You had a good flight in?
I had a good flight in. Good summer?
Good summer.
Busy.
Yeah, you were very busy-
Yes.
Early in the summer. So, you can imagine where I wanna start.
I-
I wanna start with CWB. You announced the deal in June.
Mm-hmm.
There was an important vote yesterday.
Yes.
Maybe just to start, if you can, is there anything to update us on the transaction? You know, maybe as a sort of a further part to this question, I thought, you know, maybe we'd hear some regulatory rumblings, just given the regional issues, potentially in a Qu é bec-based bank buying an Alberta-based bank. You don't hear anything. The follow-up question in terms of an update is just: could we actually see an earlier close than what you originally indicated-
Yeah.
... in terms of the end of calendar 2025?
So, first of all, thank you very much for having me. This is a great conference, and you run a really tight ship, so it's always nice to be here. Things are progressing really well on our deal. So discussions with OSFI and Competition Bureau applications were in, you know, the week after the announcement. So these are, you know, progressing well. And, you know, our view, and that's what we said to the Competition Bureau, and, you know, they're working hard on the transaction, is that this is a good trade for competition. And if you look at, you know, complementary platforms, geographies, products.
Some of the early feedback we're getting from the Bureau is that, yes, we kind of see the same thing. We're working really hard towards an early 2025 close, you know. That's the mindset of the team right now.
So early 2025. Okay. You know, a follow-up question, which comes up a lot. I don't think we've had a chance to really sit down and talk about the transaction in this kind of way. I mean, people say you know, you came into this deal with peer-leading ROE, peer-leading shareholder return. It's like, why do you need this headache? Why not just keep doing what you're doing? Shareholders are happy.
Yeah, and we're gonna do both, right? And I agree. And the way we view this is, and we've had discussions between National Bank and CWB for the past 30 years on the possibility of this, and I think most of the investors see the strategic rationale. So, you know, organic growth remains the priority at the bank, and, and this fits in perfectly. So it's on strategy. We've talked about growing outside of Qu é bec, we've talked about growing, you know, commercial bank wealth. And so if you look at, you know, the CWB and their business, this is exactly what we were doing. So I think it's gonna come in nicely as an accelerator to organic growth.
So our view is once we, you know, work on the integration together, it really is a boost to our growth versus and it's not in lieu of what we're doing, so.
'Cause that's the other question in terms of you know, you've been very clear in terms of wanting to grow commercial and wealth outside of Qu é bec. Is this doing this deal sort of an admission that the growth rate it's going fine, but the growth rates aren't-
No
... blowing you away? It's-
So we've been focused on larger commercial and wealth. Our growth, if you look at our growth in our commercial book over the past three years, outside of Qu é bec, 18%. The total book was growing at about 13%. Our growth is going in the right direction. That's. I think it's just a question of you know, discussion we're having, timing. This is right on strategy, and so we're absolutely not frustrated with our performance. If you look at last quarter, we are doing really well and very happy. So this is really, you know, I think, just a perfect fit for us and will get us there even faster.
What about the ROE dilution? I mean, a lot of people are focused on ROE in particular. These days, a lot of conversations with your peers about ROE. Peer-leading ROE, this is dilutive, at least initially, and people are saying, "Why do a deal to take down that ROE?"
Yeah, if you just look at math on day one, it looks dilutive. But if you isolate, you know, the commercial bank, and you put our platform on it, you know, we're gonna bring up the ROE right to the level of National Bank's commercial operation. You just look at 2023, and we'll just focus on commercial here. Non-NII income for CWB was, you know, roughly 12% of their total revenue, and National Bank was 27%. So here, you know, you've got foreign exchange, swaps, advisory. If you look at also NII, you know, we have a complete platform, cash management, deposits. So that's another, you know, area where we're gonna be able to also enhance, you know, the products that are offered.
So we're gonna be able to take, you know, the ROE to the level of the bank. So yes, if you just add up numbers, day one, it looks dilutive, but, medium to long term, it's gonna fit perfectly, with our business model.
You mentioned that non-interest revenue as a percentage of overall revenue very low for CWB. Is the expectation that you could bring it all the way up to?
Absolutely. Yes.
Yeah.
Exactly. Yeah, that's exactly what we're gonna do. And, I mean, it doesn't mean that they're not generating the conversation with our clients on ancillary business, but they don't keep all the revenue because they don't have the capacity, so-
Right
... we'll be able to do that.
Then is there anything else you can add in terms of either the revenue synergy side of this deal that you haven't said? Or, you know, I'm getting a lot of questions about the capital side.
Mm.
The people are looking at the capital picture and saying, "Okay, obviously there's an opportunity here. CWB's a standardized bank, you're advanced-
So-
How does this all come together?
So on the revenue, the you know, number one focus will be on the commercial side. So we talked about that a little bit. Then private bank wealth as well. You know, we have a model at National Bank where commercial, private bank, and wealth extremely collaborative, on the ground, approaching clients, so we're gonna bring that also. CWB doesn't have a retail operation. So we do have a digital role, a product that we can roll out as well. You know, our branches are going to increase by six times, essentially, out west. So we're going from six to 36 branches. So that's another opportunity as well on the revenue side. Capital, you mentioned capital. Capital is another upside for us.
So we've announced that on day one, we're looking at it as a, as a you know, standardized. Obviously, you know, we have the advanced models. So we're actually working with CWB right now, and we'll be able to provide a capital plan, you know, once we announce, you know, day one close, and what it looks like. So that's capital upside, that's ROE upside as well, so you know, more organic growth and possibly, you know, buy back shares at some point in time.
You talked about the branch growth. Is the intention to make the CWB branches fully retail and commercial? Like, or is it, a re they gonna stay, or some of them gonna stay purely commercial banking centers, or-
So we'll-
Is it decided yet?
... we'll see. We're gonna look at, you know, their network, ours. We also have, you know, wealth branches, and we're gonna optimize all that and see if we have, like, centers with all of our products: commercial, wealth, private bank, and then where does retail fit in, so we'll design all that during the integration period.
The question I also get just in terms of the CWB brand, and does that go away, or has that been decided yet?
During the integration process, we'll decide, so we'll look at market studies, what sticks most and, you know, what makes the most money, essentially. Yeah.
That's always a good guide. And I want to move on to other parts of the business. Obviously, a lot of strength and success to talk about. But just a final question here in terms of, you know, culture. I alluded to at the beginning, you know, when the deal was first announced, I think everyone agreed strategically it made a huge amount of sense. The question was, you know, sometimes a little bit from the regulatory side, but more from a cultural side: How does a Montreal-based bank gel with an Edmonton-based bank?
Mm.
It seems like-
And, uh-
... not naturally the best combination from that perspective.
Look, it's a very important question because you've got to put the numbers aside. And it was a very important matter for both boards. And we spent a lot of time on this. And, you know, Chris and I spent the past two years connecting and looking at this possibility. And so, you know, starting this year, we got a little bit closer. You know, one thing that was great. You know, you always have ups and downs when you go through this process, and during the due diligence process, one major high was when the teams met. And we saw a lot of similarities with values, the way we manage talent. We're very entrepreneurial banks, and so we see a lot of similarities on how we approach clients.
The other thing is, you know, the DNA of both banks. National Bank, created by entrepreneurs who had a difficulty accessing credit. Same story with CWB, so we get it. Yeah, we're far apart, but we hit it off well. It's a huge honour for us, right, that the board of CWB, after all of these discussions, say, "Yeah, we want to do a deal with you, and we'll do it exclusively with you because we know that that's the right fit." Yeah, I... Look, there's always differences, but we feel very comfortable right now.
I wanted to talk about the business as it is now. And again, lots here to talk about. Big picture, I thought it'd be helpful, you know. I think clearly see the outperformance of National Bank. I think you have to give, you know, the Québec some of the credit. So maybe we'll see if you push back on that at all, but just an update in terms of the Québec economy, you know, where it stands now, your outlook. Obviously, you're very well-positioned to give us a little bit of insight into that and-
Yeah, in general, and you're right, we did benefit from, I guess, less leverage in general in the Québec economy. You know, dominant position from National Bank, right? So, in terms of less leverage, you know, house prices, lower dual income households that benefited from subsidized daycare as well. So, that has helped in terms of sustainable performance and credit, for sure. And we think we're gonna keep benefiting from this through this cycle, because you know, you look at the shock from variable rate mortgages, right? So it's Ontario versus Qu é bec. So we have a pass-through, right? So at the peak, before the Bank of Canada started lowering rates, the average shock in Ontario was CAD 1,200, and it was CAD 600 in Québec.
So obviously, the impact is, you know, has had, you know, more significant, you know, impact on our delinquencies, for instance, in Ontario versus Qu é bec, on variable rate mortgages, so we benefit from that, for sure. Having said that, you know, we believe also that, you know, in our growth path, right, we need to diversify, and that's why the CWB transaction fits in perfectly right now, as we look ahead.
Wanted to talk about financial markets. You know, it strikes me, you know, at the beginning of the year, the guidance here was for very low earnings growth, and here we are, year- to- date, up 23%. I think your strongest business segment. Despite the introduction of the DRD, you're able to deliver those kinds of numbers, and better than you had expected, and better than other segments. So really, the question is: How have you been able to achieve that? You know, from the outside, it's definitely hard to understand. It's nice to see, but help us understand how that happened.
Mm-hmm. So, yeah, definitely better than expected. You know, we're facing a tax change, credit cycle, so we had that in mind. We didn't do anything differently. You know, we stick to the businesses we know. Markets were good. At least keep that in mind as well. We've really grown the earnings potential of our financial market business over time. So, you know, in good markets, you have, you know, our traditional business, like lending, ECM, DCM, and, you know, the more cyclical business doing well. And our trading businesses are also doing well during cyclical or countercyclical, you know, markets. But I think it really comes from how we've built our businesses through time.
You know, focusing on areas of growth that we believe are going to deliver strong performance, and discipline and agility. So when there are opportunities to redeploy capital, we're quick. And that's, you know, entrepreneurial. And we, you know, pay for that kind of behavior in financial markets. So, when we redeploy, there's no internal discussion or fights about, "This is my book or your book," or. So I think a very agile, focused, Canadian platform, niche in the U.S. I think all those things have, you know, allowed us to keep, you know, that sustainable performance over time. So, look, great performance this year, but nothing different than what we've been doing.
I'm not gonna say I'm gonna deliver the same growth next year. But, you know, our goal is to, you know, year- over- year, it's 5% earnings growth in capital markets, right? That's-
But it's sustainable in the sense you're saying. There's nothing that you can point to this year to say, "That's not gonna repeat, that's not sustainable."
Correct.
You talked about, you know, obviously, the Canada focus with some niche in the U.S. Question is, why not go bigger in the U.S.? You're clearly showing an ability to deliver in Canada, so why not take that secret sauce-
Mm
... and build something very, very powerful, in the U.S. market?
Well, look, we are doing it, and we're doing it in areas that we believe, you know, we could provide value to our shareholders. So first thing is, you know, help our clients who are growing outside of Canada, so in the U.S. You know, we've chosen certain industries, like renewables, for instance. And I heard Victor, we're also a very big player in renewables in the U.S., where we've been able to structure deals with very strong sponsors. Structured products, we've sold more products in the U.S. than in Canada this year. Different structures, so here we keep the risk. We don't keep the risk in the U.S., so it's more, you know, selling into wealth networks.
You know, so, you know, and obviously supporting government issuance, so U.S. dollar debt and all that. So, we stick to the businesses that we understand. We want to make sure that we control pricing and risk when we go to the U.S. We feel relevant, and ultimately that it's ROE accretive. So, you know, we're not, we're not gonna go and build out a big, you know, Wall Street expansion investment bank. We're gonna choose tactically niches where we believe we can make a difference. And, you know, that's the way we've been doing it forever. It works for us. Not just in the U.S., you know, we have some activities in Europe as well. So, we're gonna change that.
The mindset in financial markets is make money first, is spend after. And, you know, in risk management, one of the number one things is control your cost. 'Cause often, when you start building out platforms, then you get into, you know, the FOMO kind of mindset, and we've got to start trading, or we've got to start putting on these types of risk, or start lending to XYZ because we need the revenues now for all the build, the cost that we've put up. So the mindset is make money and then spend, and that's what we've been doing forever, and it's. You know, when we want to hire people in financial markets, it's everyone else that pays, right? And that every single employee in financial markets know that.
We're gonna keep that kind of approach. That's secret sauce, if you want to call it.
If we talk about financial markets, business that we don't talk as much about is wealth, but it's put up very good results. So maybe, you know, we'll keep the metaphor, the secret sauce. What's the secret sauce in wealth? You talked about financial markets, but how are you able to deliver in wealth, especially outside of Qu é bec and-
Qu é bec? Absolutely. 40% of our revenues are outside of Qu é bec in wealth, and I'm very happy to talk about our wealth business because it's such an important part of the mix, of our performance, of our ROE as well. So, you know, the premium ROE comes from business mix, and wealth is such an important part of that. There's four things that are important in our strategy. The first one is distribution focus. So it's really about, you know, acquiring clients through advisors with a open architecture platform, which is unique in Canada. Second is our, I guess, acceptance of independence and supporting them with custody and brokerage services. Select manufacturing of specialized products.
So, you know, when financial markets talks about structured products, well, that's one product that is clearly a focus for our wealth platform. But we, you know, stay away from general, you know, asset management. And then, you know, I guess the ability to bring that all together and keep, you know, growing is also, you know, a very important factor. Synergies between financial markets and wealth are also very important from distribution, obviously, but from a back office and technology point of view.
So one of the message I send to the teams, and Étienne, who runs our financial market business, and Nancy, who's responsible for our wealth business, you know, it's best back office, best trading technology, so really best infrastructure, with a mindset of obviously servicing, but you know, cost reduction across the platform helps a lot, also in our kind of performance. So, lots of collaboration there. That's important. So, no, it's a business that is key and you know, wouldn't mind seeing the bottom line of National Bank, you know, seeing wealth take a greater proportion in there.
I wanted to talk about Credigy.
Yes
... a niche business for you. First off, you could just help us understand how it fits into the overall strategy of the bank. How does Credigy fit? It's very unique.
Look, it's a great way to deploy capital in the U.S., high ROE. Again, you know, the kind of the same mindset of being niche. So, Credigy we deploy, you know, capital, towards, consumer credit, auto loans, life settlements. So, Credigy has a very unique way to analyze credit. So model-based technology, very fast. And with the bank, right, we've been able to quickly assess, so credit, how do we fund these, the risks around these portfolios? Great complement to our core banking, and, you know, if you think about deploying, you know, capital in the U.S., we like this approach versus, you know, a bank, for instance.
So yes, it's been accretive and more and more, you know, I think an integral part of what we do at the bank.
And can you talk about how, you know, the prospect of higher capital rules in the U.S. are sort of helping fuel that business? And then what I was thinking about was, you know, to the extent that the Basel endgame comes in maybe softer than expected. Maybe it's not, maybe it is as expected now, but does that sort of temper that.
So we've seen 13% growth so far this year. I thought it was gonna be a bit higher, but so those discussions I think maybe have tempered. U.S. elections also, I think, has reduced a little bit the movement and bank consolidation. But that trend is still there. So it could have an impact, and but I still believe that we're going to see more opportunities, you know, this year or next year as well because the, you know, the U.S. regional bank situation hasn't been solved, and we're still, you know, getting a lot of, you know, opportunities coming our way, so.
I was just wondering, just in terms of the competitive landscape, as alternative assets become more popular, I mean, Credigy was doing it before it was cool, but are you seeing tougher competition impact the ability of Credigy-
Well-
... to actually get deals done?
Yeah. No. And our competitors there are, you know, hedge funds. They could be other banks. Wall Street banks are also there, so there is competition and interest in alternative assets. What's the advantage that we have is, so I talked about, you know, credit. So they have a fantastic way to, you know, be able to quickly assess all data points, not just sampling the credit quality. And, you know, we provide them a platform where they have, you know, access to treasury, access to the derivatives team, structuring team, and that, you know, helps on valuation, hedging risk.
So being able to deploy capital, having the credit box, having all the tools that a bank has to be able to fund and hedge, well, they have more than some of the, you know, other investors that are interested in that. So I think our ability to say yes or no to a deal quickly is a big advantage with Credigy, versus our competitors for, in the U.S.
Wanted to talk about ABA. Maybe get to the point, you know, in terms of the, the most fundamental question here, just in terms of, you know, how core is this business, and you know, if the right offer came along, would you be willing to, to sell ABA?
So it's a phenomenal investment that we've made. You look at the performance, it's doing really well. What I like about ABA is we own 100%. It's in Cambodia. So we control the board, we control you know the strategy, the risk profile of the bank. So for us, you know, there's still some room to grow in Cambodia. You know, some challenges in the economy over the past year, and we've been able to actually do really well because of you know the type of you know lending that we've put in place in in ABA. So we'll see. I think as you know we're gonna focus in growing the platform in Cambodia.
They have a phenomenal digital offer, and payment functionalities. So if one day, you know, we could see ABA grow outside of Cambodia, we probably will need a strategic partner at that point in time. A local strategic partner, whether it's institutional or a bank that has a balance sheet as the size of ours, that understands more the market there. So that's a possibility one day. But for someone to come in and just say, "We wanna take a chunk of your bank because it's great returns," the answer is no.
Just take a step back in terms of capital deployment, but you're not interested in deploying inorganic capital, or capital inorganically in that region?
No, no. That's, that's definitely not a focus right now.
Just going back to, you know, the performance of that business. It's actually been better than expected, but we're still seeing gross impaired loans gap up. And so I think you addressed this on the call, but I think it's important, you know, why shouldn't investors be worried about that when they see that-
Mm-hmm
... that big move in gross impaired loans?
You know, I understand. And what makes us confident, and what should bring some comfort to shareholders is, if you compare it to Canada, a much longer process to get files resolved. But what we have seen, when files do get resolved is that, you know, court sides with ABA, same thing with the other banks. And we have seen, you know, the performance that historically has been there in terms of, you know, net charge-offs being extremely low is there as well. So I think Bill, our CRO, addressed it, on the call and said, "You know, the files that were resolved in Q3, two-thirds of them had zero losses." So that remains the same. But you're right. Look, Dave, there's...
You know, we're taking a prudent approach, obviously, in building reserves at ABA, but it is taking longer. And the main reason so processes are longer, but courthouse was closed for a very long time during COVID, big backlog. And the elections also last year in the country, so there's a change has also resulted in a backlog. So those are the reasons, really.
One thing I wanted to follow up on that, so you're very well protected on these loans, and so even on impairment, you're not taking losses. But the question that I sometimes get is just, y ou obviously, there's a whole legal structure behind that for you to enforce on your claims.
Mm-hmm.
You know, you're a foreign bank, is there regulatory risk here? Could one day you just wake up and they say, you know, the security that you had, you actually don't have anymore, and how big a risk is that?
We're not the only foreign bank, right, in Cambodia. Many of the local banks are owned by foreign investors. So, that's not our experience. Our experience has been, you know, very, very clean. Even when we see pushback or when we see, you know, owners trying to delay processes, the court has always favored the banks in claims.
I want to wrap up, just a few minutes left, just get your thoughts on the global minimum tax. Didn't really come up this earnings season, but I'm bringing it up here because I think it has the potential to be more meaningful for you guys, just given your TEB revenues is larger than peers. So the question is, how should we be thinking about the global minimum tax? How big an impact could it have on your results going forward?
So first of all, it's financial markets. It's mainly our European operations. You know, global tax will have a bit of an impact on global tax for the whole bank. But it's still i t's not meaningful overall. We'll be able to provide Q4, we're going to give an update. Again, going back to what we said last year, and we're going to say the same thing this year, we believe in the earnings potential of our financial markets business and think that even with this change, it won't stop us from growing our business next year.
Okay, I think that's a good place to end. I want to thank you so much, Laurent.
My pleasure.
Always great speaking to you.
Thank you.
Now we have a 10-minute break, and then we'll be back with EQB.