Perhaps we could start the next session here. I have Laurent Ferreira of National Bank. Before we begin, I just want to remind everybody that his 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 National Bank of Canada.
That's really well said.
Thank you. Had a lot of years of practice with this conference in saying that. I can almost recite it from memory. Thank you for joining me today on what.
Thank you. Thank you for having me.
Seems to be not a bad weather day, so that's great. I do wanna spend some time with everybody talking about capital-
Okay
given the recent announcements with the Domestic Stability Buffer and the changes therein. I think, in your case, your capital ratio is on a relatively high area. All the same, I just wanna explore what it might mean for National Bank. You know, buffer's wider now, potentially all the way up to 4. Maybe you can give us a little bit of a thought process around how you view the changes that have come and what, if anything, will change for you in the way you manage your capital base.
Absolutely, and be a pleasure. Short answer to your question is OSFI's announcement doesn't really change our capital plans or the approach we have. We really like our business mix right now, the capital we have allocated to our various businesses. We obviously like the performance, we've had, you know, over the years, and also in 2022. You know, our goals don't change, the priorities don't change. Maintain strong capital levels. We're gonna continue to invest in our business. You know, focus on organic growth is definitely a formula that has worked for us. Return capital to shareholders, right, through a sustainable dividend growth and share buyback. That doesn't really change our plans at this point in time.
Does it mean that I mean, as we stand here today, you do sit at a higher level of Common Equity Tier 1 versus your peers? Is that what you're essentially telling me, that you're gonna keep running at a higher ratio than peers? Does it mean that, you know, you'll have the same hurdle rate for future acquisitions? Is it really that nothing changes, or is it just that you have an opportunity here to maybe let the others sort of catch up to your high capital ratio and not necessarily that you'll keep running at such a wide buffer?
Good question. A couple parts here. DSB at 3, and the possibility, let's call it that, of it going to 4, we're very comfortable operating above 12.
Okay.
That's where we stand at this point in time. As well, with the economic uncertainty, I think you heard us last year, you know, we said we did put a pause on buybacks. I think it's just, I would say, a prudent thing to do at this point in time, you know, to operate above 12. Now, having said that, call it whatever you want, prudence, bit of luck, we are, we think, at a really good place, to keep growing our business, to keep growing the platform and keep investing, you know, in the business, in the businesses that are performing in National Bank. We're gonna focus on making sure that, you know, our diversified business mix, which has been really performing, continues. You know, we continue to allocate to these various businesses.
Yeah, I think you're right. Look, we do have a position right now that, you know, we're not looking to save capital. We're not looking to rebuild capital. We're actually looking to deploy capital. I think you're touching on a good point there. I think we're in a good spot.
Okay. moving on to the other topic of the day. I was gonna try and say that in French, but my French is not that good, so apologies.
Le sujet du jour.
Here we go. Maybe talk a little bit about the mortgage situation.
Yes.
A lot of concern out there that we've got, very big mortgage payments on the horizon. Your book's a little different, a lot more in Quebec. Maybe just give us a bit of an overview of your situation, where you sit.
Absolutely
Can you give us some details around the size of where you think potential issues. We got a little bit of talk of that this morning with the other CEOs. Can you give us maybe a sizing-
Sure
... of the part of the portfolio that may pose some risks with higher interest rates?
Just at a very high level, though, right now, not overly concerned with defaults. Very comfortable with our position. You know, obviously, clients are experiencing increases in payment, so we're watching that closely. We're very active, you know, in engaging with them and making sure that they're gonna be able to absorb the increases in interest rate. Our book, roughly CAD 60 billion. A third of it is variable rate mortgages. That's kind of a, you know, a good indicator because we have seen increases in payments in that product. Our variable rate mortgages is a fully variable rate mortgage product that, you know, it doesn't, it doesn't have any trigger rates.
That has been, I would say a good data point for us, to observe, you know, can client absorb. We've seen increases in terms of payments above 30% in that portion. That's 1/3 of our book. When we look at the fixed rate mortgages, 2/3 of our book, right now about slightly over 10% of our fixed rate mortgages are due for renewal in the next 12 months. If you look at that cohort, we have the uninsured portion, the average LTV is below 40, and 3/4 of these clients have an amortization period that's below 25 years.
When we look at what's going to happen in the next year, we're quite comfortable because we have our clients of variable rate mortgage clients that have seen the increases already. You know, we've seen a bit of an increase in delinquencies in the past quarter, but it's still below fixed rate mortgages delinquencies and below pre-pandemic. You know, we are observing the evolution of our fixed rate mortgage payment, and we're gonna see that in the next while. Overall, when we look at the performance of our portfolio as well as, you know, the ability of our clients to sustain higher rates, it's quite good.
Maybe just to dig into that a little bit more because you do have a cohort of mortgages or customers that are facing higher payments. Can you give us a little bit of insight into, they've had a fairly large increase in their monthly payment. Can you give us some insights into how fast that's depleted maybe the excess deposits that have been built up during the pandemic? Is that the roadmap that you can use for the fixed rate mortgages that are coming due this year and next?
Liquidity has come down a bit, still above pre-pandemic, so that cushion is still there. You know, if you... Again, I'll go back to what we've observed, and I think that's a really good indication. One-third of our book payments gone up. 80% of that comes from variable rate mortgages. If we look at that cohort, their liquidity is still higher versus pre-pandemic. They're into their first payments, so that erode quick, faster, obviously, but they're gonna be able to sustain that. I think at this point in time, you know, overall the health is still. It's pretty robust.
What would a stress test tell us? I mean, what if rates keep going higher? I mean, how much can rates go higher, and at what point do you think this could pose a problem for the mortgage book?
I wouldn't want them to go much higher than they are today. I mean, we are anticipating, I think, more increases in interest rates over the next couple of months. I think we're all hoping that we're gonna see peak rates midyear. I think what's important, you know, the labor market is, I think, a very important component in the risk analysis here. As long as we have a very tight and healthy labor market, you know, this is not just, you know, interest rate or house prices, it's really a question of managing cash flow through a period of time through a stress. I think, I think... Again, I'll go back. We're comfortable with our position, comfortable with what we're seeing.
Do I wanna see an extra 400 basis point of increases? Absolutely not. We all hope that rates are gonna peak by midyear.
Maybe just the last couple of questions on this topic, maybe we can just dive into a little bit about some of the other things that we see around the edges with respect to the mortgage industry in Canada. I mean, a few things that have been thrown at me is there's too many investors now in residential real estate, and the subprime component of mortgages has grown in proportion to what it was just 10 years ago. Are these things that you see? First of all, do you see that in.
Yes.
Clearly, I don't think you have any subprime in your mortgage book, but-
Not subprime, but investors, yes.
What can you tell us about those two issues, and do they concern you?
The investors, I mean, they're part of the Canadian landscape. If you look at our book, again, CAD 60 billion, I think it's roughly slightly above 10% the amount of investors that we have. Typically, the investors have a higher credit score at origination, higher saving, and the delinquency that we have observed in the past has always been lower with investors than non-investors. I mean, it's part of the Canadian landscape. Is it a problem? I don't think so. We're very comfortable in terms of the risk profile of these clients and our position in our book. You know, overall, is it a problem for the Canadian real estate market?
I think it does put some pressure on housing affordability and rents, I think, you know, governments are definitely aware of that and addressing it in some way. In terms of subprime, it's 15% of the Canadian market, alternative lenders. I think we are keeping an eye on them just because they are on the riskier spectrum. I don't have any strong views or do I. You know, I don't see any issues at this point in time. Again, you know, I think what's more important right now is to make sure that our labor market, and that's the one thing that we're gonna keep an eye on, is that we have a strong labor market to go through this uncertainty.
Maybe we can use that as a segue into the next set of questions, which is credit and credit quality and Provisions for Credit Losses. I do wanna touch on Provisions for Credit Losses as well as existing reserves. I'm gonna maybe separate the two into two sort of different buckets. You know, I realize you're not the chief risk officer, so I won't go into too much detail.
I'll do my best.
You know, you are the CEO and you could set a tone from the top. One of the things that we notice when we look at how each bank sets reserves, I'll contrast National with having a base case scenario that doesn't look that stretched. You talked about unemployment. I think the unemployment number that you use is very modestly higher-
Mm-hmm.
-in 2023. Is this to say that, you know, really don't see a concern in the marketplace? I don't even think you have a very big drop in house prices, I thought that the reserve build you had last quarter was relatively modest. Can you talk about how you see it through your lens as a CEO, how well reserved you are, what statistics you look at?
Mm-hmm.
tell Darko why you are well reserved.
Good. I'll tell you. Maybe just very high level in terms of the approach, the philosophy, and you know us, very proactive and prudent in general. You go back in time, 2016, we saw, you know, in the oil and gas sector a deterioration. We built up allowances very quickly. We did the same thing in 2020 at the beginning of the pandemic. Very proactive. We also have management overlays. You know, we have a stagflation scenario that we put in last year. I think in terms of the approach, very proactive when we see a negative situation and, you know, general, I think, prudent in terms of building up, but also releasing. In terms of credit quality, I think the most important thing is cycles. All right?
I think cycles are very important. When you look at our growth, our loan growth pre-pandemic, right, we were below peers by 200 basis points approximately across the commercial spectrum. Why? We saw the end of the cycle. We felt a little bit concerned in you know, certain areas. We hit pandemic, we saw opportunities, right? We build up there. You saw also us put the brakes on credit growth last year, right? Well, we're seeing interest rate increases. There's uncertainty on how everything's going to unfold. You know, that's a great asset by the way to have the ability to turn the switch on and off in terms of deploying capital when you know, there's uncertainty.
You know that, what you buy today is not gonna perform as well as what you would buy in 6 months from now, I think is a great asset to have and a tool. You, you have to look at cycles, and you have to adjust quickly. On your business, you know, you put caps. Now in terms of our provisions, overall at this point, our total allowances are approximately 50% above pre-pandemic level at this point in time, and our performing allowances are 6.4 times our last month, last 12-month, impaired, you know, PCLs. I think we're really well provisioned. We still have a very, you know, proactive, prudent approach and a culture of risk management. I do think we're in a really good spot.
You know, you heard my comments overall on our position in terms of our mortgage book. We feel very comfortable overall with the risk profile, and we also feel very comfortable with the ability of our clients to keep paying, right, and to sustain higher payments.
A couple follow-ons there, on that. When you say it's 6.4 times the last 12 months of losses, the last 12 months losses are like-
Very low.
the lowest we've ever seen.
Mm-hmm.
So-
Okay, we're approximately 3 times pre-pandemic, last 12 months pre-pandemic. Just as a. You're absolutely right.
three times. I mean, I have to go back now and check the numbers.
Yeah, me too.
We're not gonna be up here and splitting hairs on numbers. I think the next sort of logical walkthrough on that would be, well, you're expecting PCLs to rise.
Yes.
You've given us a range, a fairly wide range as you normally do, and I think you know, 15-25 basis points. I think based on that, looking at consensus numbers, it looks like your earnings per share growth really can't happen this year, if we use sort of the midpoint of the range. Is there anything you can help us with? It's a wide range. Is it more likely that it comes in this year at the lower end of the range, or is there any thoughts on how you could maybe overcome this normalization of credit and actually produce EPS growth this year?
We did give the range of 15 to 25.
Yeah.
last quarter for impaired. We expect them to be at the lower end of that range. That's what we expect. Now, in terms of, you know, factors, for, you know, EPS, I think the most important one is gonna be pre-tax, pre-provision growth for 2023. I think the one big factor that we have at this point in time is our capital position. I think that's gonna give us the opportunity to keep growing our franchise and deploy capital organically. As we stand right now, as I said, impaired low end of the range, we see growth opportunities in all of our businesses for 2023.
Maybe that's another way to segue into the top line, which is net interest income, where we think about net interest margins and sort of where we sit today. We actually saw some expansion. Are we at peak margins for National? Do you think we can push on that? Not only are you potentially grabbing more organic loan growth while peers maybe not so much, and is there an opportunity to further expand the margin from here?
A good question. You know, NIMS definitely are the story of 2022 rate increases, which was the exact reverse of what happened in 2021 when, you know, we had tons of liquidity, large amount of deposits and rates that were really low. You had that effect in 22. At this point in time, when we look at 23, first half, we still see NIM expansion. It's a little bit more difficult at this point in time to predict the second half, depending on monetary policy, depending obviously on deposit trajectory, loan growth versus deposit growth. At this point in time, a little bit more difficult to predict. What we are seeing is definitely expansion overall for 2023, both NII and NIMS.
Is NII expansion maybe the biggest factor in your pre-tax, pre-provision growth? Can it be like low double digit following on from last year? Or would you guide to maybe a slightly below double-digit growth rate for net interest income as you see it from the top?
It's... Look, rates have had a huge impact in 2022.
Yeah.
We're gonna see that impact transport into 2023. It is a part of, obviously, our NII expansion in 2023. Having said that, it's, you know, rates and NIMS are part of where we see growth for 2023. If you look back, our NII growth in 2020 was 18%.
Mm-hmm.
Our NII growth in 2021 was 11%. 2022 was 24%.
Yeah.
Now big, big hit, big, big jump on rates. 2020 and 2021, rates were not a factor. Yes, rates and NIMS are part of NII, but, you know, even if rates start falling, you know, they could have an impact on other businesses. It could be good for loan growth, it could be good for our wealth and financial business, financial market business, you know, as, you know, better for valuation in general. You know, half of our revenues come from wealth and financial markets. You, NII is. One component is rate. Definitely it was a boost for 2022. That stays into 2023. I don't see falling rates as a potential impediment for us to keep growing NII in 2023 or 2024.
Where, I mean, when we think about you being in a position of strong capital and deploying it organically, what's your number 1 place for deploying that capital today in an organic fashion?
All our businesses. We see definitely opportunities in all of our businesses. In terms of where, strategically, we're putting more emphasis right now, Canada, commercial, wealth.
Okay. That's very helpful. Thank you for that. I'm gonna turn to some of the questions we're getting from the audience here. I do see some. Okay. The first question that's been upvoted is, how has the free trades on direct investing platform worked out? Are you surprised that others have not followed suit?
It worked out really well. I mean, the... It took longer because trading revenues, which, you know, we understood, you know, the math very quickly that, you know, those were gone, but the volumes also dropped significantly in 2022.
Right.
given the markets. Having said that, it was a great platform to acquire clients. This is what the strategy was, and to build up actually also cash balances and deposits because, you know, people transfer, when they open account, they transfer money. It's worked out really well for us. You know, we essentially broke even in the first year.
What's interesting about that is, you know, I don't have feet on the ground in Quebec, I live here in Toronto, but how aggressively have you marketed that as a tool?
Not as aggressively as. We didn't market it aggressively. We did, you know, some marketing. That's. We didn't have an app.
Okay.
The app just came out in December. If anyone is interested, you can download it. Just go on the App Store. It's there for you to download. That's another thing. We're gonna follow up, you know, and market. What's been really interesting for us, and we're in Quebec. So based in Quebec. We're across Canada, but in terms of, you know, our connection to retail market, it's not as strong. We are in trading, we are servicing, you know, in French, English, and Cantonese and Mandarin. We are, you know, with every account that we've opened outside of Quebec, over 50% of those clients have also opened a bank account with us.
in terms of a door, an entry to National Bank, it's been a phenomenal pipeline for us. Yeah.
Okay. Another question from the audience, it sort of dovetails into what I wanted to ask for as well. The question is: how does the pipeline look for capital markets and expectation for trading activity? I'd love to hear your comments on this as well. I probably have some follow-ups based upon your answer. Please.
Very good performance in Capital Markets for 2022. We still see some growth in 2023, and we guided towards that in our call at Q4. Equity is gonna be a tough act to follow. Extremely strong year in 2022. We do see, I think a better year overall in equity and debt issuance in 2023 versus 2022. We do see also a better balance across all of our businesses. Our FIC business has really picked up, specifically in the second half of last year, and we're seeing sort of that trend again this year. We're coming off a very strong year. We're coming off very 2 really strong years as well in Capital Markets.
We, we do see some potential for growth at a lower pace, though, in 2023. We do see revenue growth above 2022 in our financial markets business. Pipeline is strong. We like the space that we're in. We like, you know, Canadian platform, Canadian clients. No, we're not gonna expand in the U.S. We wouldn't compete in the U.S. We're, you know, we like the Canadian platform and niche player where we can compete. Businesses we understand. ROE accretive. Very focused.
Maybe just, thinking about, you know, your answer to previous question, which was you've got capital, you want to deploy it across all businesses. Now with the DSB being higher, potentially even moving even higher, it might create, I don't know, tension for capital. You know, one of the things that we've always thought about with respect to National Bank is your cap markets business is relatively big.
Mm-hmm.
Is it going to be possibly the one?
That I reduce?
That... Well, you reduce or hold back on, or is nothing absolutely changed going forward?
It has-
Especially in the context of a higher DSB.
Right. Capital markets has always been a place where we could be more agile in terms of capital deployment. Let's look at an example. If Credigy calls us and says, "Look at the opportunities we have here. We need to deploy capital. These are gonna be fantastic for us." Well, the first place I'm knocking on is capital markets. It's always been a great, you know, relationship and approach to managing the growth of our bank and being as agile as possible in deploying capital. Yes, but look, we're in a really good spot in terms of capital. I don't really see any business right now in financial market that needs a rethink because of OSFI's announcement.
What about the Basel IV reforms? Are they actually? I mean, we know there's going to be some changes coming for the cap markets business. It's still not.
It's very small. I think it-
Okay.
There's nothing in trading. A little bit in the corporate market book, but the reforms, though I think it spans over a 3, 4-year period, it's a positive impact in this year. With our capital position at this point and capital or, you know, organic capital that we're gonna be able to generate a capital generation over the next 4 years, it's very manageable.
Okay.
Yes.
Great. Another question from the audience here. In the current environment... The question is essentially around Credigy and, you know, do you see any challenges in the current environment for Credigy? I think you may have touched on that, but maybe speak about the longer term, strategic implications for Credigy as well.
Challenges were rates in 2022. I think you saw an impact of approximately $50 million in terms of mark to market because of assets at fair value. That was a bit of a challenge. Higher cost of funding as well was a bit of a challenge for Credigy, we saw that. They're all in the numbers. They're not something that's... Those are the two shorter term. In terms of opportunities, we're starting to see really good opportunity, especially as liquidity is drying up-
Mm-hmm.
In the, in the U.S. We're seeing, just as an example, you know, regional banks where they're losing their liquidity faster, say, than JP Morgan is. They, they are active in selling their assets. This is a fantastic opportunity. What we're looking at is still consumer finance. The assets that we're mainly looking at right now are mortgages, LTV below 50, very high RAROC, high ROE. So we're going to, I think, slowly build up as we see opportunities come our position. You know, I think we've deployed we have about CAD 7 billion deployed at Credigy. We think we're gonna get that to CAD 8.5 billion-CAD 9 billion by the end of this year.
Rates going up doesn't change that view or like volatility interest rates 'cause it moves a challenge for funding. That's not a challenge.
I think there We could still see some volatility. I don't think it's gonna be as big as what we saw in 2022.
Okay.
All right.
In the longer term, where do you see Credigy going?
In the longer term, we're gonna keep doing exactly what we're doing. The one thing we've said to them is, before, right, so let's go back 15 years. It was distress only.
Mm-hmm.
It's all distress, performing, funding, asset purchases. They were in the US and other countries. Now they're only in the US, but they're also looking at Canada. They're looking at essentially North America. Longer term, I want them to look at really the spectrum of consumer finance for North America. That's my approach for them.
Okay, great. We're coming up to the point where we ask you for the final word. Please, if you could give us the key message that you want investors and shareholders, to walk away with today, please.
Great. Thank you. Well, thank you very much. Thank you for your support. You know, National Bank 2023, as I've mentioned before, our objective is growth in 2023. Our guidance towards PTPP growth is mid-to-high single digit. We're gonna keep our approach towards cost management. Again, our objective on operating leverage is positive for the year. Longer term, you should expect, you know, discipline, constant discipline in terms of capital deployment, risk management, cost management, focused on growth, performance and ROE focus also. That's it.
Okay. With that, we can end our session. Thank you very much, Laurent.
Thank you. Pleasure. Thank you.