Good afternoon, ladies and gentlemen, and welcome to the National Bank of Canada's first quarter 2020 results conference call. I would now like to turn the meeting over to Ms. Linda Boulanger, Vice President of Investor Relations. Please go ahead, Ms. Boulanger.
Thank you, Operator. Good afternoon, everyone, and welcome to National Bank's first quarter 2020 presentation. Presenting to you this afternoon are Louis Vachon, President and CEO, Ghislain Parent, Chief Financial Officer, and Bill Bonnell, Chief Risk 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, 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 for everyone for joining us. Earlier today, we reported excellent results with adjusted net earnings of CAD 620 million, up 12% from last year. Our performance was driven by continued growth in all business segments, disciplined cost management, and strong credit quality. For Q1, the bank delivered a robust return on equity of 18.3%. Our credit quality remains excellent, reflecting our prudent approach to lending and a resilient economy. Quebec's economy continues to perform well, fueled by net immigration at record levels. Population now grows at a rate of approximately 1%, double that in the U.S. Consumer sentiment remains supportive in our home province. Unemployment averaged 5.1% in 2019, the lowest rate on record. The unemployment-to-population ratio for people aged 15- 64 surged to a record 76.8%, more than 2% above the national average.
Women's labor force participation rate stands at 87%, the third highest among the OECD countries. The household net savings rate in Quebec exceeds 9% currently, the highest in a generation and far above the Canadian average. Lastly, household leverage is moderate as housing remains affordable. Before moving to the business segments, let me briefly comment on the situation relating to the COVID-19 virus. While it is early, our team is closely monitoring the situation and its potential impact on the global, Canadian, and Cambodian economies. Now, let me share some highlights of our business segments' performance going forward. Our P&C segment continues to have very good momentum on both sides of the balance sheet. In all our retail and commercial businesses, we remain very focused on achieving the right balance between volume growth, risk management, and margins. In that context, I am very comfortable with our current positioning.
Our investments continue to be driven by our number one objective of offering our clients the best experience. In personal banking, we're seeing notable progress in our clients' digital engagement, which is a key driver of client satisfaction and retention, as well as efficiency. This is a direct result of investments in our data and digital infrastructure over the last few years. In commercial banking, we have successfully completed the deployment of a new innovative financing platform for small business clients, resulting in much shorter approval and disbursement times. In addition, we've initiated an important transformation last year on the investment side of our personal and wealth business lines. Our goal is to adopt a common and simplified advisory approach to deliver our clients a best-in-class integrated experience. So far, more than 2,500 advisors have been trained in behavioral advisory coaching.
As an example of tangible results, the number of clients with systematic investment has more than doubled for NATGo, which is our new mass market investment experience. Our wealth management platform delivered another quarter of double-digit earnings growth. Favorable markets and net inflows contributed to generating strong assets and revenue growth. In the current environment, we continue to benefit from the shift to fee-based and managed assets, which allows our investment advisors to be more efficient and concentrate on delivering meaningful advice to their clients. During the first quarter, our assets under administration reached the CAD 500 billion threshold for the first time, highlighting the diversification and leadership of our franchise. We continued investments in talent and digital initiatives. We remain well-positioned for future growth. Turning to financial markets, we delivered another robust quarter.
Both global markets and investment banking benefited from the general recovery in the market environment from a year ago. Our differentiated business mix, with a higher contribution from global markets, continues to pay off. This quarter witnessed sustained momentum in core equity niches, namely securities finance, and structured products, as well as in fixed income. We continued investments in our financial markets franchise in favorable market conditions. Our outlook remains positive for the business as a whole. Our international segment continues to perform very well. As mentioned last quarter, Credigy has a robust pipeline and is expected to deliver double-digit earnings growth in the current fiscal year. In Cambodia, ABA Bank had another very strong quarter with net income up 71% and loans and deposits up 50% year over year. As mentioned in our last call, we are maintaining our current moratorium on significant additional investments in emerging markets.
As we are entering a new year, our capital deployment strategy remains unchanged. Our number one priority is to maintain strong capital levels. Second, we continue to invest in our businesses to fuel organic growth in our core markets with the objective of generating positive operating leverage for fiscal 2020. Returning capital to shareholders remains a priority for the bank. As mentioned on our last call, we put a hold on our buybacks during the first quarter to absorb regulatory adjustments. We are pleased with our current capital level, which is strong with our CET1 level at 11.7%. As usual, we will provide an update on our dividend policy next quarter. To wrap up, I am pleased with our first quarter results. In an environment of macroeconomic and geopolitical uncertainties, all our businesses continue to have good momentum. Our capital is strong, and we continue to manage our costs effectively.
Our credit position remains excellent against a solid micro backdrop in Quebec and Canada. On that, I will now turn the call over to Ghislain.
Thank you, Louis, and good afternoon, everyone. The bank delivered a solid performance in the first quarter, driven by good business momentum, disciplined cost management, and strong credit quality. My comments today will focus on efficiency and capital, beginning on page seven. We started the year with continued momentum on the efficiency front, delivering a solid operating leverage of 2.8% in our first quarter. Our P&C segment delivered positive operating leverage in Q1, partially driven by muted expense growth, resulting mainly from lower amortization following the write-down of obsolete technology recorded in the third quarter of 2019, as well as from savings related to distribution optimization. With the P&C segment that continues to invest in its activity, we expect expense growth to normalize around 3% for fiscal 2020 and operating leverage to be positive.
Our wealth management segment continues to perform well on the efficiency front, with a positive operating leverage and an excellent efficiency ratio for the quarter. Our financial markets segment delivered neutral operating leverage as a strong top-line growth was offset by higher variable compensation and higher transaction expenses. Both financial markets segment and U.S. specialty finance and international segment posted excellent efficiency ratios in the low 40s. Over the years, we have showed consistency in our ability to manage our costs effectively and achieve meaningful efficiency improvements. At the same time, we have made major investments in talent, client experience, and technology. As we are progressing through our transformation journey, maintaining the right balance between investing to generate future growth while managing our costs prudently remains a key priority for the bank.
Our transformation continues to bear fruit, and we remain confident in our ability to deliver a positive operating leverage for fiscal 2020. Now, turning to the capital review on page eight, our CET1 ratio stood at 11.7% at quarter end. Strong earnings growth contributed 39 basis points to our CET1, whereas risk-weighted assets had an impact of 27 basis points, reflecting good volumes across all segments. The combined impact of accounting and regulatory changes occurred during the quarter, reducing CET1 by 17 basis points in line with expectations. Our total capital ratio stood at 16% at the end of the quarter, and our liquidity coverage ratio at 144%. To conclude, we are pleased with our capital and liquidity positions, which we view as prudent at this stage of the cycle. On this, I'm turning the call over to Bill for the risk review.
Merci, Ghislain, and good afternoon, everyone. I'll begin on slide 10. The performance of our credit portfolios remained strong last quarter, having benefited both from a supportive economic backdrop as well as from our overweight Quebec and underweight unsecured consumer lending profile. Total provisions for credit losses were CAD 89 million, or 23 basis points, unchanged from last quarter and one basis point lower than the same quarter last year. PCLs on impaired loans totaled CAD 82 million, or 21 basis points in Q1, in line on a quarter-over-quarter and year-over-year basis. Lower impaired PCLs at Credigy were offset by higher impaired PCLs in financial markets. Credigy's performance continued to match our expectations as declining provisions tracked the amortization in the unsecured consumer portfolio. Total PCLs on performing loans were CAD 8 million in the quarter.
Excluding the international sector, PCLs on performing loans were CAD 12 million, or three basis points, primarily due to portfolio growth and revisions of forward-looking factors. In Q1, we adjusted several factors in our pessimistic scenario to take into account potential negative economic impacts of the coronavirus. These adjustments led to higher-performing PCLs, primarily in non-retail loan portfolios. Looking forward, we'll continue to be vigilant in monitoring changes in the macroeconomic environment. We maintain our target range for total PCLs in 2020 and expect to end up close to the middle of the 20- 30 basis point range. Turning to slide 11, our gross impaired loans declined to CAD 677 million last quarter, and our GIL ratio improved by 1 basis point to 43 basis points. Net formations were lower in our P&C segments.
Increased information in the financial markets segment related to one account in Western Canada in the electricity generation sector and was partially offset by lower formations at Credigy. On slide 12, you'll find a review of our retail mortgage and HELOC portfolio. Insured mortgages account for about 39%, followed by HELOCs at 33% and uninsured mortgages at 28%. Borrowers in the province of Quebec account for the majority of the portfolio, and exposure in the GTA and GVA remains modest. In summary, we were very pleased with the good performance of our credit portfolios in the last quarter. Our overweight Quebec and underweight unsecured consumer lending continue to position us well for strong performance in the current economic context, and on that, I'll turn it back to the operator for the Q&A.
Thank you. We will now take questions from the telephone lines. 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 telephone 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 Meny Grauman from Cormark Securities. Please go ahead.
Hi, good afternoon. Just a question on ABA specifically. I'm wondering if you're seeing any signs of economic weakness so far in Q2, if you've changed your outlook at all. Obviously, the coronavirus is one factor, but also the partial suspension of the duty-free access for Cambodia. I'm wondering how you view those risks given for ABA specifically.
Thanks, Meny. This is Louis. So on Cambodia, the first thing, the European Community action, that was not a surprise. That was already factored into our budgets and forecast for 2020. What obviously was a surprise was the virus. As you may have seen, Moody's just revised its expected growth for Cambodia from 6.5% growth in 2020 down to 5.5%, mostly on the impact of the tourist industry, which is currently being felt. So far, I think we don't have a huge amount of historical precedent with that operation. So far, in January and February, we haven't seen any negative impact on the franchise. But granted, I think it's too early to see what the impact would be. So I think we'll have more to say on that on the next call.
My sense, the way I think we look at it as a team right now is that if the virus reduces growth globally for one or two quarters, I think the momentum of that business and the fact that we've been conservative on the credit side, I think should still allow us to generate good double-digit growth in earnings in that business. If we move to a more pessimistic scenario of the virus causing a full-fledged global recession, then I think we're probably a little less confident on that prediction, but then at that stage, I would probably assume that PCLs in Cambodia would be not our number one priority or concern.
Understood. And just to follow up, have you made any changes to the way you're monitoring operations on the ground there, especially from a risk perspective?
Nothing significant, no. I think we continue. I think there's been, as you know, very few documented cases. So in terms of operations on the ground right now and monitoring, we haven't changed anything specifically.
Thank you.
Thank you. Our following question is from Steve Theriault from Eight Capital. Please go ahead.
Thanks very much. If I could start with a question on Credigyrowth. We're starting to see the last couple of quarters, and this quarter in particular, the assets ramping. Wanted to ask, should we expect to see the type of seasoning and rise in PCL maybe next year, maybe in 2021, back to the levels we saw at the tail end last time? So just want to get some color there, not fully appreciating maybe the mix of what you're putting on the books this year.
Yeah. Hi, Steve. Thanks for the question. It's Bill. I'll start off, and maybe Ghislain will add. So as you know, the PCL impact is very dependent on what type of assets Credigy is seeing opportunities in. Generally, in the consumer unsecured portfolio, which generates most of those PCLs, the weight of their portfolio is significantly lower than it was when we reached the peak. It was over 30%. I think now it's down to around 20%-23%. So it depends on whether we see further opportunities in the consumer unsecured, but I don't expect in 2020 to be anywhere near where we were in 2018 and 2019. Anything else?
But some rise possibly in 2021 as the assets you're putting on now season, or not necessarily?
Yeah. So I think in the performing PCLs, it will be driven by the growth in the portfolio. At the end of 2019 and again this quarter, the impact was from the amortization of the consumer unsecured. So I would expect that to taper, and I would expect to see some performing PCLs growing higher by the end of the year.
Okay. Yeah. And maybe Bill. Sorry.
Sorry, this is Ghislain. So I just want to add, so I think that on the credit side, what Bill just mentioned is okay. And I just want to reiterate that what we said last quarter, that we expect double-digit growth for revenues and net income for 2020. So we reiterate what we said the last quarter.
Okay, and just the other item for me was, Bill, I want to ask just on that utility and the manufacturing PCL we see this quarter, did they spend some time in stage two, or did they skip directly to Stage 3?
No, the entity in the Financial Markets had been on the watch list and been in Stage 2 for quite a while. And that's why you'll see that there was a migration from Stage 2 provisions to Stage 3 provisions for that. That's why even though we made some changes in our scenario to take into account the COVID-19 virus, Financial Markets still had a reduction in the performing loss provisions, primarily because of the migration. So it had been in Stage 2 for a while.
Okay. Thanks for that.
Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Hi, good afternoon. Just on the P&C banking, the guidance for 3% mix growth through the year, you obviously put up 1% in Q1. Just trying to get a sense of you're obviously going to ramp up expenses over the remainder of the year. Can you talk a bit about what that's related to? And then if the revenue growth environment is tough out there, do you have the levers to kind of pull back on that if need be?
Yes. Hi, it's Lucie. I'll start, and maybe Ghislain can complement. So on the expense this quarter, the lower expense is really due to some savings in the write-off and also efficiency in the distribution network. It is expected to normalize throughout the year to end up between 2% and 3% as guided previously. And on the revenue growth, I would say that the revenue growth is also in line with the expectations that we have on margins. And it is expected to have a slight decrease in margin this year. So we will still end up with a positive operating leverage, like Ghislain explained.
And then just, yeah, I guess maybe a little bit further. And I think that in the prepared remarks, and I forget who mentioned this, but putting capital to work to drive positive operating leverage, is there thoughts of a need to have another restructuring charge within your organization, or do you feel comfortable with where you stand from a cost structure perspective?
It's probably during my remarks, but no, there's no restructuring charge budgeted for this year. It's not in the plan, and we're not even discussing it within the bank.
Cool. Thank you very much.
Thank you. Our following question is from Sumit Malhotra from Scotiabank. Please go ahead.
Good afternoon. I just want to start by picking up on revenue within the personal and commercial bank and maybe following on where Doug was going there. Louis said many times in the years I've covered this bank that Quebec is a no-boom, no-bust province or marketplace. It's certainly been a boom for a few years now. Yet when we look at either loan growth in the consumer book, the commercial portfolio, and the year-over-year in revenue, despite the fact your margins actually only down one basis point, those numbers are towards the lower end of the group and in some cases at the very low end. Why do you think it is that your revenue has trended that way during such a strong period economically for the province?
Candidly, do you think you've been somewhat too risk-averse in some of the areas where there's an opportunity to drive more top-line growth?
So I'll start. And so I think, Sumit, I think we've been pretty consistent on our narrative that, yeah, we're very happy with the performance of the Quebec economy. But at the same time, we want to make sure that we've been conscious that we feel we're late in the business cycle. And that's why we want to continue to whatever business we put on the balance sheet, we want to make sure that it's at good terms and conditions from a risk perspective and also at decent margins. So we've been here for a long time. We're very comfortable with our position in the province. We are very sensitive to market share over the mid and long term. We're a little less sensitive to market share over a short period of time.
I think for us, I think it would just make sure that we manage the volume growth at the right thing. We'll see. Listen, if there's no recession within the next three years, you may be proven right that we were a little bit too conservative too early. You know what? I think as a team, that's a risk we're willing to live with. Any else?
The other thing.
Stéphane?
Yeah, this is Stéphane Sumit, so I'll just add as well. We often talk about house prices being lower in Quebec. The same applies basically to the business markets. Real property, whether it be land or premises for entrepreneurs or lower value, so the individual transactions, whether in ag or in manufacturing, are always lower, so that always impacts over and above the balance between risk and balance growth. It's also a reality of the Quebec dynamic, which explains the lower asset growth.
So if I hear you, it is a commentary on your risk appetite. And if expenses are going to increase over the coming three quarters, you've got a nice start on operating leverage. You're going to be positive for the full year. But you're willing to give some of that back if the opportunities you see for lending is not where you think the risk appetite lies. That's the synopsis I hear from you.
Yeah. And I think, Sumit, correct me if I'm wrong, but I think we've been pretty consistent on that, right? So particularly areas like commercial real estate, yes, we have an appetite for commercial real estate. We don't have a limited appetite for commercial real estate. So if you put some cap on commercial real estate growth, by necessity, we may, for a short period of time or for a year or two, underperform other people that don't put a cap on commercial real estate loan growth.
Thank you for that. And I'm going to stay with you for my second and last question and maybe to go on with that theme of consistency. There's nobody in this group that's been more consistent when it comes to the wholesale business than National has. And again, today, in a quarter where there's some pretty big numbers, you guys seem like you do a nice steady performance irrespective of what's going on. To that end, we heard Bill's comments and the risk commentary. It was all centered around credit risk. Would be curious to hear a lot of stuff we see in the tape this week in terms of worst week since 2008, in terms of equities, bond yields at record lows. You and I were talking on these calls in 2008. It doesn't feel like that this week to me as it did back then.
But I just would like to hear your thoughts on how the bank and the dealer more specifically thinks about risks in your trading portfolio and more accurately manages those risks in periods like we've had this week as far as market risk and potential trading losses is concerned.
Now, how do you want to take that one? Or do you want me to answer?
Sure.
Go ahead.
I think you've heard us also in the past. When it comes to trading, we generally have a risk profile that's sort of defensive: rates, credit, and equity. It's about that balance that Louis is talking about in terms of growth and good risk management, so it does reflect in our results. You're right. Stable growth. Also, whenever there's a risk on, which we've seen at the end of last year, we participate, but we're also careful in that as well. That's why I think you're seeing a little bit more stable revenues overall. I don't know if that answers the question, Sumit, or.
Yeah. But as we all have enough scars around the table, we know that when it comes down to trading income, there's always room for surprises. But I think strategically, the key thing for us is to stay to businesses where we feel we have an expertise and value added. And explaining, again, this quarter, the difference between our results and that of our competitors probably had a bigger rebound. The bigger difference is the size of their U.S. franchises versus ours. So number one, risk management is strategic risk management. And we don't feel we have a comparative advantage in U.S. credit and U.S. capital markets business. And we stick to the business we know.
And more to the point, last thing. You've told us over the years that the bank tends to be long volatility when it comes to trading operations. I think we and other banks have discussed there can be good volatility and bad volatility depending on positioning and how trading trends. Is there anything, and I'm not asking you to give me the P&L for this week, but is there anything in periods of dislocation like this that stands out to you negatively from the bank's positioning and a risk perspective?
No. I think it's so far good volatility. Bad volatility would be volatility that at some point would start impacting the M&A pipeline.
Thanks for your time.
That's what we would watch out for.
Thank you.
Thank you. Once again, please press star one at this time for any questions or comments. Our following question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.
Thank you. Good afternoon. If I could turn to PCLs for a moment in your personal and commercial banking segment. So that increase that occurred in the quarter, it looks like, one, it was first driven by higher provisions on performing loans for personal banking loans. So one, what's driving that higher provisions on personal banking loans given the strength we're seeing in the Quebec economy? And the second factor appears to be higher provisions on credit card receivables. And what's the factor driving that higher? Does it have anything to do with the rule change at all, or are there other factors at play there?
Thanks, Nigel. I'll start off on that. If you look at slide 27 in the SFI, actually, the Stage one and Stage two provision increase for P&C is really coming from commercial rather than personal or credit cards. I think quarter over quarter, the performing loan provisions are lower a bit in personal banking and credit cards, partially because of the strength in the Quebec economy and Quebec consumer. The commercial banking one, the increase, the majority of that comes from the change we made in our forward-looking macroeconomic factors. As I mentioned at the end of last quarter, it's still fairly early to try to assess what the final impacts will be of the coronavirus. But we felt it prudent to make some adjustments in our pessimistic case.
And we tweaked a little more negative three factors, which we thought had a higher chance of being impacted, that being commodity prices, stock markets, and corporate credit spreads. And naturally, that impacted the non-retail part of the portfolio. So that's what you see in the commercial banking. And that's really what you see overall for P&C and their loan losses. Impaired loan loss is pretty stable quarter over quarter in P&C. It was the performing in the commercial book that had the increase. Does that answer your question?
Yeah. So is it fair to say that as of right now, you're not expecting any uptick in performing PCLs on the personal side?
Listen, we'll follow the macroeconomic events. We think that the coronavirus, if the impacts continue, it'll be felt first through performing and in the non-retail sector of the portfolio.
Okay. Appreciate the color. Thank you.
Thank you. Our following question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good afternoon. I just wanted to go back to the P&C segment and just on the revenue. When I look at personal, on a year-over-year basis, loans were up 4%. Revenue was up 4%, and then when I look at commercial, it was up 6%, but revenue was only up 3% year-over-year. Maybe just trying to understand maybe the variance on the commercial side if you could provide some color.
Certainly, this is Stéphane. So the reality is, if you look at revenues from a loans business, it was actually up in excess of 6%. But the overall revenues were only up 3% as we've let go of marginal returns or marginal margin deposits. And that impacted the overall revenues of the business. And those were largely on the governmental side. And we report our governmental institutional deposits as part of the commercial. And that's the main reason you see this lag. And that pretty much has been clean. You shall see it bounce back up to its regular levels in the future.
Okay. And just lastly, on the international side, if I kind of track the employees, it's been increasing sequentially every quarter. This quarter, it was up 11% over 700. When do we see an inflection point? And I'm assuming this is at ABA. When do we see an inflection point where that kind of stabilizes and kind of directionally? I think it helps us make us look at the earnings trajectory on that platform as well too, which continues to be robust.
Scott, this is Louis. I think we're still opening branches. I think a lot of the staffing, you're right, is almost all the staffing increases that you see is related to ABA. And some of that is obviously corporate and control functions. But most of it is the additional staff in branch. So we're still expecting to open some branches in 2020. And then with the team right now, we're working on plans for 2021. So I think at some point, we will communicate what the plans will be for branch opening in 2021. But it's pretty much related to that. And once we slow down the opening of branches, then clearly, I think there should be a slowdown in hiring of staff in Cambodia.
Got it. Thank you.
Thank you. Our following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Thank you. I just wanted to pick up where I think more or less Sumit left off. Louis, the bank relies more heavily than others on trading revenue. I think 16% of the overall revenue comes from whether it's equity or fixed income and commodities and the like. Probably equity trading revenue is 7%-8% of the top line for the bank. What sort of a number do you think we should be thinking from a volatility perspective around that number if we look at this quarter, last number of quarters?
From quarter to quarter, Sohrab, I think that's a tough question. I think that's not quite the way we look at the business. I think we tend to look at that within the bank, my level, at having greater and greater diversification in terms of our revenue sources. That is why strategically we created a fourth reporting segment the last three years with International. Even within capital markets, I think the hope is that we have diversified sources of revenues from the different businesses we have that ideally will not always be perfectly correlated. That mix at some point will bring some good return on capital, but at some point also have acceptable volatility. That's what I think we've tried to produce in the last, God knows, 15, 20 years.
So I don't think we have a particular target in mind of how much equity trading will represent in terms of the business. I think we try to understand what we think are the correlation patterns and risk patterns between the different businesses and ideally have a mix of business that's not that in most scenarios will tend to produce a decent return on capital. Laurent, anything else to add on that?
Sure. I mean, the business mix is different versus others. And we've talked and we've said that in the past. This is a client flow business. So it is a niche that we've worked on year over year. And we've invested in people and technology. And we're quite comfortable with it. So I think demonstrating in terms of results and resiliency, it's been there. So not a target, but definitely a place where we're comfortable. We're comfortable with the risk. And we've definitely built up some expertise in that space.
Maybe if I can just follow up. I mean, again, at the total bank level, when you say you're comfortable, are you comfortable with it growing as a percentage of the overall revenues?
I think over time, as you know, I think we've been pretty stable over the last four or five years. I think we've been comfortable with the percentage of revenue coming from the wholesale side of the business. And I think that had a positive impact on our performance and on our multiple. So I think in terms of guidance, I think we're looking to grow. We'll sell at about the same speed as the whole franchise, which is 5%-10% per year. And I think we've been pretty consistent on that in the last few years on that.
Sorry. And just one last question. Maybe I don't know if it's for Laurent or for Bill. I'm looking at the supplementary financial information where you have the derivative financial instruments kind of broken down. The credit equivalent number on equity and commodity contracts has doubled year over year. I'm not so sure. Does that basically mean the credit risk associated with the equity business has doubled year over year?
I don't believe so. That may actually be a question for Jean Dagenais.
Okay.
And maybe.
Laurent, we'll take a crack at that.
I'll take a crack. Most of these contracts are collateralized. So no, there's not a significant increase in terms of credit risk. I mean, there's some counterparty risk, but it is daily collateralized.
Maybe I remember we spoke last quarter about the SA-CCR impact and change in it from year over year. I think it was difficult to compare. We can look at it with Jean and give you a call back offline.
Thank you.
Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.
Good afternoon. Louis, could you help me think through Cambodia? And what I'm going with here is, has the bank's risk appetite changed at all in terms of loan growth? I mean, I know you're opening a lot of branches, and that's what's driving this very strong loan growth. But have you revisited your risk appetite vis-à-vis Cambodia in the context of this virus?
Short term, the answer, Mario, is no. We have not done that. And the reason is that so far, and I appreciate it's very early, and the portfolio is still aging. And we have yet to see how well it will age. It's certainly so far aging quite well. But we've been, and the reason we did not feel the need to do that is that our lending model and our business model has been the same ever since we've invested in ABA and took control, namely the last five years. And we target 95% of the loans still target exactly. So it's small family-owned businesses where we have the real estate as collateral. And so we stayed very, very within that niche. And we still were very, very comfortable with that.
So it's not that we're in credit card or unsecured and auto loans, things that are very, in theory, very volatile and very correlated to the business cycle. We feel that we have good protection given the fact that we have real estate collateral on these loans. So we have not changed anything with the team so far. As I said, we're still assessing exactly what the impact will be on the economy. And then from there, if there are changes, we'll let people know. But short term, no, Mario, we have not made any changes.
So if ABA, if it's growth as usual, and let's just all sort of cross our fingers here and hope this COVID issue becomes a distant memory soon enough, if that continues to grow, and Credigy, clearly, you've guided that we're going to look at double-digit loan growth there. And finally, if your spending in domestic P&C levels off at about 3%, then it seems logical to suggest that that business unit, the Cambodia and Credigy business unit, could exceed 15% of total bank earnings by the end of this year, say, let's call it Q4 2020. Is that a number? First of all, does it make sense to you? And are you content with that?
The answer is yes, Mario. There's a possibility. Now, I'm looking around the table here, and I think everybody wants to, in terms of revenue growth, want to maintain their percentages in terms of business lines, but that scenario that you just described is a possibility.
Okay. Thank you very much.
Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Louis Vachon.
Thank you, everyone, and we'll talk to you for the results of the second quarter. Thank you very much. Have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your.