Annual National Bank Financial Services Conference. As JP mentioned, we got a good crowd and a lot of interesting speakers. I think we're going to be learning a lot over the next few days. And Monsieur Ferreira, welcome to the stage again.
Thank you.
To kick off the day, let's start with a big picture question as we typically do on the Q1 call. Your opening remarks, you listed a series of policy decisions that Canada should make to improve the resilience of our economy, help us navigate the world in which we find ourselves today, and make a stronger economy. Ultimately, how confident are you that we're in an election now situation, but regardless of the party, that policymakers are willing and capable to deliver on some of these suggestions, which I agree with entirely.
No, it's a really good question and thank you for everyone for being here. I think the sense of urgency is there and you're hearing it from all stakeholders, businesses that are being much more vocal, obviously governments. You're hearing it now from both parties. I think we are heading, I think in a more business friendly environment. The reason why I talked about these steps is I think that, you know, the biggest risk we have right now are not tariffs. I think we'll get to a stable place there at some point. It's really, you know, falling back and being complacent as a country and not taking the opportunity to step up, you know, and it boils down to a couple of things. I mentioned a couple of things on the call.
You know, the first is I think we need a major tax reform. Taxes are too high in this country for both individuals and businesses. We need tax incentives. We need tax to be friendly to capital. It hasn't been. I mentioned a couple things like accelerated deduction for capital investment, capital gains for risk takers, business owners I think should be lower than for trading, for instance, and investing in liquid stocks. I think also we have a lot of business that are transferring. We've seen a lot of sales of businesses in the province of Quebec. There's not one business in the province of Quebec last year that transferred that didn't have a U.S. interest coming in to capital.
I think if we want to incentivize investment, maybe putting in incentives for business transfers for Canadians so that we keep businesses here and Canadian ownership. The other thing that we hear about constantly across the country also is regulatory. It is very complex. One of the things that I mentioned is I think we should, at both government levels of provincial and federal, have a head, a nonpartisan head of deregulation. I am not referring to the Elon Musk mass firing here. I am referring to getting permits out to businesses so that we get back on the track of economic growth. I think, you know, looking at what is complicating the lives of our businesses and addressing those things and getting rid of duplication, I think is something we should address as well.
I think whoever the next government that's in, I think we have to repeal certain policies that I think are really detrimental for our country. C59, the Greenwashing Act, C69, the Impact Assessment Act. I think we need to repeal also the proposed oil and gas emissions cap. Regardless if it's Liberal or Conservative. These things are not good for our country. You ask if I'm hopeful, you know, I'm hopeful, right? Are all these things gonna be done? There's definitely a sense of urgency. We're seeing a lot of the debates now around those things. I think there is a sense of coming together, working together.
So.
Yes, hopeful.
There has been a lot of negativity around this situation with election. But there's also an awareness that maybe we've been asleep at the switch too long. This is actually the, you know, the kick in the posterior that our country needed to put us on a different trajectory. You know, do you have an idea of what sort of economic potential there is if we do even half of the things that, you know, we need to be doing?
I think it could be significant. Not going to be simple. This is, this is. These are complex issues. When we talk about deregulation and getting things simpler, it's not, it's not easy. Lots of coordination between various governments. Did not talk about it, but also interprovincial barriers. It makes absolutely no sense that within the country we restrict flow of goods. We stop ourselves from being much more efficient in a country where it's energy and natural resources that are going to get us off the ground. I think seamless regulation across the country is going to be very important. We have to build infrastructure, not just energy and mining, but also roads to get our product out. I think it could be very significant. We have to get our act together.
I think we need very strong leadership in Ottawa and we need to bring together the leaders of the various provinces as well at the table and get this going.
I guess anecdotally that sometimes helps illustrate the issue. You mentioned deregulation. As a priority, are there businesses that you or business leaders you talk to that would be today? Their response would be, well, it's easier for us to go build our plant or invest in the U.S. because of xyz. We would love to do it in Canada. It's just too difficult. Is that part of the issue?
Part of the issue for sure. It's not just with the new administration. I mean it started with Biden as well. You know, the IRA has put restrictions on US content for strategic assets. It has made it difficult for a lot of our businesses here in Canada. You hear that might as well just go and set up in the U.S. That's not a good thing. We have to look at that carefully. We've made our governments aware of that. I mean you do have to have some of your operations in the U.S., but then how do you also think about growth in Canada and other markets is something that we need to talk about now.
Bringing back to the management of National Bank of Canada itself, one of your mantras ever since you've been CEO and prior to that as well is, you know, risk management is, you know, the key priority for, you know, day to day operations. How your philosophy in running the bank in this situation where the risks are evolving on a daily basis, like how do you, how do you navigate that environment and, you know, from a balance sheet standpoint or capital allocation standpoint. What's the, what's the, what's the strategy?
I guess now first I get being long ball on equity and fixed income, as is something we have a bit of experience on. You know, the other thing I would say is, look, this is a lot of uncertainty here. Who knows where this is going? You know, I mentioned, I think at some point the Canada-U.S. tariffs relationship will get to a stable place. It is very unpredictable. I like where we stand in terms of capital liquidity. Our business mix, our credit as well, having a strong balance sheet, being ready for these types of situations for our clients is the most important thing right now. A lot of it is staying close to our clients because they're the ones who are feeling the brunt of, of the concerns right now. You know, being there for them, being their solid rock.
You know, our focus is on the Canadian economy. You know, I think within, in the current context, we're actually very, very happy to be domestically focused, but our clients are resilient as well. A lot of them are, you know, initially the shock was brutal. A lot of them are talking about, you know, all right, let's, let's, we're going to start investing. Let's look at procurement inside of Canada. Let's look at the ways to, you know, be more efficient and let's, let's look at other markets. We are going to help them and support them there.
Okay. Another big part of the national story is the CWB acquisition which closed on February 3rd, I believe. And one aspect of that transaction, I mean expense synergies. As an analyst, we're like, okay, that's kind of a given. But the more important and interesting element of an acquisition like that is the revenue synergy opportunity. It's not been quantified, I get that. But it's the promise of something that I think investors value a lot more. On the other hand, it's something that's a little viewed with more skepticism because it's harder to track, you know, and measure, frankly. So what's different about the National Bank of Canada and CWB situation? Such that investors should be more confident that there's a material revenue synergy opportunity and we'll be able to see them, I guess.
I understand skepticism because it's hard work. You've got to be focused, plan correctly, which we're doing. It's early days, which is, you know, as you mentioned, February 3rd was our legal day one, March 3rd was employee day one. We're not even two months into integration. A couple things and why I'm excited. There are two blocks, right? Commercial and then retail wealth. On the commercial side, NII ancillary business. NII, it's first cost of capital and funding. CWB is more competitive. Now, I'm not talking about funding synergies that we disclosed. I'm talking about being more competitive. With the existing clients, the book of business could grow much more because larger holds, larger holds, we are more competitive and we can attract more clients to the platform now because bigger balance sheet and much more competitive on capital and funding.
That's first is NII boost with existing clients and attracting more clients on the ancillary side for a long time, and I'm sure you've heard Chris talk about that in the past is they want to do more with their clients. They want to do more fee based. If you look at fee based revenues for National Bank on our commercial side, it's approximately 25% of our revenues. CWB 12%. It starts with cash management platform which attracts deposits. It's foreign exchange. It's interest rate management, risk management, it's advisory, ECM, DCM. It's all the products that you bring to commercial clients which we do. On the flip side they have an equipment finance business which we don't have which we can bring to all of our clients. NII boost and ancillary business with all of the commercial clients. Then retail.
Retail was really non-existent with CWB. We have 39 branches that we are incorporating. We're gonna bring these products to all of CWB clients and we'll be able to do even more. We have a great retail product, we have a great, you know, digital platform. On the wealth side they started right, they had a little few investments. I think we're going to be able to make it much more efficient and attract a lot more and, you know, bring the National Bank model which is, you know, collaboration between commercial and wealth. We have all the CWB client and then, you know, a bigger footprint out west that's going to be able to attract assets much faster.
If I could pause you because your wealth business is an interesting angle because you know the HSBC Canada, the advisory acquisition years ago, Wellington West, it is a bit more western skewed than the rest of the banks.
40% of our wealth businesses outside of Quebec. We already have a presence but now we have a larger footprint. We are starting to feel it right where we are going to be more visible, we are going to be able to attract more assets. It is early days and I understand and right now we are focused on integration costs, funding synergies, those things are all coming in. We are actively working on these. Towards the end of 2025 I think we are going to be able to provide much more color on that and they are really going to kick in in 2026.
Okay, then switching to the provisioning strategy. The day one provision is a pretty hefty number I guess. What was the philosophy or how would you describe that provision? Is it one where you're taking a worst case scenario kind of perspective given the economic backdrop we've got today? If that doesn't actually play out, we should probably expect some releases over time or so.
We took a conservative approach. You're absolutely right. Which is typical of National Bank. We're also in a credit cycle and we have this uncertainty with tariffs and the current environment. On performing provisions we took $230 million, we took $378 million credit mark for the portfolio. On the performing provisions, you know, National Bank, our own provisions, we were skewed towards a pessimistic scenario. We have applied that. On the credit mark, look, the CWB portfolio is, you know, commercial loans. You know, when there is uncertainty, when, you know, the possible range of outcome could be a little wider, we think, you know, probability of default in certain sector is a little bit higher. You know, we took the opportunity to move some of the performing to impaired. I think, you know, what you're mentioning.
Are we being conservative? Yes, we prefer to be conservative in the current environment. We'll see.
You mentioned that near the end of 2025, you'll give more detail around the revenue synergy potential at CWB. Another update, at least that's what I interpreted your comments to indicate, is that your capital management strategy will be giving an updated perspective or strategy, I guess sometime this year. How could the priorities change? I mean, you're running at a very strong capital level now. Do you need to be at that level? Maybe you do because of the macro backdrop or maybe you don't. Outside of organic growth, which seems to be the number one priority, and dividend increases and buybacks, is that order going to change? It seems.
No, we're, look, we're pretty boring, I guess, right? Conservative, prudent and the order is not going to change. CET1, 13.6, Q1, we mentioned, you know, the impact of CWB about 15 basis points. Let's, you know, 13.5, let's say that's where we are approximately. Priority. The first thing is we're integrating CWB. This is a large transaction for us. The focus is on that. The focus is on getting all the benefits and making sure that it's a success. That's the number one priority. Second is organic growth, as you just mentioned on all of our businesses. You saw the momentum in Q1. We're doing well across the bank. It's integrating CWB into that model and pursuing organic growth across everything. You know, you mentioned, obviously, you know, dividend growth, but delivering premium ROE. Above all that.
It's, you know, how do we keep delivering premium ROE, which we've been doing consistently and we're going to keep doing and including with the acquisition of CWB. As for buybacks, it's not going to happen this year. It is a 2026 story. They will be more material because you're right, we have, you know, 13.5 roughly and we haven't factored in yet the benefits of, you know, portfolios being transitioned to National Bank platform, going to advanced model. We haven't disclosed what, you know, the positive impacts are going to be, but they are going to be positive, obviously. Our goal is by Q4, we're going to provide, you know, a better picture of what that entails and what are we going to do next year. Buybacks for sure on the table in 2026.
Is that AIRB transition possible in 2026 or?
I think it's going to be gradual. I mean, we're working with our regulator. You've got to go portfolio by portfolio. I mean, we have, you know, some of the similar portfolios, National Bank, and we have, sometimes we have the same, you know, type of business. You know, take for instance, real estate. We will go industry by industry, work with them. My guess, I don't want to get into trouble, but by, you know, this time next year, we should have a very good idea of, you know, what those benefits are.
We got six minutes left. I've got enough questions, but I do want to make sure we cover off Credigy and ABA Credigy, the loan book, at least sequentially. There was a bit of moderation in the portfolio growth there. You talked about market conditions not being ideal from your risk reward standpoint, which we've heard in the past on a few occasions. I think investors appreciate that disciplined approach. Maybe you can talk about what are the conditions at play now that make it such that the.
We're seeing business, right? The flows there. The issue is pricing. They're not, you know, it doesn't meet our risk reward standards. And, you know, when this happens, we step aside. Credigy is not a volume business. It's not a volume mindset. It is ROE and ROA first approach, very disciplined. It's, you know, we've done well with that approach and we're not about to change that. We'll see. The year is still young. We have, you know, some uncertainty in the market now. If it turns out to be very positive and there's, you know, M & A activity in the banking sector in the U.S. we'll see assets sell. If it turns negative, you know, we could see asset sales as well. Patience is very important in Credigy . And, you know, our focus is, you know, accretive ROE, not, not volume.
Oh, yeah, no, I get that. It's more like there's too much liquidity and too many buyers.
Yeah, we're seeing a lot more competition in the market. Private credit, insurance company that have interest in consumer loan and mortgages. There are more players in the market right now.
Okay. Moving to ABA, I've got a kind of a contemporary question and then a long term one, but the contemporary one is on credit, received a lot of attention over the past year. Plus, this past quarter we saw some moderation on new formations. Do you think that that trend has legs? Are you seeing some stabilization in the credit, credit performance?
It does have legs. I was there last week, spent some time with the board management, various teams as well. I met with the governor of the central bank, which is our regulator, as well as the Prime Minister. A couple things. First, on the economy, it is much more positive. What we're observing right now, if you look at January, February, international trade in the country is up 16%. Foreign Direct Investment, which has been a focus of the government, is at a record high for those first two months. It is over $1 billion, which, this is a small country. These are big numbers for Cambodia. Tourism is also picking up now. We are entering into a slow season.
Tourism is between September and sort of approximately now, but the first month were really strong and we're starting to see interest rates come down as well, which is going to be good for investments in real estate. In my meetings with local authorities, they are focused on growing the economy. All my discussions were very positive in terms of what they're working on bringing on various sectors. The tariff is possibly a positive for Cambodia as we're seeing some manufacturing move into the country. They're looking at, you know, vertical integration of the food industry. A lot of their products, their raw products, are exported. They're looking at, you know, you know, manufacturing in the food industry and obviously promoting tourism. A very pro business environment. That's very, very encouraging as well. Now on the formations themselves.
You know, talked a lot about that, looked at, you know, and educated myself a lot more on what's going on and what's the process. The core process is very bureaucratic. It takes a long time. We've got formations that have been going up and impairs and a resolution process hasn't, you know, picked up as much. The one thing I can say is yes, it's bureaucratic, it's a lengthy process. You know, on resolution it is the rule of law and I've had these discussions with the Prime Minister as well as the central bank. I really don't have any concerns there. Right. The issue, one of the issue has been, right, that the real estate market has slowed down a lot. Right. We've had, you know, interest rates that have increased between 2022 and 2024.
We've got savings that are up significantly. $7 billion. These are big numbers for the country. $7 billion in 2023, $10 billion in 2024 that are stuck in deposits and savings. We saw it in our numbers. We see the last two years loan growth has slowed down and deposits have just skyrocketed. Rates coming down is going to have, I think, a positive impact on the real estate market and should move a little bit there. Overall, I see definitely, I think, formation trend slowing down and I see resolution at some point also picking up. Now you talked about longer term.
What's the next phase?
Next phase for ABA. Great, great performing, phenomenal bank. The way we, I think, executed as well. Very, very happy with the team. We'll see, like, if, you know, the next phase of growth, if we need a partner in the country, if we think we could take the digital platform, which has been phenomenal in acquiring deposits, you know, their leadership in payment also, if there's a possibility that we could take that outside of the country, we'll do that with a partner. We'll open up capital and we'll see where it takes us.
That about wraps it up. Thanks for kicking off the conference. It was a great discussion.
Thank you.