe in all of our segments. We have a particular focus in Canada on Wealth, Commercial Banking, Private Banking.
We want to solidify our leadership in Quebec. There is still some room for us to grow, actually, in Quebec. And we want to grow in other provinces. So we're looking and following our client acquisition in these three segments and looking at our penetration rate, you know, between these clients, new and existing clients. And on the expense side, I just mentioned, you know, one of the most important lever is to continue to look at our cost structure and really invest to improve, you know, the efficiency of the bank. And one of the things that we're working on right now, and it's gonna be a big theme and a journey for us over the next three years, is to simplify our bank. You know, I was just listening to Victor said we're a big organization and complex organization.
It's the case for everyone. So we're gonna prioritize a lot of our IT investment. We're not gonna spend necessarily more money, but we're gonna redirect investment towards simplification of our processes, products in various channels, services. And we believe that, we're gonna bring significant savings, over the next couple of years. So there, there's uncertainty in the environment, but we believe that we have the right strategy, and we're also focused on making sure that we become also more efficient as we move along. And I look at, you know, what the team is focused on right now, and I'm very confident that we're going to be able to, continue to deliver performance in the years to come.
You mentioned a few things that I want to dig a little bit deeper into. In terms of simplification, are there any examples that you can provide in terms of?
So often, when we look at some of the products that we offer, we're offering them in various channels. We have processes for all of them. It's the same product. We can do a much better job. You have to take a bit of risk also when you do that, but we could do a lot better in the way we manage some of our products and offerings. We still have a lot to do on automation. We did quite well, I think, in terms of investing on various of our client platforms over the years, P&C, Wealth. We still have more to do, but this is my own personal view, and, you know, the assessment that we've done, as a team, we think we can do a lot more internally.
So automation, well, last year, one of the things I did when I came in, we put our IT and operations group together under one leadership. And our leader doesn't have two mandates, has one mandate, and it's really to bring these teams together, because I do believe that we need to get technology and operations to be one group and think in terms of processes and not in terms of just operating. And so, we're seeing already, you know, the benefits of bringing them together, and I think this is gonna accelerate with time.
When you talk about simplification and automation, is that enterprise-wide, or is there a specific segment where there is more opportunity?
There is more opportunity in P&C.
P&C.
P&C, absolutely.
The other thing I wanted to follow up on, I mean, you talked about Quebec still being a big focus and potential for market share gains within the province. I think for some people, that would maybe sound a little bit surprising.
Mm.
So maybe to understand that a little more in terms of the competitive dynamics in the province.
I think we have very good market share. I think our penetration rate between clients is not enough. So we have a very good Wealth franchise, we have a good P&C franchise, but I think we have some clients in Wealth that don't use the bank, and we have some clients in P&C that don't use Wealth. So I think there's a lot to do there. And so just getting people to work together and get closer together. So what we have done is, throughout Quebec, and we're doing the same thing across Canada, is create synergy centers where regions are not paid by product or by business line, but by basically client acquisition as a whole, right? And it's working together that we achieve that.
Now, having said that, we have a stronghold in Quebec. So there is some, I think we can do a little bit more, but the opportunity is really outside of Quebec for us as well, and across Canada. And so, on that, our approach is really focused on getting the right talent to join the bank and to keep growing organically, and it's working for us. So we've had some, you know, good results here in Ontario, and out west, and there's a lot more we can do.
I want to talk more about the strategy outside of Quebec, but just following up on that, within Quebec, so I understand what you're saying in terms of building deeper client relationships and the opportunity there, but is there something notable from a competitive point of view? It came up a little bit on the call, but is there a change in competitive dynamics in the province that is an opportunity for National Bank, as well, or are we just talking about more of this connectivity?
With more of this connectivity, you know, I do feel like some of my competitors have fallen in love with Quebec and are, you know, trying to deploy more capital in Quebec. But you know, we're not changing our approach and our strategy, and so far, you know, in terms of our result and our performance, it's been pretty good. You know, sometimes we see competitors come in and become more aggressive on pricing, deposits, mortgages. So if that's the strategy, if it's a pricing strategy, you know, it's a short-term strategy, so we just move out of the way.
Right.
Then when the market, you know, restabilizes, we can get back into it. But, I'm not worried about it.
And then just from a macro perspective, I mean, we've spent a lot of time, I think it's well understood, talking about the advantage of Quebec from a macro perspective relative to other regions in the country. That's been an important theme-
Mm.
for a few years now. As you look ahead, is that still the case?
Well, I think, yeah, I think in a downturn, it is the case. There's less leverage. House prices are lower. You know, we look at. We have a, you know, variable rate mortgage product that goes up when interest rates go up. And, you know, I look at, for instance, the impact for our Ontario clients versus Quebec clients. So the average payment in Quebec went up by CAD 650 per month. In Ontario, it's CAD 1,100 per month. So that's putting more strain on Ontario consumers versus Quebec consumers. We have more dual income in a proportion of higher dual income in Quebec versus the rest of Canada.
So in a downturn, yes, Quebec could be a little bit more resilient, but, you know, we're not. The Quebec is not immune to also, you know, a downturn.
I want to talk about capital. Ever since you became CEO, you've been quite cautious on capital, and I think at times, and, and I would even say myself, ask you questions, a little skeptical on why you're not being more aggressive. And I think, you know, you've been proven correct, so I'm, I'm willing to, say you were right. And that's not the last time I'll be, I'll be wrong. But, the question is, has your outlook on capital changed at all? Is it, is it still in the same posturing? Or over the last few months, has it gotten even-- has your outlook gotten better or worse? How has your view of capital changed, if at all?
Thank you very much for noticing. Very nice comment, and
I thought you would.
Appreciate it. So when we think about capital, the first thing is macro outlook, and it is uncertain. So that's the first thing. There are certain reforms coming up, which we have to consider. And, in terms of the DSB buffer, we are operating under the assumption that 12% is a possibility. So at 13.5 right now, with what we've disclosed regarding the impact of FRTB and trading books, we feel very comfortable operating at our level. We think that uncertainty remains out there, and it gives us, you know, plenty of flexibility to be able to keep growing, keep focusing on our strategy. And as we see more opportunities coming, we'll jump on them.
On the Q3 call, you mentioned it, you disclosed the impact of the FRTB and the CVA adjustment, that's coming into place in Q1. You talked about 35-40 basis points, which is the highest of the group. Can you help us understand what's driving that, why that is impacting you more than others?
Sure. So, you know, maybe relative to others, our business, our Financial Markets business and trading business also is slightly bigger. Now, I haven't seen the numbers of my peers, so I can't really comment on that. And the impact comes from essentially, you know, loss of diversification between various risks in our trading books. And so netting benefits, correlation risk between various risks. And so you have, you know, market risk RWA that is going up essentially, versus, you know, the VAR and SVAR models, internal models that we were using. So we're, we have to commit more capital to our trading businesses. It doesn't make them riskier.
It doesn't change the nature of our business, and it does not change our approach and our allocation of capital towards our trading businesses. We feel very comfortable with the risk we're taking there, feel very comfortable with our strategy. So that's, that's it. So like I said, I haven't seen numbers from our peers. I mean, I just heard Victor talk about net positive because of US, but I don't know.
Right. And I think it is an important point to talk about the relative size of your trading book. You know, you touched on it, but I just want to make it more explicit in terms of does this rule change impact how you allocate capital within your Financial Markets business, within your trading business at all? Does it make the economics of any business not as attractive?
It doesn't change, because we like... Strategically, we really like the business. Having said that, right, there is overall more capital pressure. There's more capital requirements. So businesses like Financial Markets , commercial, the RWA density is higher. But if you look at our bank and the strategy that we have put in place for many years, it's to grow all sectors, and Wealth is a very important part of the growth of the bank. So you can't keep growing, you know, your, your RWA without having, you know, a solid Wealth franchise that balances it out. And, you know, we've talked about our ROE, which is, you know, our target ROE is between 15%-20%, and we, that hasn't changed either.
So as capital requirements increases, as we have new reforms coming in, we have that in mind as we grow our franchise. So Wealth is going to be very important for us going forward, because we have, you know, capital requirements in Financial Markets and our commercial business. So that's why, you know, when we think about growth going forward, we talk about commercial, but we talk also about faster growth in our Wealth business.
That faster growth is driven outside of the province of Quebec?
Yes.
On the subject of Financial Markets , you know, Q3's trading number missed expectations. So I want to just revisit why that's the case. Obviously, because it's a very important component of your earnings and what the outlook for the business is going forward, the trading business.
Absolutely. So, you know, we had abnormally low trading volumes and client activity during the quarter. We also had volatility that was very low. If you look back in March, you had a peak in volumes, peak in volatility with the banking crisis and a low in June and July. So from a, you know, a sequential quarter-over-quarter comparison, you had Q2 high vol, Q3 very low and very low volumes. And if you—you know, I'd like to remind everyone, if you look at comparables, Q3 of last year was very strong for National Bank versus peers. And so on, from a comparable point of view, it was a little bit more difficult for us. You know, the business is sensitive to client volume. It is, you know, activity, market making, structured products.
There's our securities finance business as well, our rates business, our foreign exchange, mainly Canadian. So it is really sensitive to activity in the market. So when activity is down, volatility is down, that's not driving clients to be active in the market, we're not gonna be the top performer. We don't warehouse long position, we don't warehouse credit, and so this strategy that we've put in place, we've been very clear about it, how you know we manage our trading businesses, you know, has a long track record of performance over the years, and we're not about to change it. So I don't get a concern over a couple of months of you know slowdown in volumes or volatility.
As long as we stick to what we understand and we know and we do it well, you know, it's, it's just gonna come back. Look at 2020. 2020 was high vol, high volumes, phenomenal trading year for us. 2021 was not, and it was a much more difficult year for us in trading. We had a huge pickup, though, in equity issuance and investment banking. 2022, big year in trading. So far this year, we've had two quarters that were pretty good, one that's slower. So over time, it has been very consistent and very profitable for our shareholders.
So it's working the way-
Absolutely.
You'd expect it to work. Tying it to the segment as a whole, the Financial Markets segment, you know, and you've talked about this, there's been a step up in the earnings power of the business through the pandemic. And so the question that I'm getting coming out of this Q3 is, and I think I know the answer, but I'll pose it to you, in terms of, is that a temporary run rate? Are we going back down, or, or is this new run rate still valid in your view?
I think, yeah, it's nice of you to point it out. You are absolutely right. We did have a nice step up in our run rate since the pandemic in our businesses, and we didn't change anything. So our approach to risk, our strategy, capital allocation, nothing really changed. But I think it's more a question of market dynamics. Our competitors, you know, were such that we were able to, you know, increase our government debt business, securities finance, structured product business. And in investment banking, we did grow our mining, our energy and project finance platforms. So call it strength in capital, competitors maybe not putting as much attention in that, in these areas. You're right, we were able to gain market share.
The step up is real, and I believe it is sustainable.
I want to talk a little bit about tech. You know, I've been talking to some of your peers about AI, just because it's, it's so topical and definitely getting a lot of questions about it. You know, for, for National Bank, and you talked a little bit about the investments that you're making on, on the technology side, but should investors be worried about, you know, a bank like National Bank not being able to keep up when it comes to AI, maybe other kinds of technological developments? I think historically, we don't see evidence of that, but the question, you know, when you see this kind of new technology that looks like it's very expensive, how big is that risk that, that this is a technology that is gonna be harder for you to, to keep up with, to implement in your business?
So, that's a very good question. And, I think smaller scale brings better focus and coordination across the organization. So I think, and we've been able to do that, I look at the example in Financial Markets, where for years we sat engineers and traders together to build in-house capabilities, and, you know, implement technologies and build an edge on electronic trading, including AI, in electronic trading, that, rivals, you know, everyone in Canada. So, I think here, you know, smaller scale is an advantage because, you get, you get, I think, better coordination across the bank. And here, what's important, especially in new technology, and when we talk about, you know, simplification, you want to build tools that are reusable across the bank, and for that, you need coordination.
So you need to really think about what are the most important things that we need to build as a group, get the best people to work on that, and then make sure that it is reusable. So another example is a lot of the technology that we use in Financial Markets . We use a lot of AI in Financial Markets . We need to reuse that, and we are reusing it for our Wealth business. Right. So the trading algos that we use in Financial Markets , we can use them for our clients in Wealth. So I do not believe that having more money to spend is going to accelerate or would accelerate you know the implementation of new technologies and building an edge in certain areas.
I believe in focus, know where we can be competitive, and build around that, an expertise that we can then really scale. That's what we've been doing. You know, so we want to replicate a lot of the approach that we've had in Financial Markets . We see applications, you know, you mentioned AI. We see applications in our corporate business, in Wealth. I think our advisors could really take advantage of a lot of the tools that we can build for them. Call centers is another area that we believe we can make a difference. So, I'm actually very excited about new technology like AI, and believe that we can make a big difference both revenue and on the expense side.
Is that a near-term potential, or it's much longer term, in terms of seeing those benefits to-
Well, I don't think it's the next, next year, but I, I don't think it's in 10 years from now either. So I think it's in the, the 2-3-year range, we're going to see significant changes. So if we do it right, and we really focus on the areas that we can, you know, build that edge that I'm talking about, we, I think that we're, we're gonna see some, some, some impact in the next 2-3 years.
You're saying that technology playbook that National Bank has used well to compete with larger peers, that's still... That's the playbook, and doesn't change with AI or any other new technology?
Well, AI, no. AI, I think, is a game changer. I think, you know, for instance, for coders, it's going to really speed up development. And you're gonna say, "Well, Laurent, it's gonna speed up development for everyone else." Yes, but then again, it's your choices. So where do we want to speed up development? Where do we need to speed up development, and where is it going to bring value? So I think there's a lot that we could do with that. And, you know, we see tons of application, obviously, across the bank in risk, fraud detection. No, we've been using AI for quite some time.
Our Financial Markets sales team, we have an engine that collects all the client behavior information, trading patterns that we see in the market, market data, and we collect all of that, and we provide an enhanced set of information to our salespeople that really provides them with an ability to provide much better advice to our clients. So, you know, we're again just getting people to work together. It's not the size of your bank that matters. It's having the right people with the right ideas. Not trying to do everything.
Yeah.
That, that's the other thing. Focus is saying no to a lot of things, by the way.
I wanna take some time, we don't have that much time left, to talk about Credigy and ABA. Laurent, you commented several times, and I think even in the last call, that you see the potential to deploy more capital in Credigy next year. So I'm curious what you're referring to. What do you see as the opportunity in that business specifically?
Yeah. Credigy is a, you know, great, great business for us, differentiator versus our peers. So Credigy is, you know, has been performing over time, but when we look at the opportunities in front of us with the uncertainty, there's potential liquidity disruption coming up, and obviously a credit cycle. So in terms of a credit cycle, higher rates for longer, that in itself is an opportunity for Credigy. We believe that 2024, we could see more bank consolidation in the United States that will generate asset sale, and Credigy does really well when portfolios come to them, and we have opportunity to bid on them. So that's another opportunity. So I'm, I'm really excited about the possibility of taking advantage of situations in the U.S. We're well, we're well-positioned because we have the capital.
You know, we're gonna do it, we're gonna do it right. You know, the It, it is a different model versus our peers. But if I look at you know, the risk, rewards and how you know, our performance over time with Credigy, I think, I think if you compare it, it has been in terms of U.S. exposure very valuable, and, and, and has brought great returns to our shareholders. So, yeah, I think we're, we're in the next two to three years, we're gonna see more opportunity. Q3, even though volumes are still low, we're starting to see opportunities. We bought $600,000,000 of new portfolios at Credigy, and we think that that is gonna start picking up.
Do you see a potential to move down the credit curve in terms-
Possibly. Absolutely. We're still looking more just secured asset, but Credigy has the ability to buy, unsecured as well. So it, it all depends on opportunity and pricing. Absolutely.
And then, ABA, you know, the PCL ratio is rising at ABA, and I just want to revisit sort of the unique credit characteristics of the kinds of loans that you're making at ABA. And so I think it'd be helpful to kind of refresh.
First of all, I'm very comfortable with our credit position at ABA. The loan book is very diversified, not a lot of concentration. The average loan is still $65,000. It's still microloans. 98% of our loan book is secured, and LTVs are in the 40s. So in terms of just that picture, we feel very, very confident. We have been over the past couple of years doing a little bit more on SMEs, larger SMEs, still, you know, below, way below 10% of our book. But as the bank is growing, we are seeing opportunities to grow there. Our impairments have gone up a little bit. It's mainly tied to, you know, the global downturn, so on trade, tourism.
We don't have exposure to construction. We don't have exposures to real estate development, no condos, no office, no big hotels. So, you know, given all that, given our experience with ABA, you know, we very close to the management, obviously there and we have, you know, members of the board that are ex-National Bank employees. I feel very comfortable, even though we could see impairments go up, that, you know, net charge-off rates are gonna remain low.
And then, in terms of margin, I was looking historically. It seems to be quite a bit of downward pressure on margins, not just more recently, but if you look back over a few years.
Yes.
I'm just wondering what's driving that, and do you see that pressure abating anytime soon?
Mm-hmm.
The dynamics there, admittedly, caught me off guard. I don't think I noticed it before, but so I'm wondering about-
They were bigger this year. They were bigger this year. So, first one is... So three years ago, we had no SME, no larger SME, so just going into that, has put a bit of pressure on NIMs. And then this year, specifically with higher rates, we've seen migration, we've seen more competition, in the market. So, that really explains the dynamic with, with NIMs. Now, having said that, this year, was a more competitive environment, but I am really, really happy with the execution. We grew, our client franchise by 36%. Our balance sheet grew by 10%. So in a more competitive environment, we gained a lot of market share. So looking ahead, I think we're really well positioned for growth in the future.
And then, just in terms of tying Credigy and ABA together, I think you've been quite clear, but just, while I have you, it sounds... My understanding is that these are just not replicable strategies, meaning-
Mm-hmm.
You have them, you're comfortable with them, they're working well for you, but there's no sense that you can, you know, do other types of, of M&A in order to, to replicate the kind of-
We don't have anything right now that we're looking at. No, absolutely. And, you know, these are... When you look at, you know, our strategy and deploying capital outside of Canada, whether it's Financial Markets or Credigy or ABA, you know, the discipline is around, you know, ROE accretive. Is this going to help us increase ROE or not? And that's what we've done when we deploy capital outside of Canada, and, you know, right now, we're very happy with those assets, and, we're gonna keep growing them.
Great. I think we're out of time, so thank you so much, Laurent, for being here.
My pleasure. Thank you. Thank you. Thank you very much. Good. Good.