I'd like to introduce our next guest, Laurent Ferreira, Chief Executive Officer of National Bank. Welcome, Laurent. Thank you. Thanks for coming today.
Thank you for having us.
And I'd love to start off by asking you sort of a macro question: how you see the economy right now, where you see risks, how you sort of feel. I think the perception in the investment community is that you've taken a bit of a cautious approach versus some of your peers. And any thoughts you can offer?
That was our stance coming into the year. Q2 numbers are not great. Business investments are down, exports as well. Confidence in general. Consumers are doing well, though. We're seeing resiliency in demand. Geopolitics are still a source of instability. Government deficits still need to be discovered. And a concern for the bond market as well. Longer-term rates are trending higher. Now, having said that, I obviously am more and more encouraged with what we're hearing from our governments, both in Ottawa, provinces and the focus on the Canadian economy.
Everything that we're hearing about putting back the emphasis on productivity, nation-building projects, the focus on manufacturing, defense spending, these are all great news for Canada. We have to get it done, though. That's, I think, one of the things that is going to be important in the next couple of quarters.
As a bank, we're obviously very pleased to hear that. It's good for the banking industry in general, not just National Bank. It's something we're really focused on, focused on Canadians, focused on the Canadian economy. Hearing our governments putting so much focus on productivity and being a leader in the G7 is really good news to us.
Great. Thanks for that and maybe Quebec specifically, I think your predecessor, Louis, would like to quote a couple of interesting numbers on Quebec in terms of two-income households and some of the buffers that are there that make it a bit less risky. Obviously, the housing market not having gotten to an inflated level like we saw in other parts of Canada, like the GTA.
There's less leverage in the Quebec economy. You take median prices for a home here in Toronto, CAD 1.2 million. It's CAD 570,000 in Montreal. So it's a big difference when your mortgage is CAD 350,000 versus CAD 800,000 in terms of cash flow, so that's one of it. Generally, higher level of savings as well, so I think that plays a big part of it. Now, Quebec is affected. We have the highest level of tariffs versus all the other provinces at roughly 8%. That's because of steel, aluminum, and we have a big proportion of our GDP that comes from manufacturing, so like Ontario, we're feeling the brunt of the tariffs.
Unemployment is still low, so that's good in general, but the big thing is really less leverage, I think, on the consumer side. Population growth was not as big in Quebec than it was in Ontario.
When we had these big years post-COVID, the population growth in Toronto was 100,000 a month. It was 10,000 a month in Montreal. So that plays into it as well, I think, in terms of the resiliency of the market and how it can get through a slowdown in the economy.
Fair to say through a cycle, you would expect Quebec to be relatively well-positioned versus the rest of the country.
Yes.
Okay. Fair enough. Thanks for that. Maybe talking about the CWB integration, obviously very topical, given that it closed recently. There's still that revenue upside potential that I believe you'll be announcing in the maybe Q4 results?
Certainly something we're going to talk about. Yes.
Okay. Anything you wanted to touch on, maybe what's impressed you about the client base that you've acquired versus some more challenging parts of that acquisition?
There's a lot to say about CWB. First of all, big year for us entering 2025. In March, we onboarded all of CWB employees, so that was all done. Everyone got their paycheck, and in August, we did our first client migration, so that went really well, and the next couple of months, that's what we're working on, so by the end of the year, we're going to have all of the CWB clients on our system. It's a lot of work. When you think about a migration, it's not just putting data onto your system. It's connecting with your client. It's sending emails about the change.
It's telling them to onboard digitally, and so people don't necessarily react to your email, so you have to call them and you have to work with them. I've been very impressed with the commitment of our employees, both CWB and National Bank.
So that has been fantastic. And it's a tough time. They're going through a change. So for National Bank, there's excitement. There's excitement as well at CWB. But there's also a lot of emotions because they're seeing a big change and a logo that's leaving. CWB is leaving. It's becoming National Bank. So you have to respect that as you do that. But I am really happy with how things are going, impressed with the team. Client attrition is very, very low. You have to work at it, though. And during this time, the goal is minimize disruption. No one likes to go through changes.
To minimize disruption, get everyone on board. And yeah, and then we're going to focus on growing the pie. And that's going to be a focus for 2026.
What about the cultural differences? Obviously, Quebec, Alberta, different in some respects. Anything on the client side or the employee side that you've seen as maybe a bit of a hiccup?
I'm glad you're bringing it up because we worked on this transaction for over two years before we announced it in June of last year, and culture was a big topic of discussion between us and CWB and the board of CWB and our board, and it is one of the main reasons we decided to merge because there are tons of similarities between our two institutions, our go-to-market, our values, the mission of the bank, and in terms of clients, we understand the market. We've been there since the mid-1980s, serving governments, serving institutions, serving corporations.
CWB is just an extension of all that. Now, you're going to bring up the French and the English thing, well, I think it's what makes us unique. I think we are maybe the most bilingual Canadian bank, and I think that's unique and I think good for us and something different.
But I am not concerned at all. On the contrary, I think we are going to be able to leverage the cultures between National Bank and CWB.
Okay. That's very helpful. In terms of expansion, whether it's the number of physical locations that CWB has, I think it's 40-some odd, where is there an opportunity? Is it on the digital side? Is it more so on investing and just getting more physical infrastructure out? What does the growth trajectory look like once you've sort of settled into that, getting the clients on board?
For sure, more digital. That's for sure. So, branch—no plans on reducing. We're there to grow and not there to shrink. Maybe optimization between National Bank, National Bank Financial, so our brokerage, commercial centers, and other retail branches that we have, and CWB. So we're going to work on that. But the main expansion is digital. CWB did not have the tools. So this is something we're bringing to clients. So this is another change for a lot of the clients is onboarding them on our tools. So digital expansion for commercial clients, bringing also retail banking.
So that's something for CWB, it was not a focus. A lot of the CWB commercial clients were not doing their banking with CWB. So that's another area of growth and opportunity for us and wealth as well.
But so the focus is more bringing the tools and onboarding all the clients on the National Bank platform and then expanding that. And also being more visible, more, I think, marketing. We want to shift a little bit of our marketing spend outside of Quebec and into Western Canada. So that's going to be part of it as well.
Okay. Awesome. And then I guess the obvious question is, with CWB, that's really helped your geographic expansion domestically. You've got US SF&I. You've got an outlet to grow. And that's obviously growing very well for you outside of Canada. Financial Markets have been great. What's sort of the next leg of the journey for National?
To your next step, that's good.
Just in terms of whether it's geographic expansion or maybe business line-wise, what are you focused on?
We still have a lot of room to grow. So you're right. Capital markets, our wealth business, and commercial as well. A lot of our growth over the past couple of years has been outside of Quebec. We still have a lot of space to grow. CWB is going to allow us to boost that growth as well. So that's our focus in terms of organic growth where we're going. Now, if you go beyond that, one of the areas that we want to work on is retail banking.
And the reason for that is we believe that we are going to see in retail banking, all industry, over the next five years, the most disruption than any other segment, whether it's AI, whether it's fintechs, whether it's regulatory pressure, competition. I think fees in general in retail banking are going down.
I think the pressure on NII is going to go up. The cost of deposits is going up in general. So there are a couple of things that I'm working on with the team, and this is going to be a focus going forward. We have to keep improving our cost structure. That's systems, automation, using all the available tools, but also simplifying our product offering.
So that's something that is going to continue to be a focus for us in terms of growth, and the other area is, well, not the other area, sorry, but within retail, we can't act like the large banks, so our retail banking model, very established in Quebec, an opportunity to grow out west, but we think that partnerships are also going to be part of our business model. We're going to do more of them.
I think you have to take small players like Wealthsimple, for instance, very seriously, and I'd rather work with them than fight them, and so that's the approach we have, so we think that there's going to be this disruption is going to keep going. These are trends that are accelerating, and we're going to work with those trends. We're not going to fight them.
Sounds like it's an obvious one for open banking, too.
Absolutely.
That seems to have sort of fallen off to the side the last few years.
I think it's going to come back.
Do you think it's?
I think it's going to come back. And I think we're going to see something much more serious with the current government before it was all conceptual. I definitely think that it is going to be with our Prime Minister, who has definitely experienced it also in the U.K. I think that's something that we might see coming back very soon.
Okay. What about capital deployment? Obviously, a very, very strong CET1, 13.9 as of last quarter. And yet the NCIB that you did announce at 2%, I do think some investors thought, well, could.
Underwhelming.
I wasn't going to use that word, but maybe the option could have been to maybe come in at 3% or 4%, and anything you wanted to add on that? I know you talked about it on the call a little bit, but.
Right. So on the buyback, we announced 2% just because where we stand in terms of our capital at 13.9. We had a couple of things that came into the quarter. We sold the participation in two banks in Africa. We also had capital refinements. RWA and market risk went down significantly also in Q2. We don't see that go up in the near term. So we thought it was appropriate at this point in time to start buying back our shares. And so that's why we announced the buyback.
Now, we think that 2% is the right number. Now, I want to be clear on this. And I thought we were very clear on our call. 13.9, where we ended Q2, does not include any benefit from the conversion of our commercial loan book at CWB to the advanced models.
So that is still. I don't know if you were surprised with my comment? So those benefits are going to come. We were very clear we're going to work on those in 2026. We've already engaged with our regulator to work on those during 2026. So those are things. But we're not going to announce those things before they are realized. Now, in terms of where we stand, I am not in the camp of 12.5. We want to operate at 13. Not 14, 13. That's where we believe we're at the right spot. It gives us optionality. We're delivering this year at this level, 15% ROE.
We're going to deliver a very similar ROE next year. And with all the synergies coming into CWB and the capital benefit, we believe that in 2027, we're going to be back in the middle of our 15%-20% target.
So when I think of capital deployment, the number one priority for National Bank is peer-leading ROE. And how do we do that? First, organic growth. After, inorganic and tuck-ins that fit our strategic plan and that are going to boost organic growth. Then it is sustainable dividend growth and then buyback. So it was normal for us to announce a buyback at 13.9%. Would we announce the buyback at 13.4%, maybe not. But we have capital upside with our capital generation and obviously CWB coming up.
Okay. So just to maybe clarify, so when you mentioned 13%, you don't want to be at 12.5%. Do you mean you don't want to be at 12.5% because there's geopolitical risk that's a bit elevated?
I want to be able to say.
You see long-term.
I want to be able to say yes. So if there are opportunities that come to us, whether organic or inorganic, I'd rather be sitting at 13% than 12.5% and grow faster. And at 13%, we're still delivering peer-leading ROE. So to me, the important thing is where do we allocate capital that generates ROE and not necessarily where should we be operating. And we think that 13% is where we have ample flexibility.
That's medium term.
Yes.
Okay. Thank you for clarifying that. Okay. That great color there. Maybe going into some of the business lines, Financial Markets, which had been on rails on the trading volume side for a couple of quarters, first half of the year, and then obviously a pullback to a bit more of a normal level. Client activity is not going to always be as robust as it was in Q1 and Q2. Maybe talk a little bit about not the secret sauce of how you got that sizable trading line to where it was in the first two quarters, but just more so on some of the investments you made.
And a couple of quarters ago, there was some discussion on strategically investing in the U.S., even in Europe, how that's sort of evolving on a go-forward basis.
Okay. So there's a lot of things. So first of all, the drivers. Let's think about the first half of the year. Structured products, securities lending, tons of opportunity there as well, especially in the first quarter. It was a very active quarter also in trading. So when you see large movements, you see a lot of volume. And we have a large trading business, market-making business, where we make markets on a lot of products. And so more volume, better spreads, those things. So you've got the benefits of higher vol. So we generally tend to be long vol given the nature of our business.
And we benefit from higher volume. So those were the drivers in the first half. Now, what you saw in Q3 is a significant shift in market sentiment. I'd like to point out in Q2, the realized vol in the markets was above 30%.
And it was just above 10% in Q3. So we went through that big shift. And we were still able to deliver year-over-year growth in our trading businesses. Volumes were down. Obviously, sequentially, we had to manage that drop in volatility, drop in volumes. And we don't benefit as much from markets that rally very strongly. So what did you see in Q3? You saw very good markets. So you would say, well, Laurent, that should be good for your structured product business. You're issuing more products. Yes. So we did do that. But we had also a big drop in volatility and in volumes that counterbalanced that.
You also saw a big rally in credit. So we don't hold inventories in credit. We don't hold portfolios in bonds. So we don't have that kind of philosophy. We're a trading house. We focus on areas that we know well.
We know how to allocate capital. We understand the risk. We control pricing. And we have skill and experience that allows us to take advantage of market stress. Because this is what you say. So there's a market stress. Go back to March 2020. One of the worst market stress we've seen in the past 10 years. We had a blowout quarter. So we want to run a business where we take advantage of certain products that we know we're good at. There's demand for it. And we're going to position ourselves such that if there's a spike in volatility and volumes, we're going to be there and we're going to take advantage of it.
And so we want to take that expertise, expand certain products, go into various markets like the U.S., Europe, but stick to what we know. Don't fall for FOMO. Oh, the new thing. No.
So for instance, structured products, we sell a lot more structured products now in the U.S. than in Canada versus 10 years ago. We're starting to sell more in Europe as well. So as long as we know at the end of the day how we're making money on a daily basis and how we control risk on a daily basis, we're going to keep growing our franchises like that. So organic growth has been also, I think, very important. Étienne, who leads our Financial Markets business, will talk often about technology, how it has been a big driver as well.
I tend to think people first, but definitely in-house technology, we've been investing in our systems for structured products for trading since the late 1990s and early 2000s, and that has allowed us to scale all of these businesses.
Back then, we didn't have the balance sheet to compete, but we had people in technology. Through time, we're able to build expertise. That's sort of maybe the secret sauce. I don't know if it's a secret sauce or not, but it's what we focus on.
Okay. Thanks for that color. It's very helpful. So with a strong capital ratio, you have the excess capital, you are still investing in financial markets on a go-forward. And it is that strategical sort of surgical approach, let's call it. So you could continue to move the needle feasibly for the foreseeable future.
Yes. We want to see all of our businesses grow. Wealth is an important part as well of our revenue mix, and Financial Markets is very tied to wealth as well, so you listen to what I just said, so what do we do? Structured products. A lot of the products are ETF, all that. They're wealth products, so a lot of the philosophy in Financial Markets is what our retail clients and institutional clients are going to buy and trade, so that's part of it, so growing our wealth business is important for our Financial Markets business.
Okay. Switching over to P&C Banking and the mortgage business, you alluded to the Montreal leverage level being a lot lower as a comparable to Toronto, quite a bit lower. So I guess at the same time, you counterbalance it a little bit with less immigration coming into Quebec versus Ontario.
That's part of it. Yep.
But how do you see the mortgage business evolving in Quebec? And should it be structurally better and a better growth story versus.
It was clearly, and you saw it in our numbers, 80% of our originations were in Quebec in Q3 and very healthy. We saw most people renewed at lower rates. Sticky clients, a lot of 95% renewed with us. That's a retention rate has been very high. Better pricing as well. We're observing over the years. The margins are slightly better. And 80% of our book has been repriced since the beginning of restrictive monetary policy. All of our variable-rate mortgage owners all have lower rates than the peak of Q3 2023. I think the average payment is down CAD 300 per month right now on variable-rate mortgages.
And fixed-rate mortgages also are originating at slightly lower rates. And delinquencies are still relatively low. Very healthy, for sure. House prices, definitely a big factor in our performance here. Our overexposure to Quebec is a good thing in this cycle.
Yeah. What about the other parts of the business? Or maybe touch a bit on the cost side on the optimization of the branch channel. Every bank seems to be focused on optimizing as opposed to not necessarily cutting branches, but doing it more efficiently. How does National stack up there?
So again, we're going to continue to focus also on optimizing all of our businesses. But the bank branches are for sure a focus. We've been doing it for quite some time, reducing footprint. And I forget the exact amount, but we have several branches that are cashless now. So that means there are ATMs and services, but we don't have the transactional counter per se anymore. So that will keep going. And with CWB, we have an opportunity to be able to even accelerate those investments.
Again, and that's part of what I mentioned earlier, where I do believe that retail banking, we're going to go through a major disruption over the next five years. And so that has to be part of the analysis as well.
Okay. And then I can't not ask a question about credit. In terms of the outlook, obviously a much better quarter on credit in Q3. Any thoughts there? And then maybe you can include a bit of a touchpoint on ABA Bank. I know investors are still a little bit, not to say overly concerned, but there's still some lingering concerns about the GILs. And they don't seem to have peaked out just yet.
So for credit, look, at the beginning of the year, we moved to goalposts because we saw what was coming. And we knew that impairments, we're going to be a little bit higher in 2025. We entered a credit cycle. I think we're riding the top of the wave of the credit cycle at this point in time. We could see some lumpiness, but I think we've guided well to where we think we're going to end up the year. And we're very happy with the performance. I think it's during lots of learning through COVID and working with our clients on going through a credit cycle, earlier intervention and working.
Our credit teams are not just passive anymore, just waiting for something to happen. They're very involved in portfolio reviews, industry reviews, and remediation solutions for our clients is something that we do very proactively.
So we're not out of the woods yet, I think, in terms of being in the credit cycle. And that's why we're going to remain prudent. We built a seven basis point performing provision this quarter. Part of it was the growth of the balance sheet. But again, I don't think we're going up in terms of PCLs from here, but I think we're going to be riding this level for a period of time. In terms of ABA, I think the one thing I would say, we've been through a cycle. I have no concerns overall with the level of impaired. I am not happy with the resolution process.
There's nothing I can do about it because it is what it is. It is a core process that is much slower than here in Canada. Having said that, every file that has gone through the process has been resolved.
There is no cause for concern. It's been resolved. It is the rule of law. That's the part that is, it's hard for me to say we're going to clean it up and it's going to be done within two years. It is a different market, a different process, and it's a much longer process. I have, again, very comfortable given the secured nature of our book, very low LTVs, our level of allowances as well in this book. With the reserves we have, we could sustain, and the level of our LTV, we could sustain a significant drop in real estate prices and would be fine and no losses, no additional losses.
Okay. Great. And maybe just some final words if you want to share any key messages for investors in the room and online.
Sure, thank you very much for your support. Our next couple of months for us is CWB migration. We're going to be very busy. Our teams are very busy and work hard at this every day. You can count on us for making sure that we get back to peer-leading ROE in the next couple of years. That's it.
Thank you very much for joining us, Laurent. Thanks for the insights. Super happy to.
It was great.
Thank you. Thanks very much. It was great.
Thank you. Awesome.
With that, I'd like to introduce our next.