Good afternoon, ladies and gentlemen, and welcome to the National Bank of Canada's fourth quarter results conference call. I would now like to turn the meeting over to Ms. Linda Boulanger, Senior Vice President of Investor Relations. Please go ahead, Ms. Boulanger.
Thank you, Operator. Good afternoon, everyone, and welcome to National Bank fourth quarter and full fiscal year 2020 presentation. Presenting this afternoon are Louis Vachon, President and CEO, Bill Bonell, Chief Risk Officer, and Ghislain Parent, Chief Financial Officer. Following our presentation, we will open the call for questions. Also joining us for the Q&A session are Stéphane Achard and Lucie Blanchet, Co-Heads of P&C Banking, Martin Gagnon, Head of Wealth Management, Laurent Ferreira and Denis Girouard, Co-Heads of Financial Markets, and Jean Dagenais, Senior VP Finance. Before we begin, I refer you to slide two of our presentation providing National Bank's caution regarding forward-looking statements. With that, let me now turn the call over to Louis Vachon.
Merci, Linda, and thank you, everyone, for joining us today. Before discussing our results, I would like to say a few words on the extraordinary circumstances the world is facing and in which we have operated in 2020. From the onset of the pandemic, our focus has been on the well-being of our employees, our clients, and our communities. Our mission of putting people first guided us in all our decisions. I am very proud of the way we adjusted. This would not have been possible without the strong engagement of our employees and the transformation we have achieved over the past five years. Our entrepreneurial culture and the agility of our organization are true comparative advantage. They have played a key role in our ability to adapt and perform well through unprecedented circumstances.
Earlier today, we reported strong results from the fourth quarter with EPS of CAD 1.69, excluding specified items, in line with the pre-pandemic levels. For the full fiscal year, our businesses performed very well with pre-tax pre-provision earnings up 9% compared to last year. Even after having set aside significant reserves over the last three quarters, we have maintained robust capital levels. We also generated an industry-leading return of 16%, return on equity of 16% for the year, which speaks to the resilience of our franchise and the sound diversification of our earnings stream. Returning capital to our shareholders remains a priority but consistent with all these guidelines. Buyback activities and dividend increases remain on pause. Earlier today, we declared a quarterly dividend of CAD 0.71 per share, no change from the previous quarter. Turning now to the performance of our business segments in fiscal 2020 and growth drivers going forward.
I am pleased with our performance in personal and commercial banking with pre-tax pre-provision earnings holding steady year-over-year. This reflects solid growth on both sides of the balance sheet offset by lower interest rates and client activity. Our performance translated into market share gains in key product categories, namely mortgages and deposits. We also saw some pickup in commercial activity in the fourth quarter. The depth of our relationships, the quality of our advice, and the commitment and agility of our teams proved to be key differentiators, enabling us to support clients throughout the pandemic. We were pleased to see a significant increase in client acquisition and satisfaction scores, which is strong testimony to the ability of our teams to provide the support and advice our clients need. The bank's digital transformation has been at the heart of our strategy over the past years.
Accordingly, we were ready to support a major uptick in digital adoption rates, which went up nearly 500 basis points among our core client base. In many ways, the pandemic has effectively accelerated our digital transformation. In 2021, we will continue to invest in our P&C franchise to support future growth. We will maintain our focus on client acquisition and priority segments, on offering proactive advice through both our sales force and digital channels, and on deepening relationships with clients through all business lines. Since the beginning of the crisis, the bank has been very proactive in helping businesses. In the context of the ongoing economic recovery, we recently created the National Bank SME Growth Fund in partnership with the Quebec government. I am pleased to announce that we have just completed the initial raise of CAD 200 million in capital.
The equity fund will complement the bank financing already offered to SME owners to help them with their transfer of ownership, growth, and acquisition plans, whether in Quebec or elsewhere in Canada. Our wealth management franchise delivered another strong performance. Our pre-tax pre-provision earnings up 10% for the year. This reflects solid transaction volumes and net sales more than offsetting lower interest rates. Our advice-first strategy is bearing fruit and resulted in a significant increase in our NPS scores this year. As we enter the new year in the context of persistent low interest rates, we remain confident we can generate future growth fueled by our active recruiting strategy, enhanced cross-selling initiatives with P&C, and market growth. We are pleased with the strategic positioning of our wealth management franchise and the diversification it brings to the bank.
In fiscal 2020, it represented 23% of revenues and generated superior return on equity. For its part, financial markets generated record revenues and pre-tax pre-provision growth of 25% for fiscal 2020. Our global markets franchise were well positioned going through the crisis and delivered a particularly strong performance. Our corporate and investment banking franchise also performed well, driven by M&A and government debt issuance. Looking forward, our financial markets business remains well positioned to continue to deliver growth, albeit at a slower pace against a record performance this year. Moving to our international segment, ABA Bank delivered solid results in fiscal 2020. Net income was up 50% from the prior year, driven by strong growth on both sides of the balance sheet. ABA continues to gain market share in Cambodia and is well positioned to benefit from the economic recovery anticipated in 2021.
Credigy also performed well in the past year in the context of a challenging environment. We saw strong momentum in the fourth quarter with net income up nearly 40% sequentially and 84% over last year, driven by higher revenues and lower PCLs. Credigy's strong P&L performance and stable balance sheet reflect both asset quality and team's discipline. This morning, we announced the acquisition of the remaining 20% in Credigy, increasing our stake to 100%. For fiscal year 2020, the additional stake acquired in Credigy would have increased National Bank diluted EPS by CAD 0.07. The senior members of Credigy's management team reiterated their personal commitment to leading the next stage of Credigy's growth strategy, as well as their confidence in the future prospects for the company.
Credigy has greatly exceeded our returns expectations since our initial investment in 2006, and we continue to see attractive growth potential in the future. Overall, we are very satisfied with the performance of our international segment, which continues to be well positioned to deliver strong growth next year. Looking ahead, while there continues to be uncertainty around the trajectory of the economic recovery, economic activity has recovered from its lows. In the province of Quebec, second wave lockdown restrictions have been more targeted, and most sectors remain open. Overall, and given recent developments regarding the availability of an effective vaccine in Canada next year, we expect a gradual improvement of the Canadian and Quebec economy in 2021. Looking back at 2020, I am proud of the bank's overall performance.
In a year marked by unprecedented uncertainty and volatility, the bank managed to meet four out of its five medium-term objectives. The strong performance has confirmed that we have made the right strategic choices in terms of risk management, capital allocation, and business mix. With four strong pillars, we are well positioned to maintain a sustainable pace of growth, and we are reiterating our medium-term objectives for 2021. In closing, I wish to sincerely thank our employees for their exceptional contribution to the success of the bank over the past year. Everyone across our organization deserves recognition for their dedication and flexibility. I would also like to thank our clients and shareholders for their confidence in the bank as we continue to build an agile bank well positioned to grow and create sustainable value to the benefit of all stakeholders.
On that, I will now turn the call over to Bill Bonnell.
Merci, Louis, and good afternoon, everyone. I'll begin on slide eight with a look back on the credit performance for the full year of 2020. We entered the crisis on solid footing with strong credit quality and a defensive positioning. Our resilient geographic footprint and product mix helped to deliver an impaired PCL ratio of just 23 basis points last year. During the year, considering the uncertain macroeconomic outlook, we proactively built prudent allowances, taking a total of 30 basis points of performing provisions, and we finished the year with 53 basis points of total provisions for credit losses. In the fourth quarter, impaired PCLs were CAD 82 million, a decline of CAD 6 million from last quarter, as wholesale and international stage three provisions declined and retail stage three provisions remained stable at low levels.
Provisions on performing loans were CAD 20 million, or five basis points, as we continued to build our performing allowances. Our updated macroeconomic scenarios are presented in Appendix 17. As you can see, the pessimistic case was adjusted to depict a scenario of unemployment rates remaining higher for longer, and the weight of this pessimistic scenario was increased. Even with those changes, retail performing PCLs were negative CAD 9 million, reflecting the continued strong performance in those portfolios. Non-retail performing provisions were CAD 27 million, primarily reflecting the scenario change and some migration from stage two to stage three. Our international performing provision was CAD 2 million, driven primarily by portfolio growth at ABA. Looking ahead to next year, significant uncertainty remains about the path and the speed of the economic recovery. We expect impaired provisions to increase throughout the year.
In retail portfolios, the exceptional recent performance should normalize, and impaired should begin to more closely follow employment trends. Non-retail impaired provisions should also increase during the year and, as you know, can be lumpy from quarter-to-quarter . Performing provisions should largely be driven by changes to macro scenarios, portfolio growth, and migration. Combining our view of these factors and our portfolio mix across geographies, products, and sectors, and considering the level of allowances we've already built, we're targeting a range in total PCLs of 25-35 basis points in 2021. Turning to slide nine, our allowances for credit losses grew to more than CAD 1.3 billion in the fourth quarter, which is 75% higher than at the beginning of the pandemic. Performing allowances reached almost CAD 1.1 billion and 80% increase since Q1. The non-performing allowances as a percentage of gross impaired loans were stable at 43%.
With all the information we have today, we are confident that we have a prudent level of allowances. On slide 10, we provide some key metrics to help assess the adequacy of our provisioning. Our strong performing ACL coverage was stable at 2.8 times, and our total allowance coverage of net charge-offs increased to 5.4 times. Absent a significant deterioration in our forward-looking scenarios, I expect that we're close to the peak in these coverage ratios. As impaired provisions increase over the next year and some stage two allowances migrate to stage three, I would expect these coverage ratios to be lower at the end of 2021. Turning to slide 11, our gross impaired loan ratio was stable at 49 basis points. Formations in retail and corporate banking declined, while formations in commercial banking increased due primarily to new formations in oil and gas and wholesale trade sectors.
On slide 12, you'll find an update on our loans under deferral. As expected, deferral balances declined significantly, down by 81% in retail lending and by 74% in non-retail lending on a quarter-over-quarter basis. Deferrals in REZL now represent just 0.9% of that portfolio, and more than 40% of those are insured. Our payment experience to date has been positive, with 98% of expired REZL deferrals and 99% of expired non-retail deferrals having restarted regular payments. The trend we saw last quarter of performance varying significantly across provinces continued, with Quebec consumers showing the best payment rates. We will continue to work closely with those impacted clients to provide support through this difficult period. Turning to slide 13, the mix in our Canadian REZL portfolio remained stable, with 38% being insured and 55% being in the province of Quebec.
Uninsured mortgages and HELOCs for condos represented 7.4% of the total portfolio, with the majority being in Quebec and with an average LTV of 59%. In the appendices, you'll find further information on our loan portfolio, including details on our exposure to COVID-impacted sectors, which remain modest and manageable. In conclusion, while there have been positive signs of ongoing improvement in employment and GDP, as well as recent optimistic news about vaccines, there remains much uncertainty to the path and speed of the economic recovery. We have been pleased with the performance of loan portfolios this year, but recognize that there is a long road ahead to return to pre-pandemic economic conditions. Given our portfolio's geographic, product, and sector mix, as well as our prudent level of provisioning, we remain very confident that we're well positioned to continue to support our clients throughout this period.
On that, I will turn it over to Ghislain.
Thank you, Bill, and good afternoon, everyone. Turning to page 15, we ended the fiscal 2020 with solid results in the fourth quarter, capping off another strong year for National Bank. Revenues were up 7% for the year, and we delivered solid operating leverage of 1.6%, demonstrating the resilience and diversification of our business mix. We were also very pleased with the positive year-over-year revenue and pre-tax pre-provision growth in the fourth quarter. The higher corporate expenses were linked to a year-end variable compensation adjustment associated with higher revenues, a one-off payment to a supplier, costs related to the pandemic, and higher investments in brand and technology. Despite the pandemic, we continued to move forward with our transformation in 2020 as we adapt to the changing needs of our customers and reinforce our culture of change and operational agility.
In the fourth quarter, we took further measures to address the evolving needs of the bank as part of our ongoing transformation. First, we reassigned employees to fill vacant positions based on their professional skills and reduced positions considered redundant in our current operating environment. This will allow us to limit headcount inflation in fiscal 2021. It resulted in CAD 48 million of severance costs. As a second measure, we also wrote off CAD 71 million in technology assets no longer useful to the bank's business. Both items were reported as special items in the fourth quarter results as they were related to our transformation and will result in ongoing operational efficiencies. These measures are expected to generate pre-tax savings of approximately CAD 43 million in fiscal 2021, or CAD 50 million on a fully annualized basis. The entire management team remains highly committed to maintaining our long-standing disciplined approach to cost management.
We also remain fully committed to the transformation of the bank as we continue to invest in our business to support the bank's sustainable growth. In fiscal 2021, our main focus will be on enhancing client experience, supporting new business initiatives, and simplifying our systems and processes. In the current context, we are confident that we can achieve positive pre-tax pre-provision earnings growth in fiscal 2021. Our scenario is also subject. Positive operating leverage is achievable in 2021, depending on the level of revenue growth. The team is committed to achieving good revenue growth despite the context of significant economic uncertainty. The first part of 2021 will provide more insight. Now turning to capital on page 16, we ended the fourth quarter with a strong CET1 ratio of 11.8%, a 35 basis points from last quarter.
Growth in credit risk-weighted assets was offset by a reduction in market risk from lower VAR, resulting in flat risk-weighted assets quarter- over- quarter. In the quarter, our CET1 ratio was negatively impacted by 20 basis points due to credit risk-weighted assets as a result of the combined effect of two items. First, continued asset growth in each of our business segments, which reduced CET1 by 10 basis points. Second, net negative migration reduced CET1 by 10 basis points, mainly driven by the re-rating of wholesale borrowers in COVID-impacted industries, partly offset by improved credit scores from retail clients. In fiscal 2021, the regulatory scaler for ECL relief will decrease from 70% - 50%. Based on our current expectations, we anticipate the change will have a negative impact of 7 basis points on our CET1 ratio in the first quarter of fiscal 2021.
Now turning to page 17, our LCR remains strong at 161%, with continued growth in deposits in the fourth quarter. Our total capital ratio stood at a solid 16% at the end of the fourth quarter. In conclusion, the bank handled fiscal 2020 in a solid position. With a strong balance sheet, significant reserves, and diversified revenue growth levers, our franchise is well positioned to generate attractive growth in 2021. With that, I'll turn the call back to the operator for the Q&A.
Thank you. We'll now take questions from the telephone line. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your device's keypad. If at any time you wish to cancel your question, please press the pound sign.
Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from John Aiken from Barclays.
Please go ahead. Good afternoon. A couple of questions on Credigy, if I may. Louis, in terms of the transaction, first off, is there any contracts being put in place to make sure that the current management team stays on for an extended period of time? And secondly, can we assume that the transaction is being funded by cash and not issuance of additional shares?
So on the second part, it is funded by cash. So there's no issuance of shares. And on the first part, your question, the team, I think, remains the senior management team remains very committed.
They have committed to us and to their colleagues today that they are staying on for many more years. They already have incentive plans in place. But as you know, we've been working with these guys now for 14 years. And from everything we see, they remain fully committed to the business going forward. So we don't have any concern, John, on that particular part for Credigy going forward. And on top of that, our bench strength of that team has obviously, over the last 5, 10 years, we brought on a new generation of managers also. So A, I think we expect to keep the founders on board for many years to come. And secondly, we have a good team surrounding them now. So all good. That's good to hear.
And if I may follow on in terms of the performance of Credigy this quarter, I know you guys look at year-over-year, but looking at this thing on a sequential growth basis, very strong growth in revenues, and yet we actually saw a decline in the average loans and receivables Q4 over Q3. Is there anything in terms of additional revenues that Credigy earned this quarter that you can explain for that? And then by definition, does this mean that we would expect headwinds to revenue coming into the first quarter of next year? Jean, do you have the explanation for that?
Yes, a portion of it is due to volume You're showing your average volume, but during the quarter, there was a higher volume at some time.
And also there's mark-to-market of some of the portfolio that are booking revenue, like reverse mortgage and other type of portfolio, and they were downgraded in previous quarter and upgraded in the fourth quarter. So altogether, it helped the business.
T hanks for that, Jean. I'll requeue.
Thank you, John.
Thank you. Thank you. Our following question is from Meny Grauman from Scotiabank. Please go ahead.
Hi, good afternoon. Just wondering how big a headwind you think trading will be in the coming year. Definitely a very strong year in 2020. And how important will that be in terms of your guidance on PTPP next year?
Laurent will start on the first part.
Sure. And thank you for your question. Yes, 2020 was an exceptional year, driven a lot by trading volumes.
So, going forward, we're still very positive, but we expect obviously lower growth, and specifically in trading. Now having said that, and based on also the good momentum that we've had in the second half of the year, we think there is some potential growth in 2021. And there are a couple of sectors that we're confident about. There's fixed income and public finance that has done quite well for us this year, and we remain quite optimistic about it in 2021. Our structured product business as well. We also expect a pickup in securities finance. We saw a reduction over the past six months, but we're seeing a pickup right now with markets. And the M&A market is really picking up. So we're seeing positive momentum there. So that drives acquisition finance as well. So yes, headwinds, but remaining positive.
And then just as a follow-up, more generally on the guidance on PTPP, you talk about positive, but no other sort of numerical guidance. Relative to the 9% you put up in 2020, is there any more you can give us? What are the key factors here? I know there's a lot of uncertainty, but if you had to pinpoint sort of key variables that would kind of push up that number, what are the more realistic areas where you think maybe you could drive better PTPP results in 2021?
My name is Louis. I think the way we look at it, we see revenue growth as the main delta here. I think we've remained very disciplined in terms of expenses. But when we look at different scenarios going forward, the delta in the scenarios is all about for the PTPP is around revenue growth, not expenses.
So the good news is I think we're going into 2021 with very good momentum in all our business lines. So what gives us comfort of being positive PTPP for 2021 is the momentum of P&C that you've seen, continued very good momentum in wealth management, continued very strong momentum in international. And then in Capital Markets, well, maybe not strong growth compared to 2020, but I think we low single-digit growth compared to 2020, I think we'll be happy with that. So that's why I think we're not going to give you additional just having a positive sign on PTPP, I think is going to be good news for us, frankly. And for the rest, we'll see how it goes. And then the other big delta that we want to talk about is PCLs, obviously. And Bill, I'm sure we'll get questions about that.
So revenues in all our scenarios, revenue growth, and assumptions around PCLs are the main point of differentiation between the scenarios, not revenue growth not expense growth, sorry.
Thank you.
Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Hi, good afternoon. Maybe just to start with P&C Banking, NIMS 2.19%, the sequential increase was quite nice. I'm just wondering if there's anything unusual in there. Is that repeatable? Just hoping you can unpack what actually drove the sequential increase in NIMS and what's the outlook for NIMS as you kind of peer into fiscal 2021?
Lucie.
Yes. Thank you for the question. So our margin has held quite good in the current environment, I would say. The negative impact of the yield curve was offset by better spread on the repricing of the loan book on a sequential basis.
On the outlook, I would say that we've been successful at growing our balance sheet while being disciplined on pricing, and we will maintain that. We will also continue to evolve our pricing methodology. For example, we introduced AI-based modeling in the pricing of the mortgages. So we will continue to refine that and evolve that to other products. But that being said, we expect a bit of pressure coming from the low interest rate environment and also the slowdown we expect in the deposit growth, mainly in the second half of the year.
Perfect. Thank you. And then, just on, I noticed in Capital Markets, the mix ratio, 37.2%, and I know this is just a quarter and not an annualized basis, but I'll throw it out there. Is this a new run rate for the division?
Does this factor in some of the cost savings that you've got from the severance, or is this just a claw back in the quarter and we should be looking at something a little bit higher as we kind of push out over the next few years?
So, Doug, this is Laurent. We've always targeted low 40s. From quarter- to- quarter, you're going to see some movement because of higher revenues or a reduction in expenses. But in the case of Q4, what we did is we reduced expenses specifically on comp, and that was to address realized loan losses. So it is just a one-time item for the quarter.
Okay. And then just lastly, a 25 to 35 basis points PCL total fiscal 2021, does that factor in releases on performing loan ACLs through the year?
Can you maybe unpack a little bit more of what's behind that 25-35 basis points? Thanks.
Yeah, sure, Doug. Thanks for the question. It's Bill. So looking ahead to 2021, I think you've heard us mention a high level of uncertainty. However, what gives me confidence in talking about that target range is a few factors. One is really understanding our positioning, geographic product, business mix, and the discipline underwriting we had before the downturn. And now we have more history on the performance of the expired deferrals. Our deferrals expired more rapidly, I think, than some peers. So we now have good experience and understanding of the geographical differences in performance and product differences. I think, too, our modest exposure in COVID sectors and seeing how they performed through the year has helped give us some clarity.
As well, this quarter, we made our pessimistic scenario even more pessimistic and increased the weight of that scenario. We think that the pessimistic scenario really does account for the dark potential path of the recovery. Finally, really understanding the size of the allowance that we've built so far, which should help us be able to absorb some of the growth and if there is more migration than expected. That's kind of what's behind our thinking and setting that target range. As for the path during the year, we do expect impairments to increase throughout the year and probably more in the back half. As impairments increase, there's a natural migration of stage two allowances into stage three. Does that answer your question, Doug?
It does.
I guess I said on migration, I mean, does this factor in in the IFRS 9 models as you look out in Q3 and you start to see a bit of an improvement in the economic outlook and you have to bring down your or you would bring down your stage three sorry, stage one and stage two allowances. Is that factored into this, or is this just the normal migration between one, two, and three, and it's not factoring in your forward-looking indicators being adjusted?
Yeah. I would say a change in our forward-looking view during the year would be an additional change into the certainly would generate some releases if the forward-looking view was much more positive than our base case or the weight that we have now in the mixed scenario. So the 25 - 35 is pretty broad.
I think as we go through into next quarter, maybe in three months on this call, some of the uncertainty will be down and we'll be able to give you a little more guidance on where we think in that range we'll end up. But as of now, given the level of uncertainty, I think that's a pretty good range.
Great. I appreciate the insight. Thank you.
Doug, it's Louis. So just to, I think, as Bill mentioned, in an ideal world, and we don't live in an ideal world, but ideally, we want to grow the book, our loan book into the stage one, stage two reserves that we have, and as opposed to releasing them over a quarter or two or three. So that's why the 25 - 35 does not include scenarios of releases.
Great. Thank you.
Thank you.
Our following question is from Lemar Persaud from Cormark Securities. Please go ahead.
Thanks. So when you're talking about the momentum in P&C, is expense savings a part of it? Where I'm going with this is when I look at the subpack, branches in Canada have declined for the past five quarters. Is the strong digital adoption a catalyst to revisit your branch strategy, perhaps shifting to smaller branch footprints or accelerating the rationalization?
Lucie, you want to take that one?
Yeah. So we talked in previous call on the efficiencies that we generated in 2020 coming from the distribution network and also from the resizing of our branch footprint. So actually, we've been right-sizing in some urban markets with our branches where we had more redundant location, but that didn't change our branch share.
So we had a plan from 2018 - 2021, and we've been executing on that plan. So that's what you see there. And of course, I think the digital adoption is a lever for us to continue to improve on efficiency. I think the pandemic gave us the opportunity to increase the percentage of digital adoption in our customer base. So our intent is to take the full potential of those opportunities, but also reinvest part of these gains into revenue-generating activities to make sure that we reinvest in our growth for the future. So that's kind of the plan at a very high level.
Okay. So then we won't see an acceleration. Specifically, if I look at Q3 2020, 409, and then down to 403 in Q4, we're not going to see it go to something like 15 branches a quarter, that sort of thing.
No. No.
Overall, in 2020, I think we're up to 19. And through that, we also have a couple of openings in some very specific areas.
Okay. Perfect. Thank you.
Thank you. Our following question is from Nigel D'Souza from Veritas Investment. Please go ahead.
Thank you. Good afternoon. I wanted to turn to your macroeconomic forecast for 2021. And if I could touch on your expectations for a decline in the housing price index next year, I was hoping you could expand on what you see as drivers for that decline. And is it fair to say that the read-through year is you expect mortgage growth to soften a bit going forward and lower demand for real estate to play out over the next few quarters?
Hi, Nigel. It's Bill. I'll start, and then I think Lucie can comment on expectations for mortgages.
So I think overall, when you look at the macroeconomic scenarios, the takeaway is that they're prudent. We were pleasantly surprised by the performance in house prices so far during the pandemic. Although in our forecast, particularly in the pessimistic case, we don't assume a strength in the housing market. But I think for the macroeconomic scenarios and that which goes into generating our allowances, you can consider that scenario quite prudent. Lucie, do you want to talk about looking forward for the mortgage growth?
Sure. But just before going into the outlook on mortgages, I think we had an excellent execution on mortgage in 2020. So we had originations hit historical levels coming from the performance of our distribution channel, and we've been able to improve the margins, like I just said. And at the same time, we absorbed more volume while decreasing our operational costs.
So we really start 2021 with that strong momentum. We expect we will grow slightly lower than what we've achieved in 2020. And I think demand will still continue to be stimulated. However, we expect some slowdown in the resale market due to the slowdown in immigration, but also the concern around the supply potentially across the country. So this is kind of what we expect for next year.
Okay. And just to clarify, you expect the dynamics to be consistent and play out in Quebec as well, or is that more so a national outlook?
The national outlook.
Okay. Thanks for the color.
Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.
Good afternoon. Can you guys hear me okay?
Yeah. So we can hear you, Mario.
Great. Thank you.
I want to go back to an answer to a question that caught me a little off guard. It was with your response to trading revenue. Trading revenue was up about 23% year-over-year in 2020, a good year. Did I hear you correctly in suggesting that you see avenues of growth where you can actually grow that still further in 2021, or were you referring to Capital Markets earnings when you made the reference to growth in 2021?
We were talking about Capital Markets as a whole. I think we have a greater level of confidence at a Capital Markets level as a whole, Mario. Trading, as you know, is question mark. Q2 was an unbelievable quarter. So it's going to be a hump for 2021 without. But that being said, Mario, none of us know how an economy transitions out of a pandemic.
So that's why also we may be surprised with the level of volatility and volume. So that's why it's a question mark around trading. It's not an exclamation mark. But the other avenues that we see, the M&A pipeline is extremely strong. Underwriting on the bond side and even on equity side has been very good year to date. So let's just hope for the best.
Sure. And when you're referring to growth in Capital Markets, you're referring to earnings, not revenue again. I don't want to put too fine a point in it, but I want to make sure I understand what you're suggesting.
That is correct.
Talking about earnings.
So you know we went through that in 2009, 2010, if you recall. You were there at that time. And so I think it's we did it then. I think we can do it again.
Small increase year- to- year.
Now, just real quickly on expenses. Expenses were somewhat elevated this year, all for very good reasons. I mean, they tracked the revenue growth, obviously positive operating leverage. When you think about expenses in 2021, and I know your operating leverage target is far more leveraged to revenue than it is expenses, but what do you contemplate for expense growth in 2021? Is it conceivable that you could fall back to the expense growth we saw more like 2019 when it was lower than what we saw in 2020?
Listen, it will depend on how things evolve. I think as a team, as you know, Mario, we've shown agility in the past of maintaining and disciplining on the costs. Ideally, I would say I think where we're at today, I think we're being disciplined on the cost side.
But hopefully, if we continue to see good momentum on the revenue side going into Q1 and Q2, I think that's where we rather focus as a franchise as opposed to cutting expenses at all for any scenarios. So I think that's where we're at going in. And that's why the up-leverage scenario will depend on revenue growth because I think we're looking pretty much at low single-digit increases in expenses in 2021. So the delta will be whatever the revenue growth is around that.
That makes sense. Thank you very much.
Yeah.
Thank you. Our following question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good afternoon. My question is on international, Louis. And I think during the start of the pandemic, you were pretty cautiously optimistic on the earnings traction this year.
And you kind of fast forward, and the international segment delivered similar earnings growth than fiscal 2019, I think around 25%. So when you look at the fiscal 2021 as economies improve, is there drivers of the business to kind of maintain that profitability going forward?
Well, let's start with one. The first driver is Credigy and the portfolio growth. So what's interesting is they've managed to grow their portfolio, as Jean mentioned earlier, in Q3 and Q4. So we already have the growth in the portfolio that was done in 2020 acting as a catalyst or to help grow our businesses in 2021. So I think for Credigy, I think we have a relatively good level of comfort around their growth prospect for 2021.
For ABA, what's been a, frankly, positive surprise for us is the extent to which their digital solution has brought a gain in market share over the last six months in Cambodia. So as everybody moved to less physical to more digital types of payments, their client acquisition has accelerated. And also, the adoption of their payment solutions has also accelerated. So that's very interesting. Now, the question mark there for the earnings of ABA is how long is the pandemic going to last? It's impacting negatively the tourist industry in Cambodia. The good news is manufacturing, agriculture, and construction remains quite strong. That's why we've continued to grow our loan growth. But I think that's why overall, I think we should, if we don't have double-digit revenue growth for international in 2021, I think we'll be disappointed as a team.
That's fair. Just lastly, before the pandemic, you kind of talked about unwinding some of the non-core investments in Mongolia, Mauritius, and Ivory Coast. I'm wondering if there's an update there on that front as things seem to be looking a bit better heading into 2021.
Nothing to report, Scott. I think the pandemic is not an ideal environment to monetize that type of assets. So it's probably been delayed for a little while because of the pandemic.
Okay. Thank you very much.
Thank you. Our following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Okay. Thank you. Maybe I'll go to Louis, but maybe the business heads want to chime in as well. Louis, you said something I thought kind of interesting. The allowances are pretty healthy, and you'd rather grow the loan book to grow into them as opposed to release the reserves.
I think that makes sense. Obviously, you were very careful with your volume growth pre-pandemic. I'm just curious to understand, for example, in Capital Markets, do you think part of the growth will have to come from more balance sheet intensive businesses next year? Or where do you see risk-taking, if you will, on loan growth to grow into those reserves that you're talking about? How important is that going to be? And what sort of implications could that have on RWA?
Okay. I'll start. If I'm not making sense, my colleagues will step in. I think where we see right now. Well, let's start with retail. I think we have good momentum with mortgages going through the year. You saw that at Q4, our friends Stéphane in commercial and his team had pretty good momentum on commercial.
We're hopeful that sometimes during 2021, the usage of credit by small, medium-sized businesses will start growing again. We're quite active on real estate right now, industrial and CMHC-insured residential housing and then Capital Markets, I would say, balance sheet, yes. I think the main thing there could be the M&A pipeline. I think that's where over a six to 12-month period, you could see an increase, a significant increase. It could come from a very busy M&A pipeline, which appears to be the case right now, but as you know, that can be very fickle so those are what we see going into the new year, three and a half weeks, four weeks into the new year, what we see as a potential driver to grow the balance sheet in 2021.
And so just to be crystal clear, Louis, the M&A pipeline Capital Markets, this would be what providing acquisition financing, for example?
That is correct. And same thing, by the way, in commercial. I think people underestimate the level of which M&A and ownership transfer can play an important role in growing the commercial loan book, particularly for the non-real estate category.
And is there any? I mean, would this cause the RWA to grow faster than the loan growth? Is it possible the riskiness of this relative to kind of the backbook, if you will?
Probably not. I'm looking at Bill or Stéphane. I don't think there'll be a big change there. But if we have slightly higher or faster growth in the loan book, then that's why that is a scenario, and that's maybe a bit more optimistic scenario.
But under that scenario, we would not release bundle-driven Stage one, Stage two. We would just, as I say, grow our RWA into those reserves. Stéphane?
I think it'll be so I think it'll be particularly wouldn't be the case because as we venture into commercial markets, we're going to also have the impact of our real estate multi-residential strategy, which is largely insured, like we mentioned, thus minimizing the impact on risk-weighted assets.
And I guess is Louis requiring you to even look further into your crystal ball, I guess. But when you think about this mix of volume growth, can you quantify what sort of spread you would be generating on these types of activities or what you hope to be generating or what you would be targeting to generate on these things?
I think when I look at this crystal ball, I just see my face reflected into it right now. Not fair enough.
Okay. Okay. That's fine.
That's fine. No, but I mean, I think like Lucie mentioned that, for example, mortgages are coming on at about three basis points better spread than those that are rolling off. I'm just trying to kind of get a feel for is this reason to feel optimistic about margins at the whole bank level, non-trading margins at the whole bank level as well?
I think the issue Sohrab is competitive behavior in the market. And that's what makes it more difficult to give you guidance on because I just don't know, hopefully, in an environment where the economy is improving, what will be the competitive behavior in the market.
Thank you.
Operator, do we have another question?
We do have a question from Darko Mihelic from RBC Capital Markets. Please go ahead.
Hi. Thank you. My apologies. Thank you. Yes. Can you hear me?
Yeah, we can hear you, Darko, now.
Thank you. I apologize. I'm going to dive into the weeds here a little bit with a few of my questions. I also wanted to revisit the idea of momentum. And so my first place that I wanted to dive into for my model was wealth management. When I look at the revenue picture, especially with what occurred over 2020, I see net interest margin compression. And I'm not sure that rates change much, so I don't know that picture. By the way, you should probably talk to Treasury and your funds transfer pricing. You're being penalized for growing deposits and assets.
But anyway, I also see you had really strong transactions and other revenue in the year. That could be fleeting just like financial markets trading could be. And then when I think of the fee-based revenues, I think of stronger equity markets. And so as I sit back and as I think about revenues for the wealth business, 6% was a very strong showing. But I don't see any of the pressures going away on net interest income, and it'd be hard to reproduce transaction kind of revenue. So is revenue growth a low single-digit, a reasonable number for the wealth business in 2021?
So Martin is very happy that he has a question, so he's keen to answer, Darko.
Thank you, Darko. I believe you need to look at some of the trends that we had in 2020 to give you an idea of what's going on.
If you look at AUA and AUM growth, we did really well and clearly above the industry. I think that shows the strength of the franchise and the fact that we have a diversified business model. We were able to compensate for a lower net interest income in 2020. Now, looking at 2021, we had a record number of new IAs at NBF, a very, very strong recruiting in 2020, which is not reflected in the numbers yet. We have a strong pipeline at NBIM. We also have invested a lot in our private banking franchise. There's new cross-selling initiatives. All of this to say that, of course, if you annualize lower interest rates, which we have in our forecast for 2021, the impact on NII is the same. But we are forecasting still strong AUA and AUM growth.
We don't have hard numbers to prove this, but we believe we've gained market share in trading revenue and commission revenues. And so this is also going to be strong for 2021. And we believe growth in fee-based to be above market growth, again, related to AUA and AUM growth. So we're confident.
So a 6% kind of revenue run rate is conceivable? Or am I putting words in your mouth?
We're going to work really hard to put up the best numbers we can.
Okay. Fair enough. I always try and overstep my bounds. And a question on mortgages as well. To what extent are you thinking about more sort of mortgage acquisitions in 2021? Or is that activity expected to slow down?
Are you talking, sorry, Darko, are you talking about new? You're not talking making strategic acquisitions. You're talking about new client acquisition, right?
Yes. Yeah.
Lucie, I think we remain quite. I think that's a market we like, and we want to continue to grow in that market. Lucie?
Yes, of course. Because for us, the mortgage product is an anchor product also for the whole banking relationship. And we've seen quite good results on customer engagement on that front. So it is an anchor strategy for us to continue to grow for sure.
Okay. Fair enough. Thank you very much. Appreciate it.
Thank you. Our following question is from Mike Rizvanovic from Credit Suisse Securities. Please go ahead.
Hi. Good afternoon. Question probably best for Lucie. I just wanted to touch on the tech-related spending and just being the smallest bank of the big six. I know we've had discussions on this in the past. It doesn't seem that there's anything in your numbers to suggest that you're disadvantaged by any means.
But I'm just thinking, given what we've seen as a bit of a, I guess, a step function in the push toward digitization because of COVID, do you see any gaps that you maybe need to fill? Are you still confident that you're very well positioned in terms of your capabilities versus your bigger peers?
I would say we're very confident of our capabilities versus our peers. And when I look at the numbers, some of the really leading indicators we look at is really the digital adoption. And COVID has given us leapfrog in terms of progression. And obviously, with that comes the improvement in the customer experience, but it comes also with the automation and digitalization of our process. So like I said, we really intend to make the benefit of those gains in every area of the business that we can.
I think also from a cultural perspective, the fact that we are smaller gives us an advantage in being agile into implementing the changes. For example, this year, we have a plan along with the right sizing of our branches. We have a plan to repurpose our branches more towards advice. We had a plan with that. We saw that COVID could accelerate our plan, and this is exactly what we did. At this point, we have 25% of our network that is repurposed, and we see positive KPIs on all fronts, even with the increase in digital adoption in those branches. I think we've been able to show that we have been quite agile with the opportunities that COVID brings us.
Okay. Thanks for that color on the repurposing. What about branch closures?
So just given the big sort of step function or step move that we've had here on digitization, why not be a bit more aggressive on your thought process on maybe closing branches? I'm assuming Canadians would probably be a lot more prepared for that today than a year ago. Is that something you can comment on? And maybe you can touch on any sort of hindrance to that potential strategy, whether it's the optics around it or government interference or any type of hindrance that you think could maybe pull that back?
Yeah. So I would say right off the gate that I think that we are probably the most aggressive on that front compared to our peers right now. So that's one thing. Our plan is really aligned with the behaviors of our customers. So that's the piece for me that is really important.
We need to go at the pace that the customer wants to change their behavior, and we don't want to push them out of our branches. So I would say that is probably more of a driver than anything related to regulation. But we're quite, I'd say, happy with the pace and the cadence that we have so far. And like we mentioned maybe in the past, through that, we also want to reallocate our capacity into more advice-based roles more than in transactional roles. And in between that, we also reduce the square footage of our branches. So without necessarily closing a point of sale, reducing it gives us also the benefit. So that's kind of where we're heading.
Great. Thanks very much for the color. Appreciate it.
Thank you. Once again, please press star one at this time for any questions or comments.
Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Hey, good afternoon. Figured I'd throw a couple in there. Also sticking to the mortgage theme here or topic, a lot of people are going to be renewing mortgages in the next year, a few years anyway, if rates hold the way they are and having a lot of extra spending money, saving 50 - 100 basis points on their mortgages. Is there a strategy in place, or is there anything that you think you can do to kind of translate those household savings into some sort of growth opportunity for the retail business? And then I got to follow up on commercial.
Yeah. So on the first part of your question, Gabriel, it's really what we are doing right now. So repurposing our branches more towards advice is exactly that.
Going over and above just a discussion with a customer on renewing a mortgage to going into an in-depth discussion about what's their financial goal and how we can help them achieve what they target is exactly what we're doing everywhere in our branch network right now. Yes, definitely, we want to take all opportunities that we have on that front.
I guess that would be an easy or easy enough cross-sell to the wealth business. The commercial question, well, it's more like a kind of surprised. I saw the 2% sequential growth in commercial. I suppose that's somewhat tied to Quebec having reopened a bit more quickly over the summer. I'm wondering how you see commercial lending evolve over the next year. I know any forecast is tough these days, but it's typically a later cycle kind of growth driver. That's certainly what we saw before COVID.
Or if you're seeing opportunities that you may have shied away from before COVID that are now more attractive from a risk-reward standpoint.
So Gabriel, on the first part, certainly the 2% Q- over- Q is partly due to the rebound of the large closures we had in Quebec in the spring. But it's also reflecting the fact that the economy here is quite resilient. There's quite a, Louis has mentioned, quite a bit of activity on the construction side. Infrastructure projects are still going on. And what I feel and what we feel we hear from business owners is business confidence remains strong, quite stronger than we'd be led to think despite the pandemic. So there's plenty of an M&A activity. So yes, there's the opportunity of reverting back to pre-COVID numbers.
But I mean, the uncertainty in front of us will dictate where we land as far as that goes. As far as new sectors are concerned, we're sticking to our strategy. And that also entails moving our specialty banking, which is a large portion of our growth outside of Quebec. And we've done so with success in the past. And there's plenty of opportunities in the tech, agri, and food ag business, as well as real estate, and particularly on the insurance side. And that insurance side on the real estate is perhaps the one area which has accelerated substantially since the COVID environment. So I hope that answers the question.
It does. Okay. Thank you.
Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.
My question was asked and answered. Thank you.
Thank you very much. So we have no further questions.
But just at this time, I would now like to turn the meeting back over to Mr. Vachon. Please go ahead.
Thank you, everyone, for listening to the call. And happy holidays. And stay safe. And we'll be talking to you for the first quarter results in February. Have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.