Q4 2019 Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the National Bank of Canada fourth quarter results Conference call.
I would now like to turn the meeting over to me through them in the <unk> Vice President Investor Relations. Please go ahead. This is lodging.
Thank you operator, good afternoon, everyone and welcome to National Banks work border 2019 presentation.
Presenting to you this afternoon or do we restaurant president and CEO .
Uh-huh, Chief Financial Officer, and thereby now chief risk officer.
Following our presentation, we will open the call for questions.
Also joining us for <expletive> you any session or just kind of shocking to see blush. It.
Heads of PMC banking, nothing <unk> head of wealth management, No <unk>, Indonesia, well go ahead of financial markets and <unk> Senior VP finance.
Before we begin I refer you decide to have our presentation, providing national banks caution regarding forward looking statements.
With that.
During the call over it did we restaurant.
Thank you Linda Thank you everyone for joining us.
Earlier today, we reported excellent results with earnings per share up 11% for the quarter capping off another strong year for National Bank.
For the year, we achieved solid business grow and record profitability, while meeting all of our medium term objectives.
Our credit quality is excellent, reflecting our prudent approach to lending.
Our transformation translated into further improvements in our efficiency ratio.
Again this year, we delivered an industry, leading return on equity of 18%.
National Bank share price reached new highs in 2019 and is a new unique position of having delivered industry, leading total shareholder returns over the one 310 and 20 year periods.
Our capital deployment strategy is clear and remains unchanged first maintained strong capital levels second continued to invest in our business with the objective of enhancing our clients experience and generating positive operating leverage.
Third return capital to shareholders through sustainable dividend increases and share buybacks.
This morning, we announced a three cents increase in our quarterly dividend.
2019, we raised our dividend by 9% and we also returned 281 million of capital through share buybacks.
During the first quarter of 2022 absorbed regulatory adjustment, we will stay on old on our buyback program, but we plan to resume at later in the fiscal year.
As a Canadian Super Regional bank with a leading franchise in Quebec, we've continued to benefit from favorable economic conditions, both in our own province and across Canada.
Qubec economy remains strong with historically low unemployment rates sound public finances, and housing affordability well above the national average this context, let me share some highlights on our business segments performance and growth drivers going forward.
Our PNC segment delivered solid results in Q4 as well as throughout 2019.
It is earnings exceeding $1 billion for the first time on a yearly basis.
Our strong performance was driven by good volume growth in both retail and commercial disciplined cost management and solid credit performance.
And the retail market, we are deepening relationships with our clients and focusing on advice.
We are investing heavily in our platforms to ensure a compelling client experience as an example last week, we launch and innovative French concept, where we combined advisory services and technology to create a highly personalized approach.
While we are currently the point than your experience and branches in Quebec, It will be gradually rolled out in Canada over the next 24 months.
We continue to progress in our digital transformation journey, which is driving client satisfaction and acquisition overall business growth and increased efficiency.
Around 50% of our clients are now active on our jet on on our digital channels and more than 90%, 92% of core payment transactions are being delivered via mobile internet banking or it yes.
In commercial banking, we're capitalizing on our proximity to cut back interpreters.
Same time, we're pursuing it focus growth strategy across Canada, and specialized markets harnessing, our strengths and healthcare agriculture technology creative industries and real estate.
And both commercial and personal banking, we strive to achieve the right balance between volume growth healthy margins and strong credit quality.
As we are entering a new year, we will maintain our overweight positions in the promise of come back as well as unsecured lending, which we view as favorable into current environment.
Turning to wealth management favorable markets and net inflows contributed to generating strong you Wham girls and fee based revenues into fourth quarter.
It also benefited from a solid operating leverage and then industry, leading efficiency ratio achieving double digit earnings growth this quarter.
As a leading franchise in qubec and firmly establishing Canada. We're pleased with a differentiated positioning of our wealth management platform, which generated approximately 23% of the banks total earnings this year.
Our focus on distribution, our positioning us Canada's largest manager of managers and the diversification of our by a business model, which is less dependent on transaction revenues allow us to be very confident in our future.
Such we're maintaining our double digit earnings growth objective through the cycle.
Turning to financial markets, our global markets business delivered a record performance in Q4 driven.
Particularly driven by structured products and securities finance over the years, we have built industry leading capabilities in these businesses.
Today, we are seeing the benefits, resulting from sustained investments in our technology products and talent.
We also delivered good results in corporate investment banking against a strong quarter last year.
For the sixth consecutive year, we're proud to rank number one in Canada and government debt underwriting.
Our financial market segment is a strong pillar for the bank.
The strength and resilience of our franchise is underpinned by our entrepreneurial culture, our differentiated business mix and our flexible approach to capital allocation looking forward, we will continue to invest in our franchise.
Now turning to our international segment, we are very satisfied with its overall performance.
During 2019 as expected CRTD GE delivered lower growth, reflecting a disciplined investment approach for 2020, However, credigy has a solid pipeline and expects to deliver double digit earnings growth.
In Cambodia, we now own 100% of Aviate Bank, which had another very strong year.
The last quarter earnings more than doubled from the prior year loans are up 50% and deposits are up an impressive 85%.
Looking ahead, we expect another very good year for Aviate and 2020 .
At this point in time, we're very satisfied where our investment in Cambodia, and we're not seeking expansion in other countries.
Context, where extending our moratorium on significant additional investments in emerging markets until the end of 2021.
At a time of profound change.
We believe that people and culture other cornerstone of our six long term success.
Entrepreneurial culture is a key differentiator in the way we trust from the bank serve our clients and attract people to write skills and values.
Our evolution as an agile organization goes hand in hand, with our digital transformation, all essential components to deliver superior customer experience sustainable revenue growth and higher operating efficiency.
We believe that building long term relationships with our clients our employees and communities is key to creating long term sustainable value for all stakeholders.
2019 would therefore I just heard our mission statement to respond to the rapid evolution of our operating environment and National Bank, we are putting people first.
As we embark on a new year I look forward to the future would prove optimism.
The outlook in Qubec remains favorable and we continue to take advantage of Canada's broader economic soundness.
Our credit quality is excellent our capital ratios are strong and disciplined cost management remains a priority throughout the organization.
In an environment of macroeconomic and geopolitical uncertainties, we are satisfied with our current positioning.
Overall objective remains to position to bank to perform well through the complete cycle.
In that context, and assuming no recession and 2020 , we are comfortable reiterating our mid term objectives for the year.
As we Mark our 100, Sixtyth anniversary I'm proud of the banks influential role and economic and social development of our community.
I wish to sincerely. Thank my colleagues of the office of the President for their leadership and are more than 25000 employees for their contribution in achieving our mission each day.
I also think our clients and our shareholders for their trust and can you continued support.
We have there right team in place to ensure the banks long term success and truly live our mission of putting People's first.
That I will now turn the call over to just say.
Thank you do we and good afternoon, everyone. My comments today will focus on efficiency and capital.
Beginning on page eight.
We ended the year with strong results and our fourth quarter driven by a solid underlying performance across all businesses.
I read PNC segment delivered good volume growth and positive operating leverage of 2.3 per se.
This quarter.
Due to the expense growth resulted from lower amortization following to write download obsolete technology recorded last quarter as well as from savings related to the service and optimization and corporate costs.
For fiscal 2000 feet 20, we expect expense growth to normalize around 3% for PNC as we balance our disciplined approach to cost management, while investing for growth.
Wealth management delivered solid revenue and expense performance in Q4 normal as expense growth was compensated by numerous cost savings initiatives, resulting in a strong operating leverage over 3% and 60% efficiency ratio.
For 2020, we expect the efficiency ratio to remain at the low sixtys for wealth management.
Financial markets delivered record revenues this quarter.
Ron performance into second half of 2019 triggered a catch up in variable compensation into fourq water translating into negative operating leverage although yearly basis expenses are up 6.6%.
Driven by continuous continued investment in technology and talent.
Despite the slower start to the year, our refined fuels market segment achieved a low efficiency ratio of 42.5% <unk> fiscal.
In 2000 linking.
Looking forward the financial markets team remains focused on achieving a healthy balance between cost and investment in financial markets.
On a total bank basis now our transformation and continued focus on expense management is bearing fruit.
We delivered solid efficiency gains in the fourth quarter and over to full year.
During the fourth quarter expenses increased 4.6% against revenue growth of 7.2% leading to a solid operating leverage of 2.6%.
More importantly, we were successful in delivering positive operating leverage for fiscal 2019, despite softer performance in financial markets in the first half of the year.
For fiscal 2020 , we target a positive operating leverage.
To conclude my comments on efficiencies efficiency has a team we maintain a disciplined approach to cost management.
While investing in our people and then thing I read customers experience and simplifying our systems and processes.
Now turning to the capital review on page nine.
We ended the year with a 51 ratio of 11.7% strong earnings growth contributed 41 basis points of internally generated capital this quarter.
The risk weighted assets increased by approximately 2 billion, our 29 basis points.
Reflecting good volumes across all segments.
As well as new transactions and commitments at treated supporting our expectations for double digit growth earnings growth in 2024 Crazy.
At the end of the quarter, our total capital ratio stood at 16.1% and our liquidity coverage ratio at 146%. We bought back 1 million common shares in Q4 rigging totaled buybacks to 4.5 million common shares for the fiscal year.
We are pleased with our capital and liquidity positions, which we view as prudent at this stage of the cycle.
To conclude on capital regarding the upcoming accounting and regulatory changes in Q1, 2020 , we expect a combined cc one impact of around 20 basis points.
On this I'm turning the call to bill for their risk review messages line and good afternoon, everyone.
I'll begin on slide 11, looking back at the full year 2019 performance of our credit portfolios.
Sitting from our disciplined on the underwriting our favorable geographic footprint and product mix and from ongoing benign credit conditions, our portfolios generated full year total pcls of 23 basis points during 2019 slightly below the midpoint of our 20 to 30 basis point guidance.
In our domestic portfolios compared Pcls remain close to cyclical lows at 16 basis points and performing Pcls three basis points stable from the prior year.
Looking now at Q4 results.
Compared pcls in or domestic portfolios increased one basis point to 16 basis points for $59 million, reflecting good economic conditions in our core markets.
Total impaired pcls were stable at 20 basis points were $77 million.
Performing loan Pcls in the domestic portfolios were three basis points for $10 million also pretty stable from last quarter.
Performing on Pcls in the international sector were negative $1 million as they continue to track the amortization of Creditease unsecured portfolio, which we've discussed on previous calls.
Total bank Pcls were stable in fourth quarter at 23 basis points or $89 million.
I'll now turn my comments to look at the year ahead in 2020.
In our domestic portfolios, while I have for us nine could generate some quarterly volatility we expect relatively benign conditions to continue with some normalization of pcls from recent low levels.
In our international sector, we expect a relatively stable level of impaired Pcls next year, but expect performing loan pcls to increase throughout the year tracking strong asset growth and product mix.
Taking those two factors into account.
Maintain or 20 to 30 basis point range for total pcls for the full year and expect to be around the middle of that range.
Turning to slide 12.
Gross impaired loans totaled $684 million were 44 basis points stable from last quarter.
Net formations declined by 7 million from last quarter to $118 million.
Formations in personal banking increased from the low level last quarter, but declined on a year over year basis.
Commercial formations were higher in Q4, mainly due to a few files in different sectors and across three provinces.
Financial markets had a net repayments in the quarter.
On slide 13, Youll find details of our retail mortgage Mueller portfolios, which remained stable during the quarter.
In summary, we were very pleased with the strong performance of our credit portfolios in the last quarter and the last year.
Overweight, Quebec, and underweight unsecured consumer lending continue to position us well for strong performance in the current economic context.
Now ill turn the call back to the operator for the QNX.
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Our first question is from Steve stereo with eight capital. Please go ahead.
Thanks very much.
Couple of things for me first on on wealth.
And on expenses very good operating leverage not just for Q4, but for 2019, and I think 2018 as well.
But I noted Lou you called it out as industry, leading and then just laying knows I noticed you suggested that the low sixtys.
Is what we should look out for 2020, so that intending to signal.
The other really phenomenal run an operating leverage is starting to hit a bit of a wall and will dissipate in in 2020.
Great question, so about that will answer it.
Well. Thank you for the question, we if we did over the last three or four years.
Efficiency ratio from around 70% to 60.3 in the last quarter. So as you Sleigh said this has been a grade ride.
And we had a lot of ideas for low hanging fruit I don't think there that obvious now.
But essentially one thing I want to make a strong point on is what we did as essentially working together working better together, eliminating some of redundancies.
Operating not does each business as a silo, but together with you see in also in PMC. So that's what we did but we're investing heavily in our private banker, we're actively recruiting investment advisors, so and we've doubled our IP investments over the last three years. So we did.
Find a lot of ways of working better together.
And there is obviously less of that going forward, we're focused on positive operating leverage every quarter.
But I don't think you'll see the same 10% improvement over the next three years.
Okay, that's fair.
And then.
We now you're talking about another strong year for AB in 2020.
It's a bit difficult given the size, but how should we think of that versus earnings nearly doubling in 2019.
Well as I said.
It should be another good year.
At some point as a bank gets bigger and earnings basis gets bigger I think just riskmetrics will do its work and it is kind of start slowing down, but I think it's still a business, which over the mid long terms just tell grow.
A comfortable double digit for a pretty extended period of time given.
Given the dynamics of the banking market in Canada, and Cambodia, and the fact that its economy thats.
Phil can grow six 7% real on an annualized basis for for an extended period of time. So to the extent that you have relatively stable global economy, that's an economy that and a bank there should generate I would say.
Good double digit earnings growth going forward.
Okay and last thing for me just you mentioned the commitments to Credigy in your grew double digits outlook for 2020 can you talk a little bit about what the pipeline looks light in terms of are you doing anything different in terms of perform mix performing versus nonperformer geography.
Sounds like that.
Online in the short term, but any any.
Initial detail would be great sure. It is mostly U.S. So from a geography standpoint, it's the same focus as the last three or four years.
So almost exclusively us.
Almost exclusively performing at this stage, we feel that performing given where we are in the cycle is a better risk return patterns.
And then it's quite diversified from the rest.
Mostly secured but still a segment an unsecured.
That's pretty much and we have most of the deals that we were you know they have a strong pipeline thats been signed up already that's why we have.
Relatively good level of confidence that.
You know they have they have a good year had them in 2020.
Okay. Thanks for that.
Okay.
Thank you. Our next question is from Meny Grauman with Cormark Securities. Please go ahead.
Hi, Good afternoon, Luis spent a large part of your remarks, highlighting economic strength in Quebec, and we definitely see in your results, but I assume some.
Some of your competitors do too so I'm just wondering if you could comment on the competitive environment and whether you see that as a risk heading into 2020.
Good question.
I think the economy in Quebec has been improving.
It's not a phenomenon thats the that dates back to the last 24 months I think steadily has been improving.
And I remind you that Quebec.
Did pretty well trained or last recession. So.
Oh, eight or nine on a relative basis to connect the economy has been pretty good so.
And so our competitors.
Investing in Quebec, I would say is more a 10 year phenomenon than one or two year phenomena. So that's why you know it's continuing of a have a reality that we've lived and for quite a bit of time. That's why you know we don't have any special concerned for 2020.
We remain very focused on.
As I said are the balance between you know generating decent volume growth.
Good risk management, and good margins and that's what's driving pretty much where were comfortable in terms of volume growth in both retail and commercial banking.
Can you on the on that subject of the margins specifically in the in the Canadian PNC business can you comment on the expectation for next year I'm not sure. If you didnt ready if I missed.
No I don't think we've answered that.
We will answer that guides.
So the outlook on lines and associates you have are always mostly flat.
It's from the year, maybe somebody that can you see some beef from one congrats to the other but so lets me Scott.
And does that.
Does that.
Clued forecasted bank of kinda rate cut or no.
Yes, it does.
Thank you.
Limited one.
Thank you.
Thank you.
Our next question is from given the shine with National Bank. Please go ahead.
Afternoon.
Just want to follow up on the Qubec market, but the different angle here.
Im seeing your loan growth, both commercial and personal coming in a bit below peers are delivering.
Mike.
Across Canada.
Just wondering if there's any a deliberate action on your part to propel loan growth given the more conservative outlook.
Hello.
Hi, Mike.
As onto with that maybe they read Dan flavor of the question. So I would I would say generally on mortgages, where we're quite comfortable where we stand at 4% more against growth generally I would say, none we grew up portfolio by remaining disciplined on pricing also and as we've seen that.
Flats mines.
Thanks, Andy and within also on same risk appetites and by new wave. This up if I didn't change much much.
Irrespective of their real estate market. So we tried to see consistent on that front and whats important sent this point is that we see an upward trend in net interest income coming from the mortgage activity and this for US is present them at this point, so thats why we pantheon the on the longest front.
Our commercial Stefan.
Commercial so you saw a loan growth of 8% and we're very comfortable with that with that growth level that the to the cycle and you've got to recognize that as far as you look at the overall real estate.
Growth it was flat year over year on a bank wide perspective, so it is solid and on a non reliance on real estate or better comfortable with that approach.
Okay.
Shifting to Credigy.
I just want to get a sense it sounds like the pipelines.
Pretty tangible there.
I wanted to get a sense for the funding how big.
You want that portfolio of again before you start I don't know looking for.
Funding.
Turning to maybe partners or anything like about nature, but the comes to mind, when we think about growth.
In particular.
Yep.
We I think we still have room to grow there. That's so thats a good question I think.
We're looking at how much we can support through through wholesale funding, but suffice it to say, we think there's still room to grow on that book.
Then we can support that being said.
We have done a number of deals already with the with the other parties where.
We syndicated part of the part of the risk and the funding in exchange for fees.
So that's a business, which eventually could also grow quite significantly but right now were more the.
Establishing to relationships and determining how we want to take that forward, but there is room to.
To go for third party money in that business eventually.
In the near term constrain no. We've done a couple of years, it's small, but I think we're willing to basis that if one day for instance, during a downturn, we see room for not you know a 1 billion and a half increased and asset flip $5 billion to $10 billion increase in assets in a particular year. Then we would certainly look to partner up with people.
And there's plenty of patient money looking to invest and alternative fixed income assets right. Now. So we don't think and we frankly, rather have their relationships and the paperwork and the backup the back office systems lined up for for that date to occur. So right now it's relatively small, but we're just getting ready for that alternative since.
Ill should that one day should that occur.
Okay last one from me and sticking to a credigy, but also lumping in the international business.
Okay.
Corporate were just over 10% of banks earnings this quarter, but.
For the bank I'm, just wondering given that you still probably going to go grow quite nicely in 2020 credit is going to.
Gear up for a good year as well, where do you see that number going and what's your comfort level, I guess and becoming a bigger part of the bank growth story, well I think it.
Continues to grow from 210, or 11, or 12 or 13 or in that range I think as long as its growing organically.
We're comfortable with the quality of the business.
I think we're comfortable with letting letting that percentage creep up to the extent that we remain comfortable with the quality of earnings that were seeing there and again that it's mostly now coming from organic growth I think thats. That's fine, we're not going to tell them to slow down obviously.
That being said in terms and international segment, that's why we we extended a moratorium till.
The end of 2021, we're not looking to deploy excess capital.
You know two international Division aside from supporting the growth of our existing businesses.
So for me thank you.
Thank you.
Our next question is from Doug Young, ladies and gentlemen capital markets. Please go ahead.
Hi, good afternoon just.
Two quick ones on credit.
It's on that there was an uptick and write offs believe it related it looks like it related to commercial banking, hoping to get some color on that.
And then on just trying to get a sense of what impact that come back many payment change had on your cards and if it didnt have a big impact I'm just I'm curious why that meet the case.
Thanks, Doug I'll start off and then I'll, let Lucy comment on the second part.
Write offs that you noticed there were a couple of files that had been impaired for over a year and the oil and gas sector that the work in process was finished the files were closed than they were written off so I think thats. What you saw the write offs. Okay. The second on the minimum payment.
So yes, there was a new regulations starting in August 2019, nothing back to that because we were already and the minimum payment which is expected.
This which is 2.5% so starting August 2020 leased it increased 9.5% payments our peers.
So you are already at the minimum you like with new and existing card.
Yes, we were.
And did you do that in anticipation of this change or was that just something thats always been part of that philosophy with your current Buck.
Data men.
Hello, and thanks for the last three years.
And I don't think we anticipate and Dan trains at that time okay.
And well, yes, okay, sorry, and then just thank you very much and then Credigy I saw there was a loss in non interest income.
Hoping to get a sense as to what that related to.
Thank you my friend, John There is and they will answer that looks more like to funding situation.
There's a.
There is various amount sometimes you go into net interest income sometime in other income and thats on the.
Nishu intercompany funding.
Just kind of inter okay. That's fine.
Okay. Thank you very much.
Thank you.
Our next question is from Sumit Malhotra with Scotia capital. Please go ahead.
Thanks, Good afternoon.
Starting with a couple of questions for the personal and commercial banking segment. So in your prepared remarks, you made the.
You made the comment that the bank has been investing heavily.
In the business and some of the new initiatives.
I know, there's there's more that goes into investing than just looking at the overall expense line, but it is a question that.
Comes up from time to time that.
The level of expense growth for for this business has been lower and I think you've indicated.
It should increase heading into the next year.
Is there.
Those put it this way when we look at 1% expense growth in the segment for the quarter or something like two for the year is there more going on in terms of for lack of a bit of term recycling. Some of the expenses that is keeping the level low.
Or there's some other factors at play that we should think about when when you comment on investing heavily in the business.
I'm not sure what recycling of expenses for TV or but I think is slowing I think you sorry, just to explain is maybe there's a there's some some projects that get completed and you're able to in the next year use.
Those proceeds into another project, rather than new money having to be allocated.
I think sleigh alluded to I think.
And they are opening remarks directly addressed I think you know why I think we will look.
We had a pretty good on the expenses and.
So you have an explanation there and then maybe to see after that you can add to that.
Yes, well for 2019 as as you mentioned that means you expense level.
<unk> was low but you know some explanation to know.
We had a lot of opportunities and.
Initiative that we.
We put in place.
We were help also by you remember.
Some of the charges that we took in Q3 that would benefit not just Q4, but also between 2020 and 2021 and some corporate costs also that we had some savings. So so thats whats for 2019 and of course. So we don't expect these and 2020 are most of these in 22 and so.
This is why we expected the expense level in PMC to normalize around 3% in 2020.
And so sorry go ahead.
And on where we are investing it it's really.
People add this year. We've also added capacity in our sales force both in retail and commercial and we continue to deploy also again.
Training plans from our employees in branches in contact Center next year. So employee investments remains an important part as well as innovation in data into time and.
And it was asked earlier about.
Given the strength economically in Qubec, whether I think the just so the question was whether you're seeing more competition from the.
Cronto based banks and the province, I wanted to go but at the other way when it when I think about some of your Qubec based competitors one of them reported today has been having balance sheet declines for some time.
Your your larger competitor, obviously, other well publicized out abbreviations seems to be undertaking a management restructuring.
I appreciate your calendar here have the challenges some of your closer to home competitors have been facing.
Given the national some greater advantage in terms of market share pickup on the lending or deposit side in qubec.
I think we see that question last quarter and I think you know what we've been saying summit is that enters our client acquisitions. It's been we had a very good year in 2019.
And momentum continues to be very good that being said it is difficult for us to do.
There's been many initiatives related to this.
A number of which predated.
The events at our main competitor so in terms of contribution in terms of acquisition, it's pretty difficult for us to comment on that but I think the main thing is.
And we've always been.
Very dedicated and very present in our local markets here.
We do care about market share, we do care about number of clients with reduce over a longer term perspective, we've seen the ups and downs and some of the most.
Longer term perspective in terms of to come back economy and that we remain focused on long term. That's why we keep repeating it I think we've been pretty consistent on that summit that we looked at the right balance between volume growth.
The risks risk box that we put in and the margins were generating because we feel that over the long term. That's what will drive I think good quality of business growth, but also long term sustainable increase in market share. So thats what were trying to combined and.
So the ups and downs of our competitors, both come back and outside of comeback.
They come and they go but I think we really want to stick the predictable be a reliable partner for.
You know, we talk clients and business clients.
And continue to drive that business going forward.
You see anything that I missed on that or anything else that no no or Stephane Paul.
Todd that we've seen or market share growth.
In the in the aggregate Vienna AG business in the in Quebec, and a lot of a clients have also come to us through open accounts as as an alternative in light of what our competition is facing and come back with regards to security issues.
Last one from me this one.
It might be more for for Lucy Doug brought up the topic on credit cards and I feel like it's one part of the business, we haven't explore too much with national obviously, the industry's thinking a lot about the.
Air Canada redesign or early relaunch in 2020, when it comes to credit cards loans in the PNC segment have been pretty flat for a number of years and.
That is is a better if you will buy what we see on credit card fees in your and your fee income, which have actually been growing at a pretty good clip. So maybe maybe a bit open ended but credit cards at least from alone perspective, or a smaller part of your business Thats help credit.
Curious with competition, perhaps heating up again in 2020 in the current space. How you view nationals competitive response, and what you want their credit card products to fill in your line up to consumers.
I'll start the then Lucy will pass so in terms of the credit in terms of risk management I think we've been again I think we've been very consistent doesn't know in terms of.
Very clear that we favor secured.
Lending as opposed to let the cycle so that we've been not the most aggressive.
You know grower of the <unk> of the a credit card portfolio I don't think is a surprise anyone.
In terms of however, underpayments side I think we have a lot more interest so until that yes. So on the previous guidance in terms of outlook.
John I would expect have been growing the low mid single digit next year.
Then.
We will continue to grow their portfolio within our risk appetite like we said, but we will face some headwinds in terms of.
New regulatory elements coming into effect and on over annuities and also the reduction of interchange rate. So going forward. Our plan is to continue to grow that business Forrester within our and the penetration of our customer base.
May need and also increasing the number of active accounts and working with our loyalty program. We believe it's important to own and currency in terms of loyalty program. So it is an area, where we won two and.
Two distinct our staff with the particularities number program. So we will continue to invest in our loyalty redemption experience and program.
That does that give you an overview that's a that's very helpful. Thank you for your time guys.
Thank you.
Our next question is from Mike benefits with Credit Suisse Securities. Please go ahead.
Good afternoon, a first question for Lucy just going back to your commentary on margin expectations for 2020 MPC banking.
So we've heard some of your peers talk about competitive pressure driving margins down in mortgage lending and that's an area where it looks like a lot of your larger peers.
I have really focus a lot more in Quebec as was alluded to earlier.
So when you have your margin outlook being relatively flat for 2020 does that imply that you're going to remain disciplined on pricing and we should maybe expect slightly lower growth relative to peers in that part of your portfolio.
It does and we started doing that's already in 2019, so far that the decrease that we see also in terms of mortgage is not happening in qubec, but outside cubic where.
The related markets in until you NBC were very competitive index contact. So we have made conscious decision in favor of the remaining increasing net interest income instead of volume.
So at this this definitely approach.
Management principal and in our discipline.
Okay. Thanks for that and then maybe just a quick follow up for Bill I'm looking at your regulatory capital disclosure your loss given default in the residential mortgage uninsured portfolio. Now. This is certainly a part of your portfolio I would consider to be very low risk, but just given what we've seen with.
Consumer insolvencies at the industry level in recent months.
I guess my question here, what's piqued my interest is why why the loss given default would be so so high it looks like about 20%.
In your case and and just given that your starting point is a loan to value of no more than 80, So how does it get to such a high loss given default.
Hey, Mike.
Oh I'll answer it a maybe a broad level and see if the fed addresses and I'll talk to but the insolvencies I'm on the insolvencies and personal insolvencies in Canada, you have seen an increase in Quebec.
The country I think it's important to look more granular at the data I believe there's a differentiation between the urban areas.
Click Montreal versus the rural areas.
And that's a factor of demographic were population growth has been and job creation.
And in the insolvencies in.
In Quebec, the dollar amount to be lower than the rest of the country because of that consumers typically are less embedded.
As well as there is more propositions, then bankruptcies and in that you'll see that data for it's obviously going up and you see the performance across the country in delinquencies for mortgages not going up so it really seems to be impacting the unsecured.
Credit versus the secured credit and of course, as we talked about a few times in the call already we're comfortable with our weight in terms of secured versus unsecured.
In terms of the loss given default I don't have a technical answer for you, but I'd say generally we tried to enter in our modeling.
For a regulatory capital we tried to be conservative in the modeling on probability of default in loss given default.
In regulatory capital you look.
Through the cycle views downturn views on the loss given default so.
I'd be more conservative or loss, given default number two to low rather than a bit higher.
So just just to sort of finish off there so that 20% is that.
I get it theres conservatism built into that but.
With that largely just reflect the discount it probably has to get applied to.
Home that's in foreclosure.
I'm just trying to run through the costs and it seems like that that would probably be the bulk of it for share. It sounds like maybe we could have an offline discussion given more deep more technical details and happy to do that with you might great. Thanks very much.
Thank you.
Our next question is from Nigel This is that fair just investments research. Please go ahead.
Thank you good afternoon, if I could.
Turning to your financial.
Market segment and apologies if you've already gone over this but I was wondering if you could provide more color for your outlook in 2024 financial markets and also if you could touch on.
How are you able to buck the trend and this quarter because.
As a sector level has been challenging and softer environment for capital markets that you've been able to grow that.
Corporate investment banking.
And also equity.
Revenue in our global markets was also really strong was that you mentioned structured products, but if you could just provide more color would help strength this quarter in which outlook is for a 22000.
Sure. This is a low aren't thank you for your question also.
So for 2020, we remain optimistic.
Obviously, assuming a good economic environment than favorable markets.
I think in terms of our trading businesses were really well position.
Our M&A pipeline, we invested a lot in terms of talent over the year. Our M&A pipeline today is probably double the size of what it was.
A year ago, So we're very happy about.
The opportunities that we have there.
Our lending book, we're going to remain prudent.
We've had good growth in 2019 were we think we're going to see through the same kind of growth in 2020.
But again remaining prudent so we're staying away from LIBOR transaction. So in terms of outlook, we're optimistic obviously, assuming a good markets and economic conditions.
Going back to Q3.
Sorry Q4.
Yes, we've had.
Very good quarter or I think Q3 was also strong so the second half of the year versus the first half I think overall, we're benefiting from a well diversified business, which remains Canadian focus.
And as you know when we work on growth initiatives were working from I think a competitive advantage in terms of our cost structure. So it's really while optimizing it has been really well optimize over the years. So it does provide us I think with some advantages there.
So more specifically in terms of performance.
Yes structured products was very strong in Q4.
And that was continued from Q3.
What we've seen is so couple of things we've increased our capabilities over the year in terms of new products and that has paid off in Q3 in Q4.
We've widened distribution specifically to institutions on structured products and we've seen growth abroad, and overall I mean, the markets were good.
In Q4, so I.
I mean, the market conditions, we are good for the type of business.
From a coin standpoint, I think we were seeing a couple of things.
There is interest for our name as an issuer and we've seen that demand grow throughout the year and specifically coming from outside of Canada.
Overall, I think we were distinguishing ourselves with our structuring capabilities and our time to market and the landscape on structured products over the past five years has changed significantly.
As of sales period instrument size growth.
Interest coming from various investors and National Bank. It has always been a focus for us and we've adapted our business overtime.
And made the proper level of investment in people and technology and I think it allowed us today to capture a fair part of the market share.
So the strength of Q4, there. We've also did quite well in a rate overall with our corporate clients and institutional clients.
I think that but.
Would would provide you with a good summary of what went well.
Yeah I appreciate the color that was very insightful. Thank you.
Thank you. Our next question is from Sohrab Movahedi with BMO capital markets. Please go ahead.
Hey, Thank you that's actually a pretty good segue to my set of questions. If I look at yeah.
The notional value associated with that total derivatives.
It's up quite quite handsomely over last year.
If I look at risk density that you report on the counterparty credit risk exposure.
It's also up.
Year over year.
Really across all enough corporate it's I guess solvent.
And.
And financial decisions, just trying to kind of get it feel for what sort of risks.
Are you, taking presumably in financial markets for the trading revenue that may or may not manifest itself right now based on what we seem to capital ratios WH I'm, just trying to get a better feel for that.
I don't know who is best positioned to answer that.
No not will answer that yes.
So.
Activities with our corporate it's mainly derivatives in terms of hedging foreign exchange and rates.
So when you see an increase in arguably a mainly it's it is the increase in terms of counterparty credit risk and often linked to mark to market valuations of our positions so not additional market risk, but yes additional counterparty risk for sure and then we do have to assess site more capital for that.
But it is the is the I guess is the credit quality of the counterparty deteriorating care I mean, you've got on page 40 41 off your.
The supplementary regulatory capital disclosure I mean, it looks like you've got still around 2400.
Of course, but the average LG de has gone from 28% to 37%.
Hi de risk density has gone from 16% to 20% just trying to kind of understand.
And if youre, taking basically additional risk to generate the trading revenue.
Hi, its sareb, it's bill.
For some of the technical discussion on the risks densities, we could have an offline discussion, but I would say.
At a high level, where we have the transactions with.
Corporate and commercial clients that are hedging either issues of bonds in the U.S. and Canada or hedging.
During their FX.
You would typically have those in a non collateralized trade, which will lead to a higher counterparty risk high risk density for a lot of the activity, which.
You talked about more in the six structures products, where there is a market risk isn't on the book of National Bank Thats transfer through the products you may have high notional of derivatives involve however, the counterparties would typically be large banks collateralized with the CSC typically at zero threshold. So there was density is quite quite low.
So I think depending on what type of activity. It is there was density would be different but happy to go through the the chart in the South Park with you offline.
From a strategic standpoint, it's Rob just no.
Change in terms of Counterparties counterparties are either.
Canadian corporate circuit, and governments or global financial institutions that hasn't changed.
Over the last X. Many years. So I don't think you should see a major shift in terms of risk preference or targeting.
So I'm sure bills and go through more details, but strategically that hasn't been a big change in risk focus there.
I appreciate that thanks, very much a bill I'll take you up on the offer at after the quarter. Thank you.
Thank you once again, please press star one at this time, if you have a question.
Next question is from Mario Mendonca with TD Securities. Please go ahead craft afternoon, let me can go back to Credigy from moments. So you've offered the commentary that you expect a little.
Stronger growth in 2020 than in 2019, if I can take you back to early in 19, you suggested that the environment may not be.
Conducive for growth there and that I think you'd also suggested that.
They just weren't opportunities for growth has what has changed that's giving you a little more confidence to grow that business is that as simple as.
The assets, you're targeting or is there something more to that.
Good question Mario I think he was I think late 18, an early 19.
A couple of things were happening liquidity conditions in U.S., where they're they're very good.
And for Credigy, sometimes the best proxy is to look at what's going on in the securitization market in the U.S. So if people can take you know assets any kind of assets, even complex assets and easily securitize them that is not a good environment for credigy.
If you see the securitization market getting more difficult more difficult to a package and sell deals and for whatever reasons more portfolios more supply of product is coming on the market that is a better environment for credigy. So essentially the difference between Q1 19.
Our H 119, NH to 19 was basically.
A better environment for.
For credit Gi and probably a tougher environment in terms of.
Risk perception and from funding and securitization standpoint for other parties. So that's basically been.
The big change too.
And also we knew in 19 that they had to quite a few of assets maturing.
So they had the backend of the of the lending club deal maturing in late Ninetys 18, and early 19 and also the other deals maturing. So we knew that just to replenish some of the deals maturing debt to generate ex volumes and did.
Things got much better in the second half of 2019, so thats been the big change on the environment remains favorable for a for Credigy right now a marissa I think it's still an environment, where they feel they can deploy capital and get to and get decent return on capital and this new capital or a capital you're going to deploy.
In these new assets has the mix change that would.
Results on the change in the risk profile credigy or the margins.
No I think it's a as I said, it's all mostly performing.
Non performing is a very small part of the portfolio right now and in terms of asset classes. It's a it's.
It's not new asset classes that stuff I think the same stuff we've had for the last few years. So.
Thats basically I don't think should be changed there. Okay. If we could just go then to maybe for a moment.
I could use a little help in understanding how you look at the risk adjusted margins in that business.
When I look at your net interest income and compare it to either the assets or the loans.
It obviously speaks to a pretty big like a pretty healthy margin.
Instead loans at something like 10% against assets and we'd be more like 650 basis points.
But yet the pcls remain fairly modest so when you look at the risk adjusted margins in that business.
I guess is that they would look awfully healthy to you right now much higher than what we've seen anywhere else in the beginning in your bank.
How do you look at those risk adjusted margins changing over time as this business matures in the loan season.
I think we're still comfortable that.
The as you know, we're very very targeted in terms of the segments that were covering under lending side in a in Cambodia. So we dealing with small family owned businesses.
But we take your real estate the house as collateral.
That essentially describes 90% of the portfolio in Cambodia and that percentage has remained essentially flat for the last four years.
So that's why we're quite comfortable in all the industry has been quite good yes. Some of these loans are new so you know how it matures at some point you could be a bit of a pickup in terms of loan losses, but fundamentally we're quite comfortable with the with the their risk profile that asset. The reason that the nims I've gone up Marios that we had.
With.
The deposit platform because of the success of their internet banking more about banking and the fact that we've been growing.
The branch network, we've been gather a more and more checking account deposits transactional demand deposits why would pay zero interest and that's been replacing savings deposits way, we paid some interest and essentially to drive up and Nims has been coming from the fast growth and as you saw in our stats when we.
My opening remarks, we've had faster growth in our deposits in 2019 that within in loans and almost all of it what's coming from a transactional deposits, which is as you know the best performing at the best types of deposits. We can hope for so that explains essentially the performance.
And that's why I think just because of of math and a bigger based.
The speed of growth should lower over time.
Still expect good years over 420, 20, and 2021 and the foreseeable future, Okay and just to put a final cap on it then is it the Cambodian real estate marker like residential real estate that we should be most sensitive to for changes in the quality of that portfolio that portfolio. Yes. Those are small loans average I remind you what does that.
Richard owns about 50000, U.S., so we're not in large.
Commercial development and Phnom Penh under the places like this that's not our business. It's a series of very small loans.
Two family owned businesses, where we take the real estate as collateral.
Thank you for out.
No problem.
Thank you.
Our next question is from Darko Mihelic with RBC capital markets. Please go ahead.
Hi, Thank you you know bill I was going a lot of a bunch of technical questions that you too, but I decided.
So maybe hold off maybe we can talk about a quarter or something but oh.
Bill has disappointed.
I will throw one that you. So your stage one stage two if I add those those allowances together.
You have good coverage against your last 12 months of losses.
Really only what are the pure as far as I can calculate has good coverage bought.
That number has been around 500 million since Q2 2018.
So the question I guess is bill.
I know, you're adding to the reserve little here and there, but it's been very flat for a very long time, so how do you anchor or how should I look at that.
That figure I would've thought that it would be growing a little more aggressively given the fact that you've got growth in loans.
Thanks for the question Darko I think the number you're looking at is probably aggregate across all of our loan books, including international.
And I would say, there's another slide I think a slide 27 in the sat Fi where you can see it really broken down more.
Bye bye.
Business.
The different sectors and our business.
And I say that because it's very important to look at that number.
Separating out international from the domestic books, if you remember over the last two years in the International book There was a lot of movement in the levels of both impaired pcls and performing PC sales coming from credit Geez unsecured consumer book growing and then aging and then amortize.
Thanks, So through the time period, you're looking at you had significant decrease in stage one stage two pcls in the Credigy line that made sense because the assets were being repaid so I when I look at the at the level of allowances I think to answer the question of do I feel comfortable that and we've got prudent levels.
Allowances I do look at the numbers separately and in the domestic books.
The ratio that you are talking about of.
Non performing loans over last 12 month impaired loans.
Is around 220.
Between 220 to 30.
And I think Thats, a I'd say a good number because there hasn't been any significant change in our business mix or profile or geography in the domestic portfolio. So nothing to adjust in either the numerator denominator.
And I'm quite comfortable.
Where that number is the twotwenty at this point in the cycle that its a.
Prudently covered in the international sectors. This at the the growth rate changes and the business mix and Credigy makes that a less useful metric less useful ratio.
I think looking at 220, I would expect to performing Pcls to increase given the good growth visibility, we have and good growth in in Credigy, but even so I would still.
Counsel you to look at the businesses separately between domestic and international does that answer your question Oh, that's very good. Thank you and I wasn't getting it what that slew of technical questions.
So if we could talk after but one last thing just occurred to me that.
As we look at the growth in Credigy.
It'd be a bank.
It's coming on at standardized risk weights right. So it's fairly it consumes a fair amount of capital is there ever a hope that would go to air be any that stuff or is that a is that just to just just wishful thinking.
Well it does not have spent eight EPA of certainly all standardized.
We have some of it is advancing pretty cheap it depends if we have a model that we can use for that but some of it is that.
Okay, and how much of that would like I mean and is that what we're looking at going forward from here and when you're thinking about a.
Stronger growth in Credigy or with the are we looking at actually advanced modeling. So it's not too much of it on the capital it depends because the portfolio are changing a lot in and being paid we pass what we don't want to develop a model that takes one year or two in the portfolio will be ought to be paid. So we will use model is the model already exist elsewhere at the bank So does that.
The percentage of advanced compares the percentage of standard varies depending on the portfolio mix.
Understood. Okay. Thanks, very much guys.
Thank you.
There are no further questions I was just turn at this time I would like to can you meaning back over to you Mr fashion.
Thank you everyone and.
Have a happy holidays, and we'll talk to you for the results of Q1 in February Thank you very much.
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No this is pretty modest coffeehouse WP.
Office Stifel. Please.
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Okay opinion, because it had been coastal communities.
Your next question with funding.