Good morning and welcome to National Bank of Canada's second quarter results conference call. I would now like to turn the meeting over to Marianne Ratté, Vice President and Head of Investor Relations. Please go ahead, Marianne.
Merci and welcome everyone. We will begin the call with remarks from Laurent Ferreira, President and CEO; Marie Chantal Gingras, CFO; and Jean-Sébastien Grisé, Chief Risk Officer. Also present for the Q&A session are Lucie Blanchet, EVP Personal Banking; Judith Ménard, EVP Commercial and Private Banking; Michael Denham, EVP and Vice Chair, responsible for the integration of CWB; Nancy Paquet, EVP Wealth Management; Étienne Dubuc, EVP Financial Markets; and Bill Bonnell, EVP International, responsible for ABA Bank. Before we begin, please refer to slide 2 of our presentation for information on forward-looking statements. The bank uses non-GAAP measures such as adjusted results to assess its performance. Management will be referring to adjusted results unless otherwise noted. I will now turn the call over to Laurent.
Merci Marianne and thank you everyone for joining us. This morning we reported second quarter results which include CWB. We generated earnings per share of CAD 2.85, up 12% year-over-year, and a return on equity of 15.6%. Our performance reflects organic growth in our business segments including an excellent performance from Financial Markets driven by strong client activity and volatile markets, and as well early momentum in cost and funding synergies from the CWB acquisition. We ended the quarter with a CET1 ratio of 13.4% in line with expectations. Our capital position is strong, allowing us to support business growth, and we also raised our quarterly dividend by CAD 0.04 effective next quarter. Turning to the macroeconomic context, the uncertainty related to global trade tensions and ongoing negotiations continues to be an overhead on the economy.
Increasing geopolitical and geoeconomic instability and projected fiscal deficits in major economies are making the path of growth and inflation difficult to forecast. This in turn is bringing instability to capital markets and is keeping long-term interest rates high. That being said, the latest developments regarding global trade negotiations seem to be progressing in the right direction. The effective tariff rate being absorbed by Canada is lower than initially anticipated. Canadian businesses have been quick to initiate USMCA compliance, and as a result, the share of covered products has increased significantly. Despite the uncertainty, Canadian consumers and businesses are demonstrating resilience. As always, we will continue to support our clients providing advice in these challenging times, and we will support investments in domestic projects across the country. Before turning to our results, I would like to say a few words on our acquisition of CWB.
We are off to a strong start, and we are excited about the opportunities ahead. I am very pleased with the integration momentum as well as the positive reception from clients. Employees have all been onboarded, and our teams across the country are working towards a smooth integration for our clients. Funding and cost synergies are progressing ahead of schedule, and with the first wave of client migrations starting this summer, this sets the table for revenue synergies starting towards the end of the year. Looking now at our business segment performance, Personal Banking and Commercial Banking generated net income of CAD 316 million, including CAD 45 million from the Canadian Western Bank transaction. Excluding Canadian Western Bank, Personal Banking and Commercial Banking delivered 4% revenue growth year-over-year as we continue to grow our balance sheet. Our commercial book grew 14% with sustained opportunities in insured residential real estate and broad-based growth across our industries and geographies.
Personal mortgages grew 4% year-over-year with strong origination levels and pointing to similar growth levels in the second half of 2025. Wealth management grew net income by 15% year-over-year on the back of strong organic growth. Net sales in our channels, combined with market levels, generated double-digit fee-based revenue growth, while our strong deposit base supported solid growth in net interest income. This quarter, operating leverage was negative for this segment because of the integration of CWB's wealth business. However, cost synergies will support our attractive efficiency ratio, which came in under 60% again this quarter. Financial markets generated net income of more than CAD 500 million this quarter, with net income growth in the first half of the year well ahead of the expectations we had coming into 2025. Global markets benefited from volatility and higher-than-usual volumes in our trading businesses in the second quarter.
Client activity remained robust despite macro uncertainty. Corporate and investment banking delivered resilient performance with revenues up 2% year-over-year. Clients remain active but prudent in the current context. Turning to the U.S., Credigy delivered net income of $40 million this quarter. Credigy grew net interest income 4% year-over-year, with underlying growth of 2% in average assets. We expect the market to remain competitive for the rest of the year. As always, Credigy will continue to be opportunistic as conditions evolve while maintaining discipline on new investments. At ABA Bank, we had a great quarter. Our client and deposit base grew 33% and 21% respectively, and loan growth came in at 7% year-over-year. I will now pass the call to Marie Chantal.
Thank you Laurent and good morning everyone. My comments will begin on slide 8. The bank delivered strong performance in the second quarter. Solid results in our business segments were complemented by the CWB addition. On an all-bank basis, revenue increased by 33% and PTPP rose by 45% year-over-year. Excluding CWB, revenue grew by 22% year-over-year. All segments contributed to this growth with particular strength in financial markets. PTPP increased by 34% year-over-year, and operating leverage was positive at 10%. Also excluding CWB, expenses increased by 12% year-over-year, mainly driven by variable compensation in line with the strong financial markets performance. This was partly offset by a CAD 22 million reversal of a property tax provision. Apart from these two items, expense growth was 9%. Additionally, technology costs reflect the continued evolution of our infrastructure and increased support for business growth.
Turning to the impact of the CWB transaction, it contributed CAD 298 million to revenues and added CAD 155 million to expenses. As we completed our first quarter together, our focus remains on executing effectively and with impact as we pursue our integration plan. We are pleased with the cost and funding synergies that are materializing already as we continue to build the foundation to fully realize the targeted synergy. To this end, CWB employees are actively learning our product processes and systems, and we opened a customer contact center in Edmonton. We are engaging with our clients, providing information on the full suite of National Bank offerings, and providing updates on the migration timeline. Moving to slide 9. Non-trading net interest income in Q2 increased by 11% sequentially on an all-bank basis. The CWB transaction significantly contributed to NII, adding CAD 251 million.
Excluding CWB, NII was relatively stable sequentially after adjusting for the fewer number of days in the quarter and the CAD 11 million annual dividend recorded in USSFI in Q1. The all-bank NIM excluding trading was 2.23%. CWB was accretive to NIM, adding 4 basis points. Excluding CWB, NIM was 2.19%, down 7 basis points sequentially, reflecting a lower PNC NIM, lower commission fees in corporate banking, and the Q1 USSFI dividend. The PNC NIM was impacted by the balance sheet mix as loan growth exceeded deposit growth. We expect this trend to continue in Q3. Turning to slide 10, we continue to see solid expansion across the balance sheet. Total loans reached CAD 286 billion, up 22% year-over-year, including approximately CAD 37 billion from the acquisition. Excluding CWB, loans grew 6% compared to last year. The commercial loan book was most impacted by the addition of the CWB portfolio.
Excluding CWB, commercial loan growth was a solid 14% year-over-year. Deposits, excluding wholesale funding, grew to reach CAD 294 billion, up 23% compared to last year. Excluding CWB, deposits increased by 10% year-over-year and were stable sequentially. Personal deposits rose by 9%, driven by continued growth in demand deposits, and non-retail deposits were up 11%. While deposit pricing continues to be competitive, the bank's funding strategy remains disciplined and client-centric, prioritizing stable relationship-based deposits over rate-sensitive flows. The acquisition of CWB meaningfully diversifies our deposit base, adding scale and expanding our reach across client segments. Now turning to capital on slide 11, we ended the quarter after closing the CWB transaction with a robust CET1 ratio at 13.4%. The day-one impact of the transaction on capital was 9 basis points. Internal capital generation was strong, adding 41 basis points to CET1.
Excluding the day-one impact, credit risk RWA utilized 23 basis points of CET1, consistent with solid balance sheet growth, while market risk RWA accounted for 9 basis points, primarily driven by business growth and underlying market volatility. During the quarter, we migrated one small CWB portfolio to AIRB, contributing 3 basis points to CET1. The majority of the capital benefit is still expected to be realized in 2026 as we migrate the client portfolios to our platform. In the meantime, we are very pleased with the strength of our CET1 ratio. Slide 12 shows that we're tracking ahead of our plan to deliver approximately CAD 270 million pre-tax of cost and funding synergies by the end of fiscal 2027. We expect over CAD 135 million by the end of Q1 2026.
In the second quarter, we realized CAD 14 million in funding synergies, with CAD 9 million through NII and CAD 5 million through lowered preferred share dividends and equity instrument distributions. This was accomplished by leveraging our rating profile and optimizing the capital structure. We have also realized CAD 13 million in cost synergies, mostly through the reduction of the IT infrastructure costs and consolidation of centralized functions. The realized cost and funding synergies of CAD 27 million in Q2 represent CAD 115 million on an annual basis, which equates to approximately 43% of our three-year target. Cost synergies will continue to materialize and accelerate as CWB clients are onboarded. Recall that the platform migration will be done in waves, beginning this summer and continuing into early calendar 2026. In Q1, we highlighted areas where we see significant opportunities for revenue upside, both in NII and fee income.
We are executing our strategy to achieve our targeted revenue synergy. We continue to expect revenue opportunities to accelerate in 2026 following the completion of five migrations, with the full benefits to materialize in 2027 and beyond. Moving to slide 13, our outlook, including CWB, remains unchanged from last quarter. Adjusted EPS growth will continue to be impacted by the amortization of the fair value and a larger share count. However, excluding this amortization and supported by our strong first-half performance, we remain confident in delivering mid-single-digit EPS growth and adjusted ROE of approximately 15% for the year. We also maintain our target for positive operating leverage in 2025. To conclude, we remain focused on driving sustained and profitable growth going forward. CWB will serve as a tailwind for our businesses for many years to come.
While it is still early days, I am pleased with our progress and excited about opportunities that lie ahead. I will now turn the call over to Jean-Sébastien.
Merci, Marie Chantal, and good morning, everyone. I'll start with slide 15. Since our last call, the Canadian economy has faced heightened uncertainty, largely driven by tariffs and global trade tension. These challenges add complexity to an economy already showing signs of softening. While recent progress on several trade discussions with the U.S. is encouraging, the environment continues to be fluid. As such, we are maintaining our cautious approach and remain prudently provisioned. In this context, our credit portfolios continue to perform in line with our expectations, supported by our defensive positioning, resilient mix, and disciplined risk management. Now turning to the second quarter results, total PCLs were CAD 545 million, or 79 basis points, which reflected the initial provision on performing loans of CAD 230 million related to the CWB transaction. Adjusted total PCLs were CAD 315 million, or 45 basis points, which was 4 basis points higher quarter over quarter.
We added 12 basis points of adjusted performing provisions in Q2, driven by model calibration, macroeconomic outlook, and tariff uncertainty. This is in addition to the 9 basis points we took last quarter. PCLs on impaired loans were $219 million, or 32 basis points, which was stable quarter over quarter. Excluding CWB, the impaired provision declined slightly to $192 million from $196 million last quarter. Looking at impaired PCLs by segment, personal banking provisions decreased sequentially to $53 million, mostly driven by uninsured mortgages. Commercial banking provisions were $71 million, reflecting a Q file. Additionally, the CWB portfolio is performing in line with our expectations. In financial markets, the impaired PCL of $55 million, or 8 basis points, was related to a single file in the manufacturing sector. At Credigy, we continued to see a normal seasoning of portfolios. At ABA, impaired provisions decreased to $14 million US.
Turning to slide 16, our total allowances for credit losses reached CAD 2.2 billion, representing 5.7x coverage of our net charge-offs. Our performing allowance reached CAD 1.5 billion, representing a strong performing ACL coverage ratio of 2x. We have been building allowances for the past 12 quarters and remain comfortable with our prudent provisioning levels. Additional metrics on our allowances are provided in Appendix 10. Turning to slide 17, our gross impaired loan ratio increased to 98 basis points, mainly driven by the CWB transaction and in line with our expectations. Excluding CWB and USSFNI, the ratio was 54 basis points, 5 basis points higher than last quarter. Formations this quarter reflect the CWB transaction. Removing this impact, total formations would have been down quarter over quarter. At ABA, net formations declined for the second consecutive quarter and remained below the peak observed at the end of 2024.
On slide 18 and 19, we highlight our Canadian RESL portfolio. Quebec now accounts for 51% of the portfolio, and insured mortgages account for 27% of total RESL. Average LTVs for our HELOCs and uninsured mortgages remain in the 50s, and high-risk uninsured borrowers represent less than 1% of the total RESL portfolio. Furthermore, approximately 75% of the portfolio has now been repriced at higher interest rates. 90-day mortgage delinquencies remain below the pre-pandemic level, with our clients continuing to demonstrate resilience in managing higher refinancing costs. Appendix 8 provides an overview of our portfolio following the CWB transaction, along with an update on tariff-sensitive sectors. Our exposure to these sectors remains limited, with the most sensitive borrowers accounting for less than 1% of the bank's total loan. Looking forward, uncertainty remains around the outlook for economic growth and unemployment.
The impact of tariffs is still difficult to quantify, and the range of potential outcomes remains wide. That said, we continue to expect impaired PCL to be within the 25-35 basis point range for the full year. In conclusion, we are well positioned to navigate the ongoing volatility and uncertainty, given our defensive attributes, resilient mix, and prudent level of allowances. I will now turn the call back to the operator for the Q&A.
Thank you. We will now take questions from the telephone lines. If you have a question, please press star one on your device's keypad. You may cancel your question at any time by pressing star two . Please press star one at this time if you have a question. There will be a brief pause while the participants register. We thank you for your patience. The first question is from Matthew Lee from Canaccord Genuity. Please go ahead. Your line is open.
Good morning. Thanks for taking my question. Maybe one on guidance. Q2 numbers I'm going to assume were better than you could have expected, with trading revenues doing really well. Just a bit surprised you didn't update earnings guidance for the year. Are there any mitigating factors for us to consider in the back half, or just maybe some conservatism built into the mid-single-digit growth expectation?
Thanks, Matthew, for the question. It's Marie Chantal here. We are very confident in delivering our mid-single-digit EPS growth for fiscal 2025. That said, we do see upside dependent on market conditions. Obviously, we're starting with a record first half, so we're on solid footing. Also, remember, we're facing a tough comp in Q3 this year. I think most importantly, what's important is our execution on the CWB integration is going very well, and it's creating tremendous upside for our growth across Canada. You can expect us to continue demonstrating strong discipline to navigate the evolving landscape and deliver robust performance. Maybe on the market condition, Ethan, do you want to give a few words?
Yeah. Thanks, Marie Chantal. Hi, Matthew. It's Étienne. I think maybe it's probably good to talk a bit about the trading performance in Q2. Obviously, we delivered an outstanding performance over what we felt was already a great quarter in Q1. When you look at market conditions in Q2, we probably had close to an ideal trading environment, especially for three groups, specifically in equities, that operated really above trend. I'm referring to structured products, issuance and trading, equity finance, and option and ETF market making. All three strategies benefited from market conditions where you saw intense but short volatility events, typically triggered by tariff announcements. That created large but short-lived moves that we were able to capture.
These dislocations were not persistent enough to disrupt the fundamentals of these markets, which means that markets were functioning well, trade volumes were strong, funding spreads remained elevated, and product issuance stayed robust. We were actually surprised by how well issuance activity held steady. We were also really pleased with our trading and rates and our market share there. It was a volatile environment, and we had strong client activity and strong results. It was also busy on the FX side with a rise of volatility and, again, a lot of active clients. When you consider that resilience, looking at the rest of fiscal 2025, what we anticipate is a trading performance that is still solid but lower sequentially and more aligned to long-term trend.
Because on one hand, I think we can expect more volatility episodes, but that probably will come with lower issuance volumes and lower trading volumes because of seasonality. If we look at other businesses that will pick up, I look on the corporate and investment banking side, what we see for Q3 and the rest of the year is fairly positive. There you could see sequential growth. The lending pipeline remains encouraging. There is strong demand in areas like renewable energy infrastructure, where we are well positioned. Advisory, the tariff uncertainty is slowing down transaction closings, but deals are getting done, and client dialogue is active. DCM, we anticipate healthy issuance early in the second half, especially from governments, and then followed probably by a seasonal slowdown a bit later in the summer months.
Equity, new issue, that's still slow, although, and that's really tied to uncertainty, but that could accelerate really quickly. Against this backdrop for financial markets overall, we feel really constructive about our ability to achieve year-over-year growth in revenues for the second half of the year. Is that helpful?
Yeah, that's very helpful. I'll pass the line.
Thank you. The next question is from John Aiken from Jefferies. Please go ahead. Your line is open.
Good morning. In terms of the AIRB transition, happy to see that there was a small portfolio this quarter. Can you provide us any measure of quantum in terms of what the potential risk-weighted asset relief could be and whether or not this is going to be a slow burn into the latter part of 2026, or are we actually going to see incremental step function more linear?
Yes. Hi, it's Marie Chantal . Thanks for the question. We were happy to migrate one small portfolio. This is really indicative of where we're going. However, as I said, the majority of the benefit is coming in 2026. Therefore, we still are planning to give full capital plan update strategy later in the year, mostly at Q4. Stay tuned. This is what our plan is in terms of capital update.
Understood. Thank you.
Thank you.
You're welcome.
Yes, thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Your line is open.
Hi, good morning. Just going to expand on capital, 13.4% CET1 ratio, you've seen confidence in moving some of the CWB portfolio over to AIRB and getting a pickup in 2026. Why not put an NCIB in place? Why not be active on buybacks? I know you talked about putting that as a capital plan later this year. What is kind of stopping you from maybe doing so earlier?
Hey, Doug, it's Laurent. I'll take that question. We think it's a bit early to talk about buybacks at this point in time. One, there's uncertainty in the market, and we do have a sort of a prudent stance in general when it comes to macroeconomics. Having said that, our focus is organic growth. Our focus is to grow our business out west. We're going to be integrating portfolios starting this summer, and we're engaging with a lot of those clients. We want to see how that flows through and the impact on organic growth as well. Marie Chantal just mentioned, we're going to provide a capital plan at Q4 and go over the full impact of AIRB at that point in time. We'll talk about buybacks, obviously.
We're going to ask for a bit of patience on that, but our focus is really on growing our balance sheet. Does that help?
Yeah, it does. I mean, do you feel that you organically can put the capital that gets freed up by moving CWB over to AIRB to work organically?
Again, it's early, but the discussions that we are having with our clients and our new clients that are joining us are very encouraging. Just CWB clients joining us, there's growth from that. Given our footprint now out west, we know that there's going to be opportunities for us to grow. Yes, having said that, we are also in the middle of an integration. We want to focus on that. We want to focus on making sure that the first wave of clients are coming onto our systems. With that, we'll be able to provide a good capital update by the end of the year and our plans for 2026.
Okay. That makes sense. Laurent, while I have you, maybe I am chomping at the bit and asking stuff that is going to come later in the year, but you said set the stage for revenue synergies by the end of the year. Can you kind of flesh out what you need to see or what needs to happen to kind of start to get some line of sight on revenue synergies or for them to start to come through? I assume it is migration systems and getting people up to speed. Just hoping maybe you can flesh that out a little bit, what you meant by that.
Hey, Doug, it's Michael Denham here. Your assumption is a good one. What's happening now is the teams are kind of working together in the field, and they're bringing some new opportunities to clients in terms of risk management services, derivatives. We have a bigger balance sheet, so there's room for increased holds. Stuff's happening in the field. To your point, the real change takes place around revenue synergies once we get into the migrations. Once we've migrated, and we're doing this in a series of steps, and once clients migrate into our systems, you're at a point where the CWB folks are kind of fully trained at all things National Bank, and the clients are able to access the full range of National Bank products and services. That happens post-migration. That's when the real revenue synergy momentum will begin.
That'll happen in a series of steps beginning in the summer.
Okay. When does PNC banking and when does wealth, when are those migrations occurring?
The PNC banking, the personal and the commercial banking transition takes place at the same time over the course of the beginning of the summer. Nancy talked about wealth.
Yeah. For wealth, we're aiming at late fall to migrate the three businesses that are now becoming wealth, which is the trust business, the investment and deposit business, and as well as what they used to call their wealth businesses. This will come in waves as well from the fall till early 2026.
Okay. Perfect. Appreciate the color.
Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead. Your line is open.
Thank you. Étienne, I wanted to start with you. Always good to see excellent results. Were you surprised by how well you did in the trading or how well the franchise was able to deliver, I guess, in the environment? Can this cut both ways? Could there also be quarters where you may be surprised negatively to the extent you were surprised positively here?
Yeah. Thanks, Sohrab. That's a good question. Like I gave in my previous answer, these were very, very good trading conditions. Were we expecting what happened around Liberation Day? No, that was not. These were a couple of the most profitable days in the history of the franchise following Liberation Day. You had markets going down 4% on the day after and 6% two days after those announcements. Obviously, with the volatility positions we had on the book and the very defensive approach we had prior to this tariff announcement, that was pretty much ideal positioning. Now, what's the downside? I think that's a fair question. You remember, Sohrab, Q3 in 2023? That was a so-so quarter for us. The reason for it was low volatility, low client activity. We are a franchise that's about providing liquidity, providing structuring solutions, trading with clients, providing hedging solutions.
When that dies down, that's the downside. That could happen. Typically, it happens in the summer. I do not see it happening this year because we still have a lot of tariff announcements and tariffs being pushed back. I think the downside for us this year is limited. If you look at the long-term trend of where our performance should be, I think if we are able to deliver year-over-year growth for the next two quarters, that still means that our long-term positive trend to our business is in place. Is that helpful?
Yeah, that's very helpful, Étienne. Maybe just for crystal clarity, when I look at your daily trading revenues and VAR chart, there is a particularly strong day that I assume is Liberation Day. Can you just clarify if it's not one single trade that would have been broad-based?
Yeah, it would have been broad-based. That is April 4th, so not the day after Liberation Day, but one day after that. S&P was down 6%. TSX was down 5%. That strength came from rates, came from FX, came from structured products where we had a big core volatility position, and came from market-making both in options and ETFs because volumes exploded and you had a lot of dislocations, bid-ask spreads widened. That is a really good environment for our trading businesses, especially as our technology continued to perform really admirably during that volatility.
Okay. Thank you. Just maybe just for Jean-Sébastien, I mean, at gross impaired, excluding Credigy, PCL loans, I mean, the trends are not necessarily comforting here. They continue to kind of trend higher with or without CWB. Why do you feel okay with these trends here, Jean-Sébastien?
Thank you, Sohrab, for your question. As you correctly pointed out, the gross impaired loan increase this quarter is really driven by the CWB transaction and also the effects of the formations of CWB during the quarter and of National Bank during the quarter. We have seen one of the largest drivers of total GIL being ABA for a while. This quarter, we have seen a continued reduction in the level of formations. The book that we also bought from CWB is secured. When you look at our GILs, most of our GILs are on secured transactions. Secured transactions tend to stay in GILs longer before they are written off, contrary to credit cards, for example, which will not show on GILs at all. I will give you another example, Sohrab.
If we had a commercial real estate insured transaction, it would also show in our GIL levels. GIL levels do not necessarily translate in credit quality. What I look at is really how's our delinquency doing, and our delinquency is trending fine. I'm also looking at how are impaired loans performing, and you've seen a stabilization in the performance, and you've actually seen some improvements in our retail portfolios. If you had excluded the CWB PCLs and commercial this quarter, we would have been down also. I'm comfortable with where we are right now.
Okay. Very helpful. Thank you very much.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is open.
Sorry about that. Can you hear me okay?
Yes.
Yeah. Sorry. I just dropped the phone. One sort of quick model question. The tax rate does seem a bit higher than it used to seem for your bank. Is it the addition of CWB, or is it more about the mix of revenue, the elevated trading in the quarter?
Thanks, Mario. Tax rate, when you look at it on a year-over-year basis, obviously, is the impact of pillar two. As we explained in the past couple of quarters, we were expecting a little bit around 2% impact, and that's what you're seeing. In terms of the CWB impact, it will not have a material impact on our results. If you look at the PNC segment, probably wondering when you looked at the model, I'm sure you saw the impact in Q2 for PNC, and that's really something related to the provisions that were higher this quarter for the PNC group. You can expect that to come back to a regular tax rate for the next couple of quarters.
Okay. If we could go to ABA for a moment, looking at some of what you guys call the ABA Bank key metrics. The formations in the quarter, it says here, let me just catch up here. Formations of $47 million in the quarter. This is formations of gross impaired loans at ABA. Gross impaired loans as well were up. I mean, it could be mostly a coincidence, but a very similar amount in the quarter. Almost exactly, actually, $47 million increase in gross impaired loans. How do I interpret that? Do I interpret that as there were no resolutions in the quarter, or are there other moving parts I do not know about?
Yeah. The resolutions are remaining low. The formations are really the largest driver of gills, and those also affect.
Does that mean there were no resolutions in the quarter? Is that the way to interpret them?
No. No, there were resolutions. As you know, our level of write-offs at ABA Bank remains low. Typically, when you continue—let me back it up. When you look at the new formations, there are three things you look at. The first is how are the newly impaired loans, and these were down. When you look at the recoveries, these were down too. Not the recoveries, but the return to performing, these were better. When you look at the resolutions, they were still low, and our write-off was still low. That is why the increase matches. Maybe we can take it offline if you have more detailed questions on that one.
I think I follow. Is there something in your supplement that actually shows that reconciliation? I mean, there's a lot of paper in front of me right now, so perhaps.
We'll take it offline.
All right. Thank you.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead. Your line is open.
Thank you. Good morning. First, I want to ask about your outlook for organic loan growth, particularly in commercial loans, and just wondering how it might be impacted by the focus on the CWB integration, I guess, if at all, or if you slow organic loan growth while you digest CWB. The second part of that is how does organic loan growth get impacted by the macro uncertainty? Do you believe it will remain for the industry low, or do you think there's a little bit of signs of stability and improved market conditions for the back half of the year?
I'll take this one. It's Judith. Thanks, Paul. On our outlook on growth, we see growth in the low teens, mainly driven by insured real estate, as it happened many quarters back, and diversified with large commercial clients across Canada. This is on the national side. With CWB, this is not a surprise that growth is very soft during the integration. We do expect growth to pick up once clients start migrating. Integration is really what we were focusing on, as Michael said at the beginning of the call. Concerning economic uncertainties, we still see those uncertainties, but with the growth that we've been seeing with our insured real estate, it's less affected, I would say. We're still confident that our growth is going to continue.
Okay. Thanks for that. Second question is going back to Étienne. Just looking at the regulatory capital supplemental, just noticed that the amount of capital required for FX risk has increased and increased quite significantly since the end of 2024. Just wondering if that's just a product of market conditions and opportunities, or if there is some kind of intentional build-out of the FX trading platform.
No, I think you nailed it, Paul. It's mostly increased volatility tends to increase market risk exposures. I think that's really the most of the answer there, both on the FX side and on the equity volatility side.
Okay. Got it. Just maybe as a follow-up, it'd be helpful to understand, Étienne, sort of if you could list, I don't know, two, three, or four things that help us better understand sort of the long-term growth trajectory for the trading business. Obviously, there's a lot of volatility from quarter to quarter, and this quarter being good volatility. How do we think about sort of the longer-term underlying growth trends and the major drivers behind that?
We have to take a step back and look at the strategy. If we focus on trading, what are we, right? We are a domestically focused operation that focuses on structuring, liquidity providing, being leaders in the different underlyings in Canada. If something is trading in Canada, I want to be the lead market maker on it. We want a trader or an algorithm making a market on it, providing liquidity. Same thing for structured products. We want to lead with deep expertise. Then we want to cover clients through a cycle, which means that we want to adopt a defensive position so that we are able to cover clients even during the tougher times when markets get dislocated and volatile, which is why we have this core defensive position, which we will not deviate from.
I want to say another thing that I think is a feature of our strategy is innovation in terms of trading technology, in terms of pricing technology, in terms of operations. We will not hesitate to build in-house when we see that technology can be a differentiator. I do not think you can hope to compete with vendor solutions in capital markets in 2025. We do not hesitate to build technology ourselves to generate scale. I think that is what you are seeing in quarters like this. It is really scale being delivered by the trading businesses. You are going to see it more and more, central stack of technology being reused across asset classes. It can be in FX. It can be in rates. It can be in securities lending, for example. Look for a lot more automation on the securities lending side.
Everywhere, look for us to add process power and add scale to our operation. Another feature of that is we took our ops team, Paul, and we brought it back really closer to the businesses. Ops is really part of the Financial Markets operation because we also see operational excellence as a potential differentiator. That is really how we think about how we want to build our trading operations going forward.
All right. That's great. I will leave it there. Thank you.
Thank you. The next question is from Lamar Persaud from Cormark Securities. Please go ahead. Your line is open.
Yeah. Thanks. I'm going to start off with Étienne here. Obviously, another big quarter for trading. You can guess by the nature of the questions on the call so far that we're all trying to really figure out what's kind of driving that. Let me ask it more specifically. Is there something that's changed structurally in your business that suggests we have to think about National as running at a higher trading level going forward? Is there something special that's going on in some of your maybe non-Canadian geographies that's really driving this big uplift in the equities business?
Thanks, Lamar. That's a good question. I don't think there's something fundamental that is going on. For sure, and maybe to follow up on the question I gave Paul, is look for international to take a growing place in what we do, but we'll do it organically, and we'll do it from a position of strength. Once we have built what we feel is a niche in a certain activity or a product, we will port that knowledge to some other jurisdictions. What we won't do is go to another country and try to be everything for everybody. We want to specialize in the products we're good at, but I think that this creates opportunity to be leaders in some niches in the U.S., in Europe, in Asia as we move forward. Look for growth there.
As something fundamentally changed in our strategy or the way that we operate, no. I still think that trading will not probably grow sequentially the next two quarters. If I look at where we were five years ago and where we're going, it's a really interesting CAGR and look for more growth in the coming years.
Okay. Thanks. Maybe moving on to a different type of question, probably for Marie Chantal here. The amortization of this fair value mark was kind of lighter than I would expect, just based on, I guess, what you guys disclosed last quarter, that 9% quarterly impact. Based on my math, it looks like it was around a third of that. Do I have that right? Secondly, maybe you can kind of talk about how you see PNC NIMs evolving relative to the 2.3% in Q2, and also comment on all bank NIM expectations. That would be helpful.
Yeah. Thanks, Lamar, for the question. You're right. Amortization was a bit lower in Q2. It's primarily attributed to a modest markdown on assets that we did relative to short maturities. The reduction is largely driven by specific segments within CWB, mortgages and retail leases. If you look at the end of our material, you'll see the appendix showing the future estimated amortization impact that we've updated for you guys. On the PNC NIM, you want to start, all banks? I can start with the all bank NIM, and then I'll pass it over to Lucie for a little bit of a deep dive on the PNC NIM. On the all bank basis, obviously, CWB continues to be accretive to NIM.
Bear in mind, though, that because of what we just discussed, the impact of the amortization increase on the fair value in Q3 is a factor to consider in the all bank NIM going forward. There are many elements, obviously, to consider. As I said in my remarks, business mix could continue to impact the NIM going forward, and different moving parts will also be dependent on market conditions. I think what's most important to remember is that we continue to be focused on growing NII, growing the balance sheet, and growing the franchise. I think that's what the important messages are. Lucie, do you want to add anything on the PNC?
Yes. We unpack some of the levers there of the directions. If we look at the asset spread, they have been mainly neutral this quarter, and we expect them to continue to be neutral. We do have a good diversified asset mix between the retail and commercial products that should allow asset spread to remain resilient. On the deposit spread, the deposit growth that we have delivered, let's say, for example, 14% demand deposit growth this quarter, is expected to continue to be strong, and that should help the deposit mix. It is expected to be mainly offset by the pressure on the term deposit that we see out there. The market is very competitive for term deposits.
At the end of the day, the direction of the NIM in the PNC is really, like Marie Chantal said, a factor of the good outlook we have on retail and commercial loan growth combined with an environment that is not conducive to term deposit growth. That is what will continue to put pressure on the NIM next quarter, we expect.
That's very comprehensive. Thank you so much.
Thank you. The next question is from Mike Rizvanovic from Scotiabank. Please go ahead. Your line is open.
Hi. A quick one for Jean-Sébastien. Just maybe going back to ABA, just trying to get an understanding of if anything's changed in terms of, I think, the previous guidance being that two-thirds of what gets resolved does not come with a write-off. And I think your write-offs, they jumped a bit in the quarter. I think it's the highest we've seen at CAD 9 million. I get it. It's still de minimis. In terms of that prior guidance, has anything changed? The second part to the question is, what's the reasonable timeline as you learn more about the backlog in the court? Is this something that could last for another couple of years plus, or is this something like, should you see some acceleration in workouts maybe in the next few quarters?
I'm just trying to understand the trajectory if you have a better sense of it today.
Good. Thank you, Mike, for your questions. For the first part, obviously, the recovery rates on file vary a little bit from quarter to quarter. The guidance that we had provided that formations in Q4 would be at the higher end of what we expected going forward is proving to be true, and we're absolutely maintaining it. As for your other question, it's a bit kind of a peak-GIL type of question. For this, I won't venture into predicting when the peak will be, but we are seeing a flattening of the curve. We have seen two consecutive quarters of formation decline, which we view positively. Looking at the formations, they're really driven by a reduction in newly impaired and some return to performing. We're maintaining our guidance to what we said before, but we are also continuing to build impaired allowances.
You've also seen us this quarter build 33 basis points of performing allowances to make sure we're well-positioned going forward.
Okay. So no change in the trajectory in the potential of seeing a bit of acceleration in that backlog. You don't really have a better sense today than you did last quarter. Is that fair?
I would say it's accurate.
Okay. And then quick one for Lucie, just on the mortgage growth. I think you did suggest 4% year-over-year ex CWB. I do not know if you disclosed or I am not sure if I missed it, but what was it quarter over quarter? Just trying to get a sense of what you are seeing in the market in terms of spreads, any differentials in distribution channels, specifically the broker channel. Are you seeing any pressure there? We did have one of your peers suggest that they are seeing a bit of competitive dynamics reducing spreads in the broker channel specifically. Any thoughts on that?
Yes. The broker channel is always a competitive channel, that's for sure. What we've seen this quarter, the mortgage spreads have been neutral for us sequentially. Definitely, there's been pressure on the competitive side and the cost of fund side. For us, it was completely offset by the excellent momentum we had in volume origination and in our very good performance in renewal. Definitely there is competitive pressure out there, but our good performance was able to offset that. Does that answer your question?
Yeah. That's helpful. And then just to kind of extrapolate from that 4% year-over-year growth ex CWB in mortgages, that would imply a relatively flat result quarter-to-quarter. Is that fair?
I would say yes, but that result over quarter-over-quarter is also the result of still very strong origination year-over-year and even quarter-to-quarter as we get into the season. Our teams are very much focused right now in responding to the demands out there because definitely we see the real estate market very differently across the country, different in terms of region, and also different in terms of single dwelling and types of dwelling. Where our strengths are is where the market remains active. We are still very, very positive on the outlook on the mortgage front.
Okay. But you're confirming that it was roughly flat sequentially on the balance side?
Yes.
Okay. Thank you for the insight.
Thank you. The next question is from Ibrahim Punawalla from Bank of America. Please go ahead. Your line is open.
Hey. It is good afternoon now. Just a quick follow-up on credit, looking at slide 36 where you lay out the unemployment assumptions, I think about 7.1% for this year and next year versus the 6.9% today. Just talk to us, when we think about the reserves at the end of the quarter, how should we think about the peak that you have in there at 9.6% versus the average of 7.1%? Does that suggest that if unemployment moved to 7.3% or 7.4% over the coming months, the reserve requirement would have to go up by a lot? What is the framework in which how we should look at these numbers and think about where the ACL is today?
Thank you, Ibrahim. I'll take the question. I'll give you a long answer on this one because there's a lot of factors to consider. When assessing a build, the starting point of the allowances is important as is the starting point of the macroeconomic factors that you have. As I pointed out in my prepared remarks, we've had 12 consecutive quarters of build, including 9 builds last quarter. When you look specifically at the build this quarter, the impacts of the macroeconomic factors were very limited given our already pessimistic assumptions and weights. When you go look at our scenarios and our pessimistic scenarios, they already called for a peak GDP decrease of -5.4%, unemployment at -9.6%, HPI down at 20%, and S&P/TSX at -26%. We're already weighted towards the pessimistic.
What we did this quarter to affect our performing PCL, it was really taking management actions. The first one was recalibrating the model. More precisely, we increased the PD calibrations on our models. Second, we added a tariff uncertainty management overlay using two approaches. The first one is a global trade war scenario, and second is we simulated further downgrades of clients exposed to subsectors. These impacts created around 70% of our build in our non-retail book. In our credit card book, which is where typically the macroeconomic factors are the most sensitive, we now have a total ACL coverage ratio of over 8.2%. We feel very comfortable with where we are right now.
Got it. Thanks for running through that. I guess maybe just one quick one, Laurent, for you. You were very vocal ahead of the elections in terms of the policies the new government should take to sort of be pro-business, get activity going. Early days, but just give us your view around based on what you've seen today, are you optimistic? What are you paying attention to as we think about data points that would make us optimistic about private sector investment and job growth in Canada?
Thank you for your question, Ibrahim. I am very optimistic. Everything that we're hearing right now from federal, also provincial government, in terms of working together and making the economy a priority is very encouraging. Yes, it is early days as you just mentioned it, but I can tell you that from our standpoint, from also talking to our clients, they are engaging with the business community and figuring out what are the various paths that we should be taking in order to rejuvenate growth in our country. I am also encouraged with, I think, the early discussions that our government is having with the U.S. administration. I do believe that we will have stronger ties once we sit down and figure out where do we land with what's going on in the world. Overall, it's positive, Ibrahim.
That's good to hear. Thank you.
Thank you. The last question is from Darko Mihelic from RBC Capital Markets. Please go ahead. Your line is open.
Hey, thank you for squeezing me in. I appreciate that. I wanted to go back to Étienne just for a little bit here on trading because it is so different from your peers. When I look at what your peers have done quarter over quarter, 44% drop at BMO, 30% at Scotia, you're up 48% quarter over quarter. I won't compare you to TD because they had the Schwab sale in the quarter, which obviously helped them. I wanted to connect this with some of your earlier commentary because you kept saying, I think, a couple of places that you have sort of this defensive position. It brings to mind the thought that perhaps what you have in essence is a put option on equity markets. The question is really threefold around that.
Am I correct in thinking that your base position is essentially a bit of a put option on equity markets? If so, where is that coming from? Is there an element of proprietary trading in here that we may or may not be seeing from other banks?
Yeah. Thanks for the question, Darko. First of all, no, there's no proprietary trading. Everything there is client-driven. That said, because we structure products where sometimes you do not have the perfect hedge, you need to take views on the market so that you do not cross the bid-ask spread all the time to re-hedge some of these more illiquid exposures that we sell to clients, things like long-term volatilities, long-term correlations. That is a big part of the defensive positioning. We really bias the book towards being defensive because, well, we know what can happen, right? Most of us have lived through the great financial crisis. We have lived through COVID. Models can describe risk at a given point, but when markets go down, everything bad happens at the same time. Suddenly, a lot of bad things happen once markets are down 20%-30%.
Experienced traders, and we have a lot of those, they know that, and they know how to orient their book accordingly. That said, your question is, is there a downside put option? Yes. In our structured products business, some of the products we sell do have essentially make us long downside volatility because we tend to sell soft protection to clients. The clients are protected maybe for the first 30% down move, but after that, they are not protected anymore. You could see that as a downside put that clients sell us when they buy those products. I'll say another thing is that, and I touched on the market-making operation that we have in equities, ETFs, options, rates. We have a lot of in-house technology that is very fast.
When markets get volatile, and that tends to happen when markets go down, markets become more volatile, bid-ask spreads widen. If you have good technology, you can be first to market on a lot more opportunities as the slower players have to widen their strategy because they're getting picked off. The markets are going too fast. In every trading business we have, we want to install these optionalities where we'll make more money when things get really out of normal condition. We really want to be anti-fragile in the way that our trading businesses operate. Technology, defensive. That means, Darko, that we leave money on the table in the good times, right? Nothing is free. When markets are slowly going up or are very quiet, we're not going to be the top performer.
We accept that because we want to manage this through a cycle and be there for clients when it counts. That is really the philosophy around how we think about the trading businesses.
Okay. That's very helpful. I appreciate that answer and that granularity. It does help me think about sort of upward-moving equity markets. Just as a last follow-on to that, Étienne, when I look at the, I mean, again, CAD 542 million in equities is a big number, and it's really up from last year. Yet, I do not see a change in the bar. Is there something that I'm missing? Some sort of, I mean, to put that kind of number out, would it not require some higher element of risk or balance sheet? Or how should I think of it? You mentioned that there's nothing really structural or fundamentally different. I'm just trying to put it in perspective of typically when I think of this kind of volatility helping you out so much with the same bar, I'm a bit confused by it.
Yeah. That's a complex question, Darko. One thing I'll say is that sometimes because of our risk profile that is very geared towards making money on the downside, the VAR scenarios that generate losses will be rally scenarios, sharp rally scenarios. That can flip depending on which position we have on. Yeah, I mean, it really varies with the size of the positions, and that's also affected a lot by client activity. These books are not static. They are very active as we trade against clients constantly. VAR can be affected by many different things.
Okay. Great. Thank you very much for the insights. Appreciate it.
Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Ferreira.
Thank you, Operator. I want to recognize all employees, including employees newly joined from CWB. I want to thank you for your dedication, hard work on the integration, and the support you are bringing to our clients. The path we're on gives me great confidence at this point in time. Finally, I would also like to thank our shareholders for their continued support. Have a great summer.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.