Okay, we might as well get started with our next session. Very happy to have Laurent Ferreira here, the CEO of National Bank. And before we begin, I will remind you that Laurent's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections, or conclusions in these statements. Listeners can find additional details in the public filings of the National Bank of Canada. Laurent, thank you once again for coming to our conference.
Thank you very much. It's a pleasure to be here.
So, I think in your case, there are some very obvious questions that come up. And the most obvious place to start is I'd love to explore a little bit more of the Canadian Western Bank deal. Now we know in terms of approval. Maybe just to start this off, maybe why don't I just open the floor and have you give us some updated thoughts and views on CWB, and then I want to dive into some specifics on CWB.
Absolutely. Well, we're obviously very excited. You just mentioned it. We got approval. We announced also our close date, which is February 3rd. And our focus is going to be day one, really, employees. So onboarding employees onto the National Bank HR platform. And then throughout the year, portfolio by portfolio, we're going to be welcoming all the CWB clients on the platform. So that's the plan for the year. It's a big year for National Bank. Significant acquisition for us, our largest in our history. And a significant step towards growing our P&C platform outside of Quebec. If you look at, if you take the total revenues for P&C at National Bank, 80% Quebec, 20% outside of Quebec, this changes and it brings it to 60/40. So a significant step towards growing our platform.
We know this is going to have a significant impact on our capabilities to grow organically faster outside of Quebec.
And so maybe just picking up on that point right there, CWB had always kind of had aggressive growth targets as a bank. So maybe you can talk about the growth targets that you think are appropriate for CWB now that it's under you. And the first thing that comes to mind for me just is lending limits, right? You're a bigger bank. You're on AIRB, which we could probably talk about too. But should we think of CWB as potentially having a significantly higher growth profile under your leadership?
That's a very good question. At a very high level, I think the way to look at it, and we'll get into specifics about metrics in our results at Q1. We'll be able to disclose more of that. But a way to look at it at a very high level, take CWB's operation, put them on National Bank's Commercial Banking operation, and take a two to three-year, two to four-year timeframe. And we see the ROE of CWB get to the level of the National Bank's Commercial Banking ROE. So that's a good way. And look, there's cost synergies, funding synergies. You mentioned capital. We have obviously plans on revenue synergies as well. All of that is upside for us. And CWB becomes much more competitive. Liquidity, capital. So all of that, we'll be able to talk about throughout the year and provide more visibility on this.
Maybe just to be very explicit, because I don't have my model in front of me, what is the commercial ROE that we're talking about at National Bank? Look, what is the, I don't have it in front of me, and I don't even know if you guys actually split it out, but I got to ask.
We don't disclose it, but the total ROE of CWB is around 10%. We think there's over the two-to-four-year period, we think there's about 500 basis points of upside in terms of ROE.
Fantastic. And so sticking with CWB just for a moment, one of the things that we've seen in the last couple of quarters are elevated losses. Does this mean your credit mark has to change? Obviously, I guess that gets determined on February 3rd, but maybe you can speak to what we've seen from a credit quality perspective.
Absolutely. So we'll update those numbers at our Q1 call. So yeah, PCL is elevated, but it's normal. We're smack in the middle of a credit cycle. So this is, and commercial losses are going to be lumpy. And so what you saw in Q3, two specific files, which explained half of their impaireds. And what you saw in Q4 was related to manufacturing and trucking or transport, which we know there are certain industry issues right now in the trucking industry. So no surprises in terms of having elevated PCLs at this time in the credit cycle. We're looking at our numbers for Q1. We think we're going to be at the top of the range that we've disclosed, which is normal. We've had two years of restrictive monetary policy. So we're right in there.
We're at the peak of the mountain, and I think we're going to be there for a couple of quarters.
Okay, fair enough. And just maybe discuss, now I think you've not really discussed revenue synergies with CWB. Is there an intention to discuss that at some point? Or am I barking up the wrong tree? Is this not a material?
You say non-material?
Yeah, is it non-material?
I think it is going to be material, so the number one focus will be Commercial Banking. If we look at National Bank's profile, we've got upside with the integration of CWB on fee-based revenue, so non-interest income at National Bank is 20% of our revenue, CWB 10%, so that's one. There's a lot of NII optimization as well. When you think of just purely deposits, CWB funds a lot through broker channels. We're not going to do that, and we have a cash management platform that we'll be able to offer to our clients, so a lot of the focus initially will be on commercial clients and getting them to the model of National Bank, and so you're absolutely right. We haven't disclosed this. We're going to start talking about it this year.
When and how and which metrics that we want to follow and that we'll disclose, we haven't determined that yet. But it is at some point this year, we'll be able to talk about it. But it is material in our mind longer term, for sure.
It's a big acquisition, and I'm really curious to see how the branding comes along. But the question that I get a lot from investors is the cultural differences. Can you speak to that a little bit? Do you see that as an impediment or as something that can help you?
That's a great question. I definitely don't see it as an impediment. I see it as a culture booster for us. The similarities are very close. Values, the way we approach clients, the way we manage talent. We spent a good two years discussing this possibility. And the discussions were around the fit. And we spent now six months since the announcement working together on the integration. On a weekly basis, there's employees of CWB in Montreal and employees of National Bank in Edmonton. And I have yet to hear something negative about the culture fit. It's, on the contrary, very encouraging, very positive.
Okay, I'm going to maybe save some questions from the audience on CWB. I'm sure they're going to come through. So maybe we can skip over to the other second most question, I suppose, or highest level of concern that I get from investors, is a discussion on ABA and the recent increase in impairments, some PCLs there as well. And so when I, and to fill this out, I mean, we've seen an increase in the impairment ratio. It's 25 basis points higher than pre-pandemic. And the elevated formations are a result of a longer resolution process, as you guys discussed. So maybe we can talk about that first. And what gives you confidence that if we have this elevated or long sort of workout process, that we're not going to get more and higher gross impaired loans and an overall higher level?
So maybe you can just touch on that for us, please, and sort of flush that out, that longer resolution process and why we shouldn't be concerned that the gross impaired loans will be piling up.
Absolutely. Maybe I could talk a little bit about the economy first and what we're seeing. So the economy is definitely trending below potential, and that's part of the reasons that we are seeing some difficulties in the market. Having said that, we are starting to see certain positive signs. There's new manufacturing coming into the market. Infrastructure build is apparent in Cambodia. We also have a new government, which is really pro-business, focused on attracting foreign direct investments, focusing on growing manufacturing capabilities in Cambodia. So there are certain signs. Export is starting to pick up again. Tourism is not where it was, but trending in the right direction. So I would say difficult year and a half in terms of the economy, still growing at around 4.5%-5%, below its potential of 7%, approximately.
You look at the performance of ABA through this cycle. It has been really good. We're able to stay out of the trouble areas, grow the franchise, keep growing on the client acquisition side. Yes, impaired loans are up. Formations are up. What we said in Q4 is we believe that gross impaired loans are going to continue to go up. Formations, we believe, have peaked at this level or were at the higher level at this point in time. In terms of the workout process, that's the one frustrating part that we have. It is taking much longer. I have zero concerns at this point in time with the process. When we look at files that have been resolved, the net charge-offs are very low.
I have spoken to the deputy minister this fall about what's going on, and there is a backlog in the system. They have a problem with capacity right now.
That just being the judicial system, do you mean?
Yeah, absolutely. And when we look at files that have been resolved, it has been in favor of ABA. And so in terms of abiding the law, it's as clean as could be. But I get you. The frustrating part is, why is it taking so long? And I keep asking the question. I get the same answer. Spoke to government. They gave me really good confidence in addressing the situation. And hopefully, it's speeding up again.
And I guess the concern has always been from my perspective, from the outside looking in. I'm definitely not an expert on Cambodia, but if we have a long process, then there's the potential for the asset that's backing the loan to degrade in value. And I don't know much about real estate there. So I'm always concerned that if we have this long process, that real estate values and the collateral backing your loan could drop significantly. So what gives you confidence?
I think the economy is what we need to follow here. Are we trending back towards potential? We are starting to see signs that we are trending towards potential. In terms of our collateral, we watch carefully loan-to-value once we at assessment during the life and when they're impaired as well. Impaired loan-to-value, approximately 50% on average, 50%. That's why the net charge-offs are so low. The overall book, the loan-to-value is approximately 40%. Good collateral. It's houses, shop houses. It's not condos. It's not office, not warehouse. Low loan-to-value. A process so far that we feel confident in.
So if we're seeing some improvement in the economy, should we start thinking about once again an acceleration of growth for ABA?
We're well positioned. What gives me really good confidence is throughout this more difficult economy, we've seen an acceleration in client acquisition. That comes from an ability to price that dynamically deposits. Our digital app in Cambodia is phenomenal. They're market leading. When you think about digital payments, mobile banking, POS, 50% market share. What that has done, when you have a leading tech stack, you're able to attract sticky, low-cost deposits. We estimate that the technology is responsible for approximately 70% of our deposits in Cambodia. So they migrate to the platform because it's such a fantastic payment platform.
In the past, I think we had seen pretty strong branch growth. Are you suggesting now that branch growth really isn't necessary?
So that's a good point. So we kept growing too. You need both. You need visibility. You need a good tech stack. And so we've been increasing the network. So I think we've added in the past two years more than 10 branches across the country. And probably the only bank that has been doing that. So it's both, getting more visibility and very strong digital capabilities. The brand is really strong as well. ABA is a household name in Cambodia. So it attracts a lot.
So I don't want to kill the rest of our time talking about ABA because there's a lot of things to talk about. But just one last thing that might be helpful for investors to think about here is, can you talk a little bit about the risk controls that you have in place and governance procedures and things like that that might make everyone feel a bit better about the position? And by the way, I might weave this into the question on AML because I don't know how AML is done in Cambodia. But over to you, maybe you can talk a little bit about governance and control.
So we own 100% of the bank. We control the board, strategy, culture. I have a monthly call with management and go over results. Our CRO provides oversight. Our chief compliance officer assists to the compliance committee of the board. And the board is ex-National Bank employees. So chief credit officer, ex-treasurer, the person who ran our branch network is on the board. They're retired. They keep helping us there. So I feel very comfortable in terms of the overall governance that we have. And Cambodia has elevated itself in terms of a country. Financial Action Task Force reviewed the country last year and said that Cambodia has reached now international standards in terms of AML. So we're comfortable with the type of governance that we're doing in the country. And the country itself is very serious about standards as well.
Okay, that's pretty interesting. Yeah, I promised I would stop asking about ABA, so I guess I'll stop there and move on to so maybe we can just broaden out the question on anti-money laundering. And I've been asking pretty much every CEO up here, and I'm searching for certain answers on AML. And I guess in your case, AML really, in your case, I think of it as being very specific to Canada. You don't have branches in the U.S. or anything where you'd be collecting cash or anything.
We have four branches in the U.S.
Do you collect cash with people coming up with? I don't see the duffel bag situation here, but.
We have four branches in Florida for our snowbirds.
And so the question then is on AML, right? I mean, what can you tell the audience in terms of your AML experience and what you see in the horizon for National Bank? And I don't imagine it'll be too different from what the other CEO is, but I feel compelled to ask you for your view on AML and your approach for the next couple of years.
It's become a serious issue, I think, for Canadian banks and the Canadian financial industry. My view is supervision is definitely going to increase for Canadian banks. I think we're going to have stricter enforcement going forward. I think the most important thing here, and I feel very comfortable about that at National Bank, is a very strong risk culture, one of transparency with management and the board. That's at National Bank, but also at ABA. What we've done over the years is we have one financial crimes unit, which has fraud, AML, in order to leverage expertise, leverage spending as well. We've increased staff by 50% over the past four years.
Really, the important thing is to keep getting the best sophisticated tool to keep at the same level, be at the same level as fraudsters or AML risk in order to detect patterns in your network. Going back to what I said about culture, I think a risk culture is probably one of the most important things, regardless of the risks that you're managing.
Okay, so switching gears, I did want to talk about Financial Markets, and from what I've been gathering today in my discussions with CEOs, it clearly feels like the pipeline is building, that there's going to be a better year in Financial Markets. Yours is a bit different. I think I'm getting a sense that there's a lot of enthusiasm over the U.S. market for a lot, but in the case of you had a really strong 2024. Core earnings were up 18% in 2024, but there's a view that taxes are going to be at play. There's a view that you're more Canadian, so maybe you can just talk a little bit more about your cap markets expectations and what you see developing for 2025, and maybe in that answer, I get this question a lot, so I want to sort of hopefully you touch on it.
Touch on the differences at play here with your Financial Markets business, and in particular, I'm very interested in the U.S. part of your structured products business and how that's going and your outlook for 2025.
That's a big question. So 18% growth last year. It's going to be hard to beat that this year. And I think we talked about it in our call at Q4. We expect growth in 2025. So I think the major difference is Canadian platform. And what we take outside of this country, it's an extension of our domestic platform. It's the expertise that we have. It's where we feel comfortable. It's where we feel like we're going to control pricing, risk, be able to build robust, compliant platforms and not go after specific market share in the U.S. because it's just a large market. So we're going to go into areas that we believe can make a difference. ROE, accretive mindset. If we leave the country, we deploy capital in Financial Markets, it has to be accretive to ROE. And it has worked for us.
So going back 10 years, 15 years, we looked at two things. Structured products is one of them. Securities lending was the other one. And we were able to, from our base, Montreal and Toronto, grow. And if you look at where the revenues are being generated right now, well. Yeah, Toronto. Very agile in terms of jumping on opportunities where we see them. They're more in the U.S. right now. At some point, they were more in Europe. So our Dublin operation was doing better. So very agile in moving that around. So we built up this expertise, Canadian expertise in securities lending and structured products. And when we talk about expertise, it's, can you price? Can you control risk? And do you have the right technology? And we did that. So we were able to grow that outside of the country.
We could do probably more in structured products in Europe. So we're looking at that right now. Rates is an area that we could do more. So we want to leverage the expertise in trading that we have in equities, electronic trading, and apply that to our rates business. So that's an area I think we're going to be able to do more.
I guess, so are you as far as you can go in the U.S. with structured product and?
U.S. is big.
It's a big market.
It's a big market.
It's such a unique offering. When I woke up to it a couple of years back, it was very mind-blowing. I just think to myself, everybody else's outlook on markets is very much a function of the market, right? In the US, but I don't think.
There's room for us to grow, but we're also looking at other markets, so Europe is an area that we can grow, but plenty of room to grow.
Okay. Yeah, maybe we can just leave it there. But if you're not going to commit to a number for cap markets growth for 2025, I won't try and pull it out of you.
When we do budget, we always aim at 5% growth. That's the target.
Okay. And then maybe just touching on something that's sort of always been in my mind. I go back. I've been covering National for a long time. We haven't touched on expenses yet and your outlook for expenses and expense control. And so maybe you can just briefly talk about your view and keeping in mind that we're about to absorb CWB. So what can you tell investors in a year in which you're absorbing CWB, what to expect on the expense front and from an operating leverage point of view, if that's the way you want it?
So we're going to review all of that, including numbers for the combined entities and provide guidance or update our guidance. But the mindset hasn't changed. Positive operating leverage and disciplined execution. Risk management 101. Control your costs, invest in your expertise, stay out of trouble. And managing costs and expenses stops you from doing a lot of stupid things. And that is a mindset that is at National Bank of Canada and with the acquisition of CWB will not change. Should we be doing more marketing out west? Yes, we're going to spend more on marketing dollars and things. But in terms of the mindset of the bank, that will not change. And so you should expect a continued focus on that, even with the integration.
Okay, I'm going to grab some of these questions from the floor.
Absolutely.
Let's see. So the first one. Financial Markets has benefited from increased volatility, and it is widely expected that rates will decrease further in 2025. How will this impact earnings?
If rates come down, it's good for corporate activity, financing, ECM business. If it translates to good equity markets, it's good for structured products as well. If markets are positive, then it's calling notes, reissuing notes. If it means a steeper yield curve, it's also good for rates trading. It's good for the bank overall as well. Yeah, I think the capital markets, the mindset there is, how do we benefit from good markets in all of our businesses? How do you position yourself when the markets become volatile, turn negative? I think throughout the years, we've been able to demonstrate that you can build such a business model, which is what we have done. So have these cyclical, countercyclical aspects to your trading businesses that allows you to weather volatile markets, but not just weather, but actually make money with them. Yeah, that's.
I mean, it wasn't in the question, but what about securities lending in a low-rate environment?
It could reduce pressure from balance sheet and reduce overall. It could have an impact on reducing. But there are other factors as well that come to play because if you have rates reducing and it reduces pressure, but you have elevated activity in the markets, then that brings more volume. So it counterbalances.
One other question from the floor: how do you view the opportunity in wealth management as a combined organization?
I think the opportunity is great for us and a priority. If you look at the bank right now, the combined bank, you'll have 30% of our bottom line coming from Financial Markets, almost 38% coming from Commercial Banking, and wealth will be at 20% down, like 19% down from what it was before. Wealth is a priority for us. And we have, with our wealth mindset in Financial Markets and commercial clients who are great wealth clients, I think we have a great, great business mix now to grow our wealth business faster with this acquisition. So it is definitely a priority for us.
Do you have some insights into where the, I mean, so there's a lot of Commercial Banking customers. Do you have any early insights as to where they have their wealth?
I'm sure it's spread out among all the other banks, independents as well. It's going to take time, but definitely an opportunity. It's an opportunity also, more visibility for us out west and a physical presence as well. That plays into your ability to attract more assets.
Okay, we're at the time where I'm going to ask you for the key messages that you'd like to leave for investors today.
First of all, thank you very much. This was a pleasure. This is a big year for us, 2025, and a very exciting. We are going to welcome CWB employees, CWB clients, CWB shareholders .