Delighted to have `Marie-Chantal Gingras from National Bank. She's the CFO Executive Vice President. And we have a limited amount of time this morning, so I'm going to just jump right into questions so that we don't leave anything behind. And of course, if you have a question, please just raise your arm. I'll try to entertain questions from the audience as well, just so we can get a good, fulsome discussion going. So thank you for joining us this morning.
Thanks for having me, Darko.
The topic is your tariffs. I wanted to start on this topic and immediately dive into a few things. I guess maybe we can just start with your intentions. How do you intend to sort of run and operate the bank during this very uncertain period of time? Maybe after that, we can dive into exposures and sensitivities, but maybe just your overall thoughts and how National intends to operate now.
Yeah, yeah, sure. So obviously, our first reaction is top priority will be to stay close to our clients. So in terms of how we're going to be operating, this staying close to clients is very important, as well as making sure that they get the support they need as they navigate through these evolving challenges. We're going to be monitoring any developments on both sides of the border. And obviously, the impacts will depend on the final scope, the final depth, and most importantly, the duration of those tariffs.
So those are just like initial remarks on the tariffs. And we ended Q1 with solid results, strong capital ratios. So we're in a good footing, good starting footing for navigating through these challenges. Now, in terms of how we'll be tackling this more specifically, I think I'll go back to some of the important fundamentals of National Bank.
So we have a very well-diversified earnings stream, and we've been very happy with the strategic choices that we've made through the years that generated sustainable performance. And remember, we generated 27% of our revenues outside Canada, 11% of which came from the U.S. So now back to our earnings. We have a well-balanced mix between retail and wholesale. On the P&C segment, we're overweight Quebec and overweight secured as well. In terms of Wealth Management, good momentum there.
We continue to see good momentum, and there's a double-digit growth objective through the cycle. FM has been a resilient franchise, very happy about that. ABA has been diversifying their exportations, which is good in the context of tariffs. And Credigy will continue to be an agile franchise that sees opportunities that are a function of their risk-reward objective. So good earnings, diversified earnings.
And lastly, what I'll say is our continued focus on cost discipline. We continue to invest for growth while staying disciplined across the board. So those are the elements I think are important to share in terms of how we're going to be tackling this.
And so maybe one of the questions that a lot of people would want to sort of understand a little bit better is maybe a discussion on what parts of your businesses would be most sensitive to tariffs and then possible mitigants to that as well. So if you can maybe just touch on where you think tariffs might have a quick impact, where it might take longer, and is there anything that helps mitigate some of this impact for your clients?
Maybe I'll start with positioning our overweight Quebec. Within Canada, our loan portfolio represents 53% weight in Quebec. That's something that's important because it will bring me to talk about some of the factors that will give you some color on where we see maybe challenges, but most importantly, where we see mitigants. I'll cover both non-retail and retail. From a non-retail perspective, if you look at our total non-retail portfolio, 10% of it is insured, which is something that's very reassuring in terms of the actual context.
If you look at if we take a little deep dive on the industries that are maybe more vulnerable in the context of tariffs, if you look at our manufacturing, more specifically the industries, for example, steel, aluminum, automobile, it represents less than 1% of our manufacturing portfolio. We have very little exposure in forestry.
And if you look at our agriculture book, a big portion of it is secured and mostly dairy in terms of the retail. So we're very comfortable with our portfolio in terms of the non-retail. If you look at the retail portfolio, again, around 50%, more than 50% of our residential book is in Quebec. And as you know, house prices have not been increasing as much as the rest of Canada.
Therefore, leverage is lower. And average payment shock has also been lower than the rest of Canada. So as we're speaking, it's approximately payment shock in Quebec is approximately CAD 400 per month. The rest of Canada is closer to CAD 680. So big difference there. And because of all those factors, we see our delinquency rate in Quebec being much lower than the rest of Canada.
Actually, on the variable portfolio, Q over Q, our delinquency rate has decreased 10 basis points since Q4. Although a little bit higher than pre-pandemic, but we're seeing good resilience there. Our retail portfolio is also being very resilient. Quite comfortable with what we're seeing.
Maybe just to follow up on one of the things you mentioned there, you said the agriculture is secured. Secured by whom? How is that secured?
In terms of the different products that we have. So dairy is something that's government-related. So there's quotas there. So that's really helpful in terms of the industry.
Just 1% steel, automobile, and aluminum.
In our manufacturing industry. Yeah.
There wouldn't be any other exposures in any of the other categories?
Not much. Forestry is, as I said, very minimal. You would see that probably in a portion of the manufacturing book.
You mentioned CAD 400 per month, but I'm assuming that that might be dropping.
It is. It's been dropping consistently since rates have been dropping. Yes, for sure. So good resilience in our portfolio.
And then maybe just a follow-up, you've closed the Canadian Western Bank acquisition. So what are your early thoughts there? Presumably, there might be some sensitivity to the tariffs as well. Or were your comments inclusive of CWB?
I can add some little bit of color on CWB regarding the tariffs, even though it's still early days. As you know, we closed them actually a month ago now. So we see impacts on the CWB being more on the secondary level. They have a very, very low portion of their book in the vulnerable industries that I've mentioned, manufacturing, and almost no forestry. So we're quite comfortable with what we're seeing. As I said, it's probably more on the secondary level for the CWB portfolio.
Okay. And maybe with that as a transition, we'll chat a little bit about CWB. First and foremost, one of the things that I think a lot of investors were looking forward to was the close of CWB, the eventual migration from standardized to RWA. But also, there was a view that there was going to be very strong capital, and it is. And it's a very small impact. But there's a hesitancy to buy back stock. So maybe you can speak a bit to your plans on the buyback relative to the acquisition and all the equity that you've issued for it.
Yeah. Yeah. So as you saw on the integration of CWB, just a little quick overview of where we are. So we've closed on February 3rd. We're actually now integrating all the employees. Our management structure is now combined. So that's very positive in terms of generating future revenue synergies. We're already working together as combined teams. As I said on the Q1 call, our client migration will happen from summer 2025 up until early calendar 2026.
This is a key element to go back to your capital question. And we've announced that we're very confident in achieving our cost and funding synergies, CAD 135 million of which will happen in the first year, coming from funding and costs, funding being two-thirds of those in year one, spread pretty much throughout the year, while cost synergies will be more towards the end of year one, considering the client migration, obviously.
So back to your question on capital. We will be converting CWB's portfolios on the AIRB approach as we're migrating the clients through our platform. In 2025, we're very comfortable with having solid capital ratios, considering the uncertainty in the environment, the tariffs. We're in the middle of a credit cycle. We still haven't closed one month, right, of CWB. We want to make sure that we have the good conditions to continue to grow domestically because we still see opportunities.
That's our number one strategy in terms of capital strategy, grow domestically, sustainable dividend growth, and then as a complement, buyback. Buyback is definitely something that's on the table for 2026. Our intention is by the end of this year to really give visibility on our capital strategy in terms of timing and amount of buyback.
This is definitely something that we are looking forward to.
You meant this fiscal, the end of this fiscal year?
At the end of this fiscal year, we'll give visibility on our capital deployment strategy.
Okay. I'm going to pause there. And just as a reminder, they reported last week. So if you have any questions on the quarter as well, by all means, feel free to raise your hand and ask. And maybe just as we sort of wrap up on this discussion, I do want to talk about ABA and Financial Markets. But one of the things that's on a lot of people's minds is provisions for credit losses and sort of I guess the first question is, do you see the need now that we've got more uncertainty in the world to build a performing provision, maybe in Q2, maybe throughout the year? I'd like to get your thoughts on that because you are the CFO. So that'd be good to get your thoughts on that.
And then even though you have some mitigants being in Quebec, having a retail portfolio there, by the way, I also think your credit card portfolio is relatively small. But that would be an area where we would have some concern.
Credit card portfolio and unsecured retail loan represents approximately only 3% of our book. So it is very small.
So in the wake of that, given everything that we've heard, so we've got uncertainty with respect to tariffs, but you have some mitigants. How should we think about the evolution of your provision for credit losses now going forward? Because just last week, you gave us a new range of PCLs, but now we're waking up to tariffs. So how would you discuss the outlook now for credit? Has anything changed materially for you?
Nothing has changed materially. We're still very comfortable with our provisioning that we've shared with you in Q1. So a couple of things maybe on the credit portfolio. We've been building allowances, performing allowances for the past 11 quarters now. So we've been prudent. And that's the thing to do in the current environment. Our weighting of our scenarios towards pessimistic has also been skewed to pessimistic for many quarters now. In Q1, as we've mentioned on the call, we've added a prudent layer in terms of performing allowances related to tariffs.
And if you look at our metrics, our performing allowances now cover 2.1 times our last 12-month impaired losses. And our total allowances cover 4.3 times the last 12-month net charge-offs. So we have a prudent approach in terms of credit. We've always had, and we're very comfortable with the position we have right now.
Speaking on credit, one of the things that we continue to see, and maybe we can just discuss this a little bit this morning, is a little bit of a rise, or not rise, but I guess impaired loan formations at ABA. Always a topic of discussion among investors. I get asked about it a lot. I'm by no means an expert on Cambodia. Maybe we can talk a little bit about the elevated formations and the longer resolution process. What are some of the reasons for that?
Yeah. So you're right. Formations have been elevated for the past couple of quarters. Although when you look at them in US currency, they have decreased since Q4. And that's something that we had expected and we had guided on at the Q4 call. And that's what we've and that's what we saw. A couple of things on Cambodia, maybe just a step back.
First of all, economy is not at its full potential. That's an important factor that we're observing. Tourism has not yet picked up to the level at its full potential as well. Although we've seen a little bit of improvement, I think we're now back to the 2019 level, if I'm not mistaken. So tourism is also being different in terms of composition. That's also something that we're seeing.
So those elements are definitely factors that contribute to gross impaired loans, staying longer in the book, and formations being elevated. That said, it's diversified portfolios. It's low LTVs. We continue to be prudent. So we're, I'd say, cautiously optimistic on Cambodia.
What is the growth prospect for the bank? Is it changing for you? Do you see continued elevated growth? I mean, this has been an extraordinary growth over the last ever since you've acquired it, actually. It's had extraordinary growth. Is it slowing down? Is there anything there that you might be more cautious on hitting the brakes? Or is it still all systems go and grow? I mean, we say that the economy is not at full potential, but I think it's 5% GDP still. So it's still a very high-growth economy.
And this is why we're very happy with this asset because there is higher growth potential than maybe other countries. As you said, it's 5% or 6% GDP. Full potential is more around 7%. So we still see opportunity to continue to grow that business. ABA is a phenomenal bank from a digital perspective over in Cambodia. So continue to grow clients year- over- year. Every quarter, it's around 30% growth in terms of number of clients. So we continue to see good growth there for ABA, whether it's in terms of loans or deposits.
Okay. So switching gears to maybe the financial markets business. We saw last week you reported a tremendous Q1, as many Canadian banks did in their financial markets businesses. And it was primarily in trading revenues. I think you benefit from volatility. Can you maybe give us some thoughts on the trading outlook today and what you're seeing and how you would position your expectations for financial markets for the rest of the year, given where we're at in terms of the macro?
Yeah. So you're right. Financial Markets had a tremendous quarter in Q1. So very good start of the year. I guess two things, some factors that contribute to that. So there was volatility and good client activities. So those are two elements that are really key to driving growth in Financial Markets. And as Étienne and the team were sharing at the Q1 call, back in December, when we presented our Q4 results, we've given net income growth outlook for 2025. And with the current situation in the market, the team is a little bit more optimistic than back in December. So we continue to see good momentum and definitely expect net income growth for 2025 in the Financial Markets business.
Okay. And how should we think about that business? Has anything changed for you there as a result of getting CWB in financial markets? Does it create more opportunities?
Opportunities. That's exactly where I was going, so in terms of CWB, we've touched upon a couple of things before, but if I maybe just take a step back to talk about revenue opportunities that we see, obviously, we see some on net interest income and fee income. And to be more specific to your question on the fee income business, risk management solutions and capital markets capabilities are definitely areas where we have very good expertise.
We've been excellent at those, and CWB didn't necessarily have those to offer to their clients, so our teams are ready to go and capture those opportunities from a financial market perspective, that's for sure, obviously, we see also some opportunities in the cash management capabilities that we will also be able to offer to CWB commercial clients.
But we'll also be able to offer some retail capabilities as well as some wealth management capabilities. And we also see some opportunities for our own clients. So for example, our wealth management clients that are out west didn't necessarily have close footprint to do their retail banking. But now with the CWB branches, they will have. So those are good opportunities also not only for CWB clients, but for National Bank clients.
And lastly, CWB has very good expertise in terms of equipment financing, which we did not necessarily offer. So those are also very interesting opportunities that we see. And we haven't yet disclosed or quantified those revenue opportunities. And this is something that we'll tackle as the year passes by.
Just maybe as I think of that, is it that these will take time to develop? Or are there some revenue synergies or opportunities that could be quicker than others? I mean, I work in the financial markets.
Financial Markets is definitely the one that we can move very, very fast. As I said before, the teams are ready, and they're ready to tackle those. And conversation has been happening already with CWB clients. We've been meeting with them. So definitely Financial Markets. And then leveraging the way we go to market. National Bank has been very successful in approaching clients, offering not only commercial capabilities, but as well some private banking opportunities. So the way we approach the market, we've been successful at that.
And we'll do the same with CWB clients. And as I said, the teams are already working closely together as a combined management team. So this is our number one priority for us, cost synergies, where we have a good plan. We know how to generate those. And now the focus is on revenue synergies.
Okay. I'm just going to scan the room for any questions from the audience. If not, I want to dive. I want to go backwards a little bit and talk a bit about what we touched on. And I wanted to talk a little bit about your expectations now for interest rates, given where we are, and how that might sort of evolve. I mean, you've already mentioned that your variable rate mortgage borrowers are seeing a lower payment shock. And likely, if there's more rate cuts coming, that will clearly just move. But there's also fixed rate mortgage shock in the book as well. And so I wondered if we can maybe just talk a little bit about how that's changed. And do you see mortgage growth as coming back?
Do you see or do you see it or do you think that there's potential here for a little bit of a slowdown given all the uncertainty? So how do you see that shaping up for you, and especially in the province of Quebec where it matters most?
Yeah. So in terms of the mortgage book, I think it might be interesting to say that already 70% of the mortgage book has been renewed. And an important portion of that from Fixed as well. And we continue to see resilience from a credit perspective. So that's very positive. As you said, obviously, with interest rates going down, this will automatically generate lower payments for our variable clients. And we've seen the housing market growth being good from month to month in the past couple of quarters. Obviously, with the tariffs, well, that could bring some uncertainty. I think it's really early to say, but there could be a slowdown in the housing market. But as of today, what we've seen is continued growth in that market.
Does it seem healthier than commercial? Do you feel like there's more momentum on mortgages versus commercial loans?
Our commercial book has been growing at low teens for the past couple of quarters, so close to 13%. Mortgage hasn't been growing at that pace. I think, as I said, with interest rates going down, we're seeing a pickup from month to month, and we're seeing also a change in behavior in terms of clients, so up until now, the most popular term was three-year, and in the last quarter, we saw a shift from clients going back to variable rate. That's been interesting, so second term continues to be three-year, the most popular, but last quarter, variable rate came back as the most popular option.
Sorry, do you mean to say that the term is three years, but they're choosing variable rate rather than fixed?
Yeah. Exactly.
This compares to a five-year or fixed?
Instead of fixed five-year, when they choose fixed, they choose three. And as you said, they're choosing variable rate more than three years in the past quarter. So I think that's also a good sign.
Okay. Well, we've run out of time. So thank you for coming in and having this discussion. It's been very good. Thank you very much.
Yeah. It's always good to see you, Darko. Thank you, everyone.