Q4 2020 National Bank of Canada Earnings Call
All participants the PC standby your conference is due to begin good afternoon, ladies and gentlemen on the welcome to the National Bank of the Canada fourth quarter results Conference call.
I would now like to kind of moving over to MS. In Dublin on <unk> Senior Vice President of Investor Relations. Please go ahead ms.
Thank you operator, good afternoon, everyone and welcome to National Bank fourth quarter and full fiscal year 2020 presentation.
Presenting this afternoon or do we best show President and CEO, David but now Chief Risk Officer, and you said the Hall Chief Financial Officer.
Following our presentation, we will open the call for questions.
Also joining us for the two any session the ours they find out shopping the sea bloodshed co heads of PNC Bank can Mustang on your own head of wealth management.
Okay got Indonesia of while co heads of financial markets enjoy national senior VP of finance.
Before we begin I refer you to say two of our presentation, providing national bank caution regarding forward looking statements with that let me town no turn the call over to the we've actually.
And then the on thank you everyone for joining us today.
Before discussing our results I would like to say a few words on the extraordinary circumstances. The world is facing and then which we have operated and 2020.
From the onset of the pandemic, our focus has been on the well being of our employees our clients and our communities.
Our mission of the Sporting People's first got it does and all our decisions.
Hi, I'm very proud of the way we adjusted.
This would not have been possible without the strong engagement of our employees and the transformation we have achieved over the past five years.
Our entrepreneurial culture, and the agility of our organization our true comparative advantage.
Yeah, I played a key role in our ability to adapt and perform well through unprecedented circumstances.
Earlier today, we reported strong results from the for the fourth quarter with EPS of $1.69, excluding special specified items in line with the pre pandemic levels.
For the full fiscal year, our business has performed very well with pre tax pre provision earnings up 9% compared to last year.
Even after having set aside significant reserves.
Over the last three quarters, we have maintained robust capital levels.
We also generated an industry leading return of 16%.
Return on equity of 16% for the year, which speaks to the resilience of our franchise and the sound diversification of our earnings stream.
Returning capital to our shareholders remains a priority, but consistent with all she's guideline.
Buyback activities on dividend increases remain on pause.
Earlier today, we declared a quarterly dividend of 71 cents per share on change from the previous quarter.
Turning now to the performance of our business segment in fiscal 2020, and gross drivers going forward.
I am pleased with our performance in personal and commercial banking with pre provision pretax pre provision earnings holding steady year over year.
This reflects solid growth on both sides of the balance sheet offset by lower interest rates and client activity.
Our performance translated into market share gains in key product categories, namely mortgages and deposits.
We also saw some pick up in commercial activity in the fourth quarter.
The depth of our relationships the quality of our advisors and their commitment and agility of our teams proved to be key differentiators, enabling us to support clients throughout the pandemic.
We were pleased to see significant increase in client acquisition and satisfaction scores, which is strong testimony to the ability of our teams to provide the support and advise our clients need.
The bank digital transformation has been at the heart of our strategy over the past years.
Accordingly, we were ready to support a major uptick in digital adoption rates, which went up nearly 500 basis points among our core client base.
In many ways depend on mic has effectively accelerated our digital transformation.
And 2021, we will continue to invest in our PNC franchise to support future gross.
We will make the maintain on focused on client acquisition and prior to the segments on offering proactive advice through bolt on sales force and digital channels and on deepening relationships with clients through all business lines.
Since the beginning of the crisis. The bank has been very proactive in helping businesses.
In the context of the ongoing economic recovery. We recently created the National Bank Me gross fund in partnership with the Quebec Government I.
I'm pleased to announce that we have just completed the initial raise of $200 million on capital.
The equity fund will complement the bank financing already offered to SMI owners to help them with their transfer of ownership gross and acquisition plans, whether in Quebec or elsewhere in Canada.
Our wealth management franchise delivered another strong performance, we pre tax pre provision earnings up 10% for the year.
This reflects solid transaction volumes and net sales more than offsetting lower interest rates.
Our advice first strategy is bearing fruit and resulted in the significant increase in our NPS scores this year.
As we enter the new year in the context of persistent low interest rates, we remain confident we can generate future growth fueled by our active recruiting strategy.
Enhance cross selling initiatives with PNC and market gross.
We are pleased with the strategic positioning of our wealth management franchise and the diversification it brings to the bank.
In fiscal 2020, and represented 23% of revenues and generated superior return on equity.
For its part financial markets generated record revenues and pre tax pre provision growth of 25% for fiscal 2020.
Our global markets franchise, we're well position going into the crisis and delivered a particularly strong performance on.
Our corporate then the investment banking franchise also performed well driven by M&A and government debt issuance.
Looking forward on.
Financial markets business remains well positioned to continue to deliver growth, albeit at a slower pace against a record performance this year.
Moving to our international segment.
Maybe the bank delivered solid results in fiscal 2020.
Net income was up 50% from the prior year driven by strong growth on both sides of the balance sheet.
Aviate continues to gain market share in Cambodia, and is well positioned to benefit from the economic recovery anticipated in 2021.
Credit GE also performed well in the past year in the context of a challenging environment.
We saw strong momentum in the fourth quarter with net income up nearly 40% of sequentially and 84% over last year, driven by higher revenues and lower Pcls cash.
Credit just strong piano performance and stable balance sheet reflects both asset quality and teams disciplined.
This morning, we announced the acquisition of the remaining 20% in Credigy, increasing our state to honor percent for fiscal year 2020 the.
The additional stake acquired the Credigy what of increase National Bank dilute the EPS by seven cents.
The senior members of credit as management team reiterated their pursuit of personal commitment to leading the next stage of credit business growth strategy as well as their confidence in the future prospects for the company.
Credit GE has greatly exceeded our returns expectation since our initial investment in 2006, and we continue to see attractive growth potential in the future.
Overall, we are very satisfied with the performance of our international segment, which continues to be well positioned to deliver strong growth next year.
Looking ahead, while there continues to be uncertainty around the trajectory of the economic recovery economic activity has recovered from the slows.
In the province of Qubec second wave locked down restrictions have been more targeted and most sectors remain open on.
Overall and given the recent developments regarding the availability of an effective vaccine in kind of the next year, we expect the gradual improvement of the kit in Canadian Bank Qubec economy and 2021.
Looking back on 2020, I am proud of the bank's overall performance and the year marked by Unprecedent the.
Uncertainty and volatility the bank managed to meet for out of its five of its medium term objectives. The.
Strong performance that's confirmed that we have made the right strategic choices in terms of risk management capital allocation and business mix.
With four strong pillars were well position to maintain a sustainable pace of growth and we are reiterating our medium term objectives for 2021.
In closing I wish to sincerely, thank our employees for their exceptional contributions to the success of the bank over the past year.
Everyone across our organization deserves recognition for their dedication and flexibility.
I would also like to thank our clients and shareholders for their confidence in the bank as we continue to build an agile bank well positioned to grow and create sustainable value to the benefit of all stakeholders on that I will now turn the call over to build on it.
So you may see Luisa and good afternoon, everyone.
I'll begin on slide eight with the look back on the credit performance for the full year of 2020.
We entered the crisis on solid footing with strong credit quality and the defensive positioning.
Our resilience geographic footprint and product mix helped to deliver an impaired PCL ratio of just 23 basis points last year.
During the year, considering the on certain macro economic outlook, we proactively built prudent allowances picking a total of 30 basis points of performing provisions.
We finished the year with 53 basis points of total provisions for credit losses.
In the fourth quarter, compared Pcls were $82 million, a decline of $6 million from last quarter as wholesale and International Street stage three provisions declined and retail stays three provisions remained stable at low levels.
Provisions on performing loans were $20 million or five basis points as we continued to build our performing allowances.
Our updated macroeconomic scenarios are presented in the appendix 17.
As you can see the pessimistic case was adjusted to depict scenario of unemployment rates remaining higher for longer.
On the weights of this pessimistic scenario was increased.
Even with those changes retail.
Retail performing pcls were negative $9 million, reflecting the continued strong performance in those portfolios.
Non retail performing provisions for $27 million, primarily reflecting the scenario change and some migration from stage to the stage three.
Our international performing provision was $2 million driven primarily by portfolio growth at EEI.
Looking ahead to next year.
Significant uncertainty remains about the path and the speed of the economic recovery.
We expect impaired provisions to increase throughout the year.
In retail portfolios the exceptional Rhys recent performance should normalize and impaired should begin to more closely follow employment trends.
Non retail impaired provisions should also increase during the year and as you know can be lumpy from quarter to quarter.
Performing provisions should largely be driven by changes to macro scenarios portfolio gross growth and migration.
Combining our view of these factors and our portfolio mix across geographies products and sectors and considering the level of allowances. We've already built we're targeting a range and total pcls of 25 to 35 basis points in 2021.
Turning to slide nine.
Our allowances for credit losses grew to more than $1.3 billion in the fourth quarter, which is 75% of higher than at the beginning of the pandemic.
Performing allowances reached almost 1.1 billion, an 80% increase since Q1.
The non performing allowances as a percentage of gross impaired loans was stable at 43%.
With all the information we have today, we are confident that we have a prudent level of allowances.
On slide 10, we provide some key metrics to help assess the adequacy of our provisioning.
Our strong performing Hcl coverage was stable 2.8 times and our total allowance coverage of net charge offs increased to 5.4 times.
Absent a significant deterioration on are forward looking scenarios I expect that we're close to the peak on these coverage ratios.
As impaired provisions increase over the next year and some stage two allowances migrate to stage three I would expect these coverage ratios to be lower at the end of 2021.
Turning to slide 11.
Our gross impaired loans ratio was stable at 49 basis points for.
Formations in retail and corporate banking declined while formations and commercial banking increased due primarily to new formations in oil and gas and wholesale trade sectors.
On Slide 12, you will find an update on our loans under deferral.
As expected deferral balances declined significantly down by 81% in retail lending and by 74% in non retail lending on the quarter over quarter basis.
Deferrals in resin now represents just 0.9% of that portfolio.
And more than 40% of those are insured.
Our payment experience to date has been positive with 98% of expired the resin deferrals and 99% of expired non retail deferrals, having restarted regular payments.
The trend we saw last quarter of performance varying significantly across provinces continued with the Quebec consumer showing the best payment rates.
We will continue to work closely with those impact of clients to provide support through this difficult period.
Turning to slide 13.
The mix in our Canadian Resolute portfolio remained stable with 38% being insured and 55% being in the province of Quebec.
Uninsured mortgages and the Helocs for condos represented 7.4% of the total portfolio with the majority of being in Quebec, and with an average LTV of 59%.
In the of indices, you'll find further information on our loan portfolio, including details on our exposure to covert impacted sectors, which remain modest and manageable.
In conclusion.
While there have been positive signs of ongoing improvement in employment and GDP as well as recent optimistic news about vaccines. The remains much uncertainty to the path and speed of the economic recovery.
We have been pleased with the performance of loan portfolios. This year, but recognize that there is a long road ahead to return to pre pandemic economic conditions.
Given our portfolios geographic product and sector mix as well as our prudent the level of provisioning. We remain very confident that we're well positioned to continue to support our clients throughout this period on the.
I will turn it over to just low.
Thank you Bill and good afternoon, everyone turning to page 15.
We ended the fiscal 2020 with solid results in the fourth quarter capping off another strong year from National Bank revenues were up 7% for the year and we delivered solid operating leverage of 1.6% demonstrating the resilience and diversification of our business mix.
We were also very pleased with the positive year over year revenue and pre tax pre provision growth in the fourth quarter.
The higher corporate expenses were linked to a year end variable compensation adjustment associates associated with higher revenues.
One of fame into a supplier costs related to depend dimmick and higher investments in brand and technology.
Despite the pen day, Mick we continue to move forward with our transformation in 2020, as we adapt to the changing needs of our customers and reinforce our culture of change and operational agility.
In the fourth quarter, we took from reserves to address the evolving needs of the bank as part of our ongoing transformation.
First we reassign employees to fill vacant positions based on their professional skills and reduce positions considered redundant in our current operating environment. The.
This will allow us to limit at concentration in fiscal 2021, it's the resulted in $48 million of severance cost.
As second measure, we also wrote of $71 million and technology assets no longer useful to the banks business.
Both items were reported as special items in the fourth quarter results as the relate to the to our transformation and will result in the ongoing operational efficiencies.
These measures are expected to generate pre tax savings of approximately $43 million in fiscal 2021 or $50 million on a fully annualized basis.
Didn't tired of management team remains highly committed to maintaining our long standing discipline approach to cost management.
We also remain fully committed to the transformation of the bank as we continue to invest in the business to support the banks sustainable growth.
In fiscal 2021, our main focus will be on in Ensync line to experience supporting new business initiatives and simplifying our systems and processes.
In the current context, we are confident that we can achieve positive pretax pre provision earnings growth in fiscal 20 to anyone.
Our scenario was also suggests positive operating leverage is achievable in 2021.
Pending on the level of revenue growth the.
The team is committed to achieving good the revenue growth despite the context of significant economic uncertainty.
The first part of 2021, we'll provide more insight.
Now turning to capital on page 16, we ended the fourth quarter with a strong C. On the ratio of 11.8% 85 basis points from the last quarter gross.
The growth in credit risk weighted assets was offset by a reduction in market risk from lower var, resulting in flat to risk weighted assets quarter over quarter.
In the quarter, our CB, one ratio was negatively impacted by 20 basis points due to credit to risk weighted assets as the results of the combined effect of two items first continued asset growth in each of our of business segments, which reduces the one by 10 basis points.
Again net negative migration reduce C by 10 basis points, mainly driven by the re rating of wholesale doors in coated in fact, it and does impact of industries, partially offset by improved credit scores from retail clients.
In fiscal 2021, the regulator of their regulatory scalar for LTL.
Relief will decrease from 70% of 50%.
Based on our current expectations, we anticipate the change will have a negative impact of seven basis points on our receive you on ratio in the first quarter of fiscal 2021.
Now turning to page 17, our LCR remains strong at the 161% with continued growth in deposits in the fourth quarter.
The total capital ratio stood at a solid 16% at the end of the fourth quarter.
In conclusion the.
The bank handed fiscal 2020 in a solid position.
The strong balance sheet significant reserves and diversified revenue growth levers I refranchise is well positioned to generate attractive growth in 2021 Whit.
With that I'll turn the call back to the operator for the acuity.
Thank you.
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[music].
There will be of beef.
Just a couple of questions.
Thank you for your patience.
Our first question is from John Aiken from Barclays. Please go ahead.
Good afternoon, a couple of questions on credit you heard me the.
In terms of the the transaction of first off is the rainy.
The contracts being put in place to make sure that the current management team stays on.
For an extended period of time, and secondly, can we assume that the transaction is being funded by cash and non issuance of additional shares.
So on the second part that is funded by cash. So there is no. There is no issuance of shares and Ah on.
On the first part of the your question.
On the team I think remains the the senior management team remains very committed they have committed to to us and to their colleagues said today that they're staying on from many more years. They already have incentive plans in place, but as you know we've been working with these guys now for 14 years and from there.
The thing we see the remain fully committed to the business going forward. So we don't have any concern the edge on on that particular part of.
Credit going forward and on top of that our bank strength of that team as the obviously over the last 510 years, we brought on the new generation of managers also.
So I think we expect to keep the founders on board for many years of calm and secondly, we have the we have a good team surrounding them now so all good assets.
Thats good to hear and if I may follow on in terms of the performance of credit view. This quarter. I know you guys look at year over year, but looking of the saying on the sequential gross.
It is very strong growth in in revenues and yet so we actually saw a decline in the average loans on receivables Q4 over Q3.
Is there anything in terms of additional revenues. The Credigy earned this quarter. The explained for that and then by by definition business, meaning that we would expect.
Headwinds to revenue coming of the first quarter of next year.
John to of definition for that a portion of interest due to volume showing your average volume the during the quarter any of US a higher volume thats quite some time and also there is mark to market. The of some of the portfolio. That's are looking revenue like reverse mortgage and other type of portfolio and the work.
Downgraded in previous quarter and upgraded in the fourth quarter. So all together to help the business.
Thanks, a question on I'll re queue.
Thank you John.
Q.
The following question is from the Meny Grauman from Scotia Bank. Please go ahead.
Hi, Good afternoon, just wondering how big the headwind you think trading will be in the coming year definitely a very strong year.
In 2020, and how important will that be in terms of.
Your guidance on the PT Pp next year.
One of the low.
Now I will start on the on the first part.
Sure.
And thank you for your question, Yes, 2020 was an exceptional year, a driven a lot by trading volume.
So going forward, we're still very positive, but we expect obviously lower gross and specifically in trading.
Now, having said that and based on also the the good momentum that we've had.
In the second half of the year HM. We we think there is some potential growth in 2021 and the are a couple of sectors that we're we're confident about the fixed income and public finance that has done quite well for us this year and we remain quite optimistic about it to in 2021.
Our structured product business as well HM we.
We also expect the pickup in sales.
The Securities Finance on we saw a reduction over the past the six month, but we're seeing a pick up right now with the markets and.
On the M&A market is.
Really picking up so we are seeing positive momentum there so that drives the acquisition finance as well so.
Yes, the headwinds, but remaining positive.
And then just as a follow up more generally on the guidance on PT pp, you talked about positive, but but no.
Others sort of numerical guidance.
Relative to the 9% you put up in 2020 is there any more you can give us like what are the.
What are the key factors there I know, there's a lot of uncertainty, but if you had to pinpoint sort of key variables that would.
I would kind of the push on that number what are the more realistic areas, where you think maybe.
You could drive better on peak.
PT pp results from 21.
I know the slowly I think the the way we look at it we see revenue revs.
Revenue growth has the main delta here not you know I think weve remained very disciplined in terms of expenses on when we look at different scenarios going forward the delta and the scenarios is all about a four for the P. TPP is about the surround revenue growth not not expenses.
So.
The good news is I think.
We're going into 2021 with very good momentum and all of our business lines. So what gives us comfort of of being positive ERP of for 2021 is the momentum of PMC that you've seen continued very good momentum in wealth management.
Continuing with very strong momentum in international.
And then.
In capital markets, well, you know, maybe not strong growth compared to 2020, but I think we.
No low low single digit growth compared to 2020, I think we'll be happy with us. So that's why I think we're you know we're not going to give you additional just having a a positive sign on PDP I think is going to be a good news for of four for us frankly and for the rest of world.
The how it goes and then the other big Delta that.
We want to talk about as Pcls, obviously, and Bill will I'm sure we'll get questions about that so revenues in all of those scenarios revenue growth and the assumptions around Pcls are the main point of differentiation between the scenarios not revenue gross not expense growth sorry.
Thank you.
Thank you.
The following question is from the.
Doug Young from Desjardins capital markets. Please go ahead.
Hi, Good afternoon, maybe just to start with Teensy banking and 2.19%.
The sequential increase was.
The nice I'm just wondering if there was anything unusual in there is that repeatable just hoping you can attack what actually drove the sequential increase in Mems and what what's the outlook for the Nims as you kind of hearing the fiscal 21.
Yes. Thank you for your question so our margin of home quite good in the current environment I would say and the negative impact of the yield curve one of the since it might better spreads on the repricing of the loan book on the sequential basis.
And on the outside notes I would say that we've been successful on growing our balance sheet, Wyoming discipline on pricing and we will maintain that.
We will also continue to evolve on pricing methods on energy Bank. For example, we introduced AI based modeling in the pricing on the mortgage is so we will continue to refine them and evolve back from on new products, but that being said, we expect the myth of pressure coming from the low interest rate environment and also the snow.
Down we expense in the deposit growth mainly in the second half of the year.
Perfect. Thank you and then just on the capital market.
Ratio of 37.2% and I know this is just the quarter and on an annualized basis total throwing at their business on new run rate for the division business factor in some of the cost saves that you've gotten from on the severance or or is this just the clock back in the quarter, we should be looking at something a little bit higher as we kind of pure out of the next few years.
The so Doug this is long, we've always targeted low fortys from from quarter to quarter, you're you're going to see some movement of.
Because of higher revenues or or.
A reduction or an expenses.
But in the case of Q4, what we did is we we reduced expenses specifically on comp.
ER and that was for a a to address the.
Realized low losses. So it is just the a onetime item for the quarter.
Okay and the.
And just lastly, I.
25 to 35 basis point PCL total fiscal 21.
The factor in releases on performing loans loans.
Through the year can you maybe on talk a little bit more of what's what's behind that 25 to 35 basis points of thank you.
Sure Doug. Thanks. Thanks for the question. It's Bill. So you know looking ahead to the 2021 I think you've heard us mention a high level of uncertainty.
However, what gave me the gives me confidence in talking about that.
The good range is a few theres a few factors one is really understanding our positioning of geographic product business mix and the the discipline underwriting we had before the downturn.
And now we have more history on the performance of the expired deferrals.
The we are deferrals or expired more rapidly I think than some peers. So we now have a good experience on understanding of the geographical differences in performance and the product differences.
I think to are modest exposure on covance sectors and seeing how they performed through the years helped give us some clarity and as well this quarter. We made are pessimistic scenario, even more pessimistic.
And the increased the weight of that scenario. So we have a.
We think that the the the.
The pessimistic scenario really does account for the.
Dark a potential path of of the recovery.
And from.
Finally, really understanding the size of the allowance that we've built so far which should help us to be able to absorb some of the the gross and if there is a more migration and the unexpected so that's kind of whats behind the our thinking and setting the target range and as for the pattern.
On the year, we do expect in parents to increase or a true at the year and probably more on the back half and the it has been parents increase there is the natural Mike.
Migration of stage, two allowances and the stage three finance.
On your question Doug.
It does I guess.
Gration does this factor in.
On the IRS nine models as you look out in Q3.
And you start to see a bit of an improvement in the economic outlook and you have to bring down your story you would bring down your stage three oh, sorry, each one of the stage two allowances that factored into this or is this just the normal migration between one two and three and its not factoring in your forward looking indicators being adjusted.
Yeah, I would say the a change in our forward looking view during the year would be in the in additional change into the certainly would it would generate some releases of the forward looking view was was much more positive than the the our.
Our base case or the weight. The we have now on the up the mix to the mix scenario. So the the 25 to 35 is pretty broad I think as we go true into next quarter and maybe in three months on this call. Some of the uncertainty will be down and we'll be able to give you a little more guidance on where we think in the pad range.
We will end up but as of now it's a of given the level of uncertainty I think that's a pretty good range.
Great I appreciate the insight. Thank you Doug its Louise So just two I think as Bill mentioned.
On an ideal world.
You know, we don't live in an ideal world, but ideally we want to grow the book in our loan book into the stage one stage two reserves that we have.
And the as opposed to releasing done in the over.
The quarter of two or three so that's why the 25 to 35 does not include the.
The scenarios of releases.
Great. Thank you.
Thank you.
The following question is from the March percentage from Cormark Securities. Please go ahead.
Thanks, So when you're talking about the momentum in PMC is is expense savings a part of it like where I'm going with this is when I look at the sub pack branches in Canada have declined for the past five quarters is the strong digital adoption the catalyst to revisit your bank strategy, perhaps shifting to smaller.
Branch footprints or accelerating the rationalization.
Uh huh.
Yes, so we talked in previous calls and on or on the efficiencies that we generate the didnt 2020 coming from the distribution network and also from the refinancing of our of our branch footprint. So actually we are we've been rightsizing some urban markets on the <unk> when our branches where we on.
More redundant the casing, but that didn't change of branch here. So when we entered plans from 18 to 21 and we've been executing on on that man from net that's what you see the and of course, citing the digital adoption is anywhere from.
The continued to improve and on the efficiency.
The I think depending on mix and gave us the of Fortunately Ti to increase the percentage of digital adoption in our customer base. So our intent is to and take the full potential of those opportunities, but on this to reinvest the part of these gains into revenue generating activities and.
To make sure the we invest reinvesting on growth for the future. So that's kind of the plan and the very high level.
Okay. So then we won't see like an acceleration like specifically if I look at Q3 2024 O nine and then down to four of three in Q4 were not going to see if I go to like something like 15 branches of corridor that sort of thing.
No no overall in the 2020 I think we were up to 19 and through that we on the last couple of the openings in some very specific areas.
Okay perfect. Thank you.
Thank you following question is from Nigel the Susan from.
The investments. Please go ahead.
Thank you good afternoon I was.
On the turn to your.
Macroeconomic forecasts for 2021, and if I could touch on your expectations for a decline of the housing price index. The next year I was hoping you could expand on what you see as.
As drivers for that decline and a is it fair to say that you know the read through here as you expect mortgage growth to soften a bit going forward and then lower demand for real estate.
Out over the next few quarters.
Hi, Nigel it's Bill I'll start and then any clues you can comment on expectations for mortgages. So I I think overall when you look at the macro economic scenarios. The takeaway is that there they are prudent.
We were pleasantly surprised by the performance in house prices, so far during their pandemic, although in our our forecast, particularly on the pessimistic case, we don't assume or the.
The strength in the housing market to them, but the I think the for the macroeconomic scenarios on that which goes into generating our allowances you can consider those of those a scenario of quite prudent. The seed you want to talk of US look looking forward for the mortgage growth sure.
But just before going into the outlook on the mortgages I think we add to the next and I think you think he was sent on mortgage in the 2020. So we add originations hit is very low levels coming from the performance of our on distribution channel and we've been able to improve the mines in the and I like I, just said and of the same.
Finally on some large volume while decreasing on operational so.
So we really starts when you 21 with that strong momentum.
We expect the we will grow slightly lower than what we have been achieving 2020 and I think the man will continue into the stimulated however, and we expect some slowdown in the resale market and due to this go down the integration, but also the concern around the supply of potentially across the country.
So this is the kind of once we expect for next year.
Okay, and just to clarify the u.
On the dynamics to be consistent.
Play on cut back as well or is that more sort of national outlook.
The national ounces.
Okay. Thanks of the color.
Thank you.
The following question is from Mario Mendonca from TD Securities. Please go ahead.
Good afternoon can you guys hear me, Okay, yes sort of an area of area right. Thank you I want to go back to the an answer to a question that caught me a little off guard was with response to trading revenue.
Trading revenue was up about 23% year over year in 2020 of the.
A good year did I hear you correctly in suggesting that you see avenues of growth that could where you can actually grow that still further in 2021 or were you referring to capital markets earnings from when you made the reference to growth in 2021 rate.
You are talking about capital markets as a whole I think we have a.
As a greater level of confidence or the kind of capital markets a level. That's a whole merial shred day, you know trading as you know is the question Mark you know it's.
So you know [noise] Q.
Q2 was a it was an unbelievable quarter. So it's it's kind of be a you know it's a hump for a day for 2021, no doubt, but that being said married on none of us know.
How and the economy.
No transitions out of a pandemic.
So that's why also we may be surprised with the level of volatility on volume.
So that's why it's a it's a question mark around trading it's on an exclamation mark.
But the other avenues that we see the M&A pipeline is extremely strong.
Underwriting on the bond side and the.
Even on the equity side has been very good year to date.
So I'm just on for the best sure.
Sure and when you're referring to growth and capital markets, you're referring to earnings not not revenue again I just want to put on one of the to find the point of it but I want to make sure I understand the.
That is correct.
So you know you know your non <unk>, we we went through that and.
In 2009 2010, if you recall you were there at that time and of wells. So.
So you know I think it's you know we did it then I think we can do it again, you know small increase year after year.
Just real quickly on expenses expenses were somewhat elevated this year all for very good reasons. They.
They track the revenue growth, obviously positive operating leverage when you think about expenses in 2021.
On on and I know your operating leverage target is far more leveraged to revenue than it is expenses. So what do you contemplate for expense growth from 2021 is the is it conceivable that you could fall back to the expense growth. We saw more like 2019, when it was lower than what we saw on 20.
Ah Lisanti will depend on how things evolve, we I think as a team as you know Maria we.
We've shown the agility in the past of the of.
You know maintaining and disciplined on the costs.
Ideally.
I would say I think where we're at today I think we're being disciplined on the cost side, but hopefully if we continue to see good momentum on the revenue side going into Q1, and Q2, I think that's where we'd rather focus as the franchise as opposed to cutting expenses that the you know what.
At all you know that for any of scenarios. So I think that's where we're at.
Going in and that's why the the up the leverage scenario will depend on revenue growth because I think we're.
You know I think.
Yeah, we're looking pretty much had low single digit increases and the and expenses in the 2021. So the the delta will be whatever the revenue growth is around that.
Thank you bank yeah.
Thank you.
The following question is from Scott.
From Canaccord Genuity. Please go ahead.
Good afternoon on.
My question is on international New and I think during the start of the pandemic you or you are pretty cautiously optimistic on on the earnings traction this year and you kind of fast forward and international segment delivered.
Similar earnings growth than in fiscal 2018, I think around 25% when you look on the fiscal 2021.
As the economies improve as their drivers of the business to kind of maintain that profitability moving forward.
Well, let's start with one the first driver is credit GE and the portfolio growth. So.
What's interesting is they have managed to grow their portfolio as John mentioned earlier in Q3 and Q4. So we already have you know the growth into the portfolio of that was done in 2020.
Acting as a you know as a as the catalyst or Ah Ah.
To help grow our business in 2021, so I think for a of four credit GE I think we have a a.
On a relatively good level of of comfort around their growth the.
Prospect for 2021.
For the BA its what's been a frankly, a positive surprise for us is the extent to which.
Their digital solution.
As broad a gain in market share over the last six months and and Cambodia. So as everybody moved to a less physical to more digital types of payments.
Their client acquisition has accelerated.
And also the adoption of their payment solutions has also accelerated.
So Ah that's a very interesting now the the question Mark there for a for the earnings of the it'd be a is.
How long is dependent Mick on the last it's impacting negatively the the tourist industry in Cambodia. The good news is manufacturing agriculture and construction remains quite strong that's why we've continued to grow our our loans.
So you know, but I think that's why overall I think.
You know, we we should if we don't have double digit revenue growth for international.
And 22 in the one I think we'll be disappointed as the team.
That's fair and just lastly on before the pandemic you kind of talked about unwinding some of the non core investments in Mongolia, Marine business and Ivory Coast I'm wondering if there's an update there on that front and has.
The things the seem to be looking a bit better heading into 2021.
Nothing to report of Scott I think its a the you know the pandemic is not an ideal environment to monetize that type of assets. So it's probably been delayed for flow the wild because of the pandemic.
Okay. Thank you very much.
Thank you.
Following question is from Sohrab Movahedi from BMO capital markets. Please go ahead.
Okay. Thank you and.
Maybe I'll go to newly but Chad, but maybe the business had one of chime in as well do you said something I thought the kind of interesting yeah.
Yeah. The allowances are the healthy on you'd rather grow the loan book to grow into them as opposed to release the reserves and I didn't make sense. The obviously you were.
The careful with your volume growth pandemic I'm, just curious to understand.
For example in capital markets do you think.
Quite adjusted gross will have to come from from more balance sheet intensive business is next year.
Or radware, where do you see risk taking the if you will on loans loan growth to grow into those reserves that you're talking about how important is that going to be.
What's sort of implications could that have on hard the viewing.
Oh, sorry, I'll start and.
I guess I'm, not making sense of my colleagues will step in the.
The.
The I think where we see right now well, let's start with the retail I think we have good momentum with the with mortgage is going through the year.
You saw that that's true for our friends of the fine in commercial and his team at pretty good momentum on commercial.
We're hopeful that sometimes during 2021.
The usage of credit by small and medium size businesses will start growing again.
We're quite active on on real estate right now industrial and.
And the same it she insured the residential housing.
And then the capital markets I would say of balance sheet, Yes, I think the.
The main thing there could be the M&A pipeline I think that's where over a six to 12 months period, you could see an increase the significant increase it could come from the very busy I mean, the pipeline, which appears to be the case right now, but as you know that can be.
Can be very fickle. So those are the what we see going into the new year you know three.
Three and half weeks of four weeks into the new year of what we see as potential driver to grow the balance sheet in 2021.
And so just to be Chris the pier Luigi the the emanate Bank capital markets. This would be what to providing acquisition financing. For example that is correct and same thing by the way in commercial I think people are.
On their estimate of you know the level of which M&A and ownership transfer.
Can play an important role in growing the commercial loan book, particularly for a non real estate or the non real estate category.
And is there any I mean, what does cause in the <unk>.
The way to grow faster than the loan gross.
Is it possible the riskiness assets relative to the kind of on the back book, If you will probably not I'm looking at bill or stuff I don't think there will be a big change there, but if we have slightly higher or faster growth in the loan book. That's why you know that's that is a scenario and that's maybe a little bit more optimist.
The scenario, but under that scenario, we would not release model driven stage. One stage. Two we were just as I say grow our two of your way into those reserves.
I think it will be a so I think it'll be particularly the wouldn't be the case because.
As we venture into a commercial markets, we're going to the also out of the impact of our real estate multi residential strategy, which is largely insured lakes, we mentioned, thus minimizing the impact on risk weighted assets.
And then I guess this new you requiring you to even look from.
Are there any of your Crystal ball I guess, but when you think about this mix of volume growth.
Can you can you quantify what sort of say what sort of spread you would you would be generating on these types of activities or what you would hope to be generating on what you would be targeting to generate on these things.
I think you know when I look at this crystal ball I, just see my face reflected into it right now.
Net add up [laughter] Oh, yeah, that's fine that's fine Okay. No rate I mean, I think like new C. mentioned that for example of mortgages are coming from.
And on a net.
At about three basis points better spreads and those that are rolling off so I'm, just trying to kind of get a feel for.
This is this reason to feel optimistic about.
Margins at the at the all bank level of non trading margins National bank level as well.
I think the the issue so Rob is competitive behavior in the market and that's what makes it more difficult to.
The give you of guidance on because I just don't know you know hopefully in an environment, where the economy is improving or what will be you know the the competitive behavior in the market.
Thank you.
Okay.
<unk>.
[noise] up operator, do we have another question.
We do have the question from Darko Mihelic from RBC capital markets. Please go ahead.
Hi, Thank you well yeah.
Yeah in the army Yeah, we can hear you Darko now.
Thank you.
I apologize im going to dive into the weeds here, a little bit with a few of my questions.
I also wanted to revisit the idea of momentum.
And so my first place that I wanted to dive into from my model was wealth management.
When I look at the revenue picture.
Especially with what's occurred over the 2020.
The net interest margin compression.
I'm not sure that rates change much. So I don't know that picture by the way should probably talk the treasury in the funds transfer pricing you being penalized for the growing deposits and assets, but anyway. I also see a you know you had really strong transaction and other revenue in the year that could be fleeting just like potential markets trading could be.
And then when I think of the fee based revenues I think of stronger equity markets and so as I sit back and as I think about revenues for the wealth business.
6% was a very strong showing.
But I don't see any of the pressure is going away on net interest income and.
It'd be hard to reproduce transaction kind of revenue so is it.
Revenue growth the low single digit a reasonable.
Number four or the wealth business in 2021.
So I must say I will the amount that is very happy that you asked a question on so it is a it came to answer Darko.
Thank you the worker, we the I believe you need to look at some of the trends that we had in 2022. The give you an idea of what's going on and if you look at a new way and the U.M. gross we we did really well and clearly above the industry and I think thats the.
Gross.
The strength of the franchise and the fact that we have a diversified business model and we were able to compensate for a lower net interest income in 2020 now looking at 2021, we add the a record number of the new I use that NBF.
Oh very very strong recruiting.
Recruiting in 2020, which is not reflected in the numbers yet.
We of a strong pipeline at the end and we also of invested a lot in our private banking franchise, a there's a new cross selling initiatives. All of this to say that you know the of course, if you annualize lower interest rates, which we have in our forecast for 2021 of the impact on EPS.
<unk> is the same but we.
We are forecasting still strong a you wait a U.M. growth. We also of the we don't have hard numbers to prove this but we believe we have gained market share in the trading revenue in commission revenues and so this is also going to be strong of four.
2021, and we believe growth in the fee base to be above market. The market growth again related to you in the U.M. group. So we're confident.
So as the 6% kind of revenue run rate is.
Is conceivable is the.
On my putting words in your mouth [laughter] on where.
You know, we're going to work really hard to put up the EPS numbers weekend.
Okay, [laughter] fair enough I always try and overstep the balance and the question on on mortgages is well what extent Oh are you thinking about more sort of mortgage acquisitions in 2021 or is that activity.
On is that activity expected to slow down.
Are you talking sorry.
Darko, you're talking about new Oh, you're.
You're not talking making strategic acquisitions, the talking about the new client acquisition right.
Yes.
Yep.
Ah you know you see a I think we remain quite a I think thats the market, we like and we want to continue to grow on that market, yes of course, because the price and mortgage product isn't anchor probably won't go through it for the whole on banking relationship and the we've seen quite good weeks out from the.
You know on the customer engagement on that fund. So it is the anchor frenzy for US the continues to grow for sure.
Okay fair enough. Thank you very much appreciate it.
Thank you.
Following question is from Mike is none of it.
From Credit Suisse Securities. Please go ahead.
Hi, Good afternoon, a question probably the best for Lucy I, just wanted to touch on the tech related spending and just being the smallest bank of the big six of I know, we've we've had discussions on this in the past.
It doesn't seem day, there's anything in your numbers. The suggests that your disadvantaged by any means but I'm just thinking given what we've seen is a bit of a I guess the step function in the police toward digitized nation because of cold did you see any any gaps that you maybe need. The sale are you are you still confident the you're very well positioned in terms of your capable.
All of these versus your bigger peers.
And I would say, we're very confident of aren't capabilities the versus their peers.
And when I look of the number of some of the really need the indicators. We look at the is is we need the just on adoption and covance as given us assets.
And leap frog in terms of progression and obviously with that.
From the improvement in the customer experience, but it's going to go so we the automation and isn't the line things on a long process.
So a nice on we really want we really intend to make the benefit of the news games and and all average in <unk> in every area of some of the business day weekend and I think on so from that comes from the perspective. The fact that we are small there gives us an advantage in the anti.
Into implementing the changes bank for example of this year, we end of plans and we have the plan along with the Rightsizing of the of branches. We have a plan to regroup is on branches more of the wise advice.
And then the we had a plan with bank, we saw net Google could accelerate on plan and this is exactly what we did so at this point we arent. The we have 25% of earnings net is me purpose and we see pockets of keep the eyes on on friends, even with the and increasing getting a decent going on assumption in the goes into the branches. So.
So I think we've been able to show net we it's been quite a giant and with the opportunities there to get the brings us.
Because of the thanks for that color on the re purposing, but what about branch closures. So just given the big sort of step function that were that moved that we've had here on the Digitization line like why not the a bit more aggressive on the or your thought process on maybe closing branches. The I'm, assuming the Canadians would probably be a lot more prepared for that today than the.
Year ago is that something you can comment on that and maybe you can touch on any sort of a hindrance to that potential strategy, whether it's the optics around it or government interference or in any type of headwinds that you think could maybe pull that back.
Yeah, So I would say the value of the.
Okay, then I think that we are probably the most aggressive on that front compared to one of these write them.
So and that's that's one thing and our plan is really aligned with the behaviors of our customers. So that's the that's the piece for me that that is really important.
We need to go and that based on the customer want to change their behavior and we don't want to push the name on on the out of on brands and so it's I wouldn't say, it's moving that is probably more of the driver and then anything we intend to make the these let's.
Lets me quite and I'd be happy with the the pace and the cadence that we have so far and the Nike like we mentioned maybe in the past the true that we also want to relocate on capacity and into more on device based Rome, Lorne any transaction on room and.
In between dance, we also and reduce the square footage of number of branches. So were not missing the closing at the point of sale the reducing it.
The gives us on some of the benefits. So that's kind of where we were heading.
Hey, thanks, very much of the color I appreciate it.
Thank you once again, please press star one at this time for any questions or comments.
The following question is from Gabriel Dechaine from National Bank Financial. Please go ahead and good afternoon figure to sort of a couple of in their also sticking on the mortgage theme here on the topic.
A lot of people are gonna be renewing mortgage isn't next year, a few years anyway of free told the the where the r. and having a lot of extra spending money.
So the 50 to 100 basis points on the there their mortgages.
Like is there a strategy in place or the or anything that you think you can do the kind of.
Translate those household savings into a small.
Some sort of a growth opportunity for the retail business and then I've got a follow up on the commercial.
Yes, the on the first part of your question Gabriel if it.
Really what's the are doing right now so repurchasing our branches more at the ones that line says exactly that still doing you know.
And over and above just the discussion with the customer on renewing and mortgage it too you know going in index discussion about what's new funds will go on and how we can the hail damage team and when the when the when do you start getting its exactly what's been doing everywhere I mean on branch didn't work right now.
So yes, definitely we want to take on appointees than we have on that front.
It would be the easy we're reviewing of cross sell to the wealth business.
The commercial the question well, it's more like a a kind of surprise the saw the 2% the sequential growth in commercial I I suppose the somewhat tied to qubec curbing reopened the bit more quickly over the summer.
I'm wondering how you see commercial lending evolve over the next year I know any forecast of tough these days, but it's typically you later cycle of kind of growth driver of the certainly what we saw before crude.
The or if you're.
Seeing.
Opportunities that you may have shied away from before COO covert that or no more attractive from a risk reward them at the end point.
Okay, well on the on the first part the certainly the the 2% Q over Q is part of leads you to the rebound of the of the large closures we had in Quebec in the in the spring, but it's also the.
Reflecting the fact that the of the economy here is quite resilient, there's quite of a movie as mentioned quite of a bit of activity on the construction side infrastructure projects are still going on and and what I feel and what we feel we hear from for business owners is a business.
Business confidence remains strong the quite stronger than we'd be led to think despite the pandemic. So there's plenty of on M&A activity. So there is a yes, there's the opportunity of reverting back to a precursor of it the pre cobot numbers, but I mean, the uncertainty in front of us well low will dictate where we land as far as that goes.
As far as the new sectors are concerned we're sticking to our strategy and that also entails moving our specialty banking, which is a large portion of our growth outside of Quebec, and we've done so its success in the past and there's plenty of opportunities in the tech Agri and food the AG business as well as real estate than the other.
Particularly the on the insurance side, the net insurance side on the the real estate as perhaps the one area, which is the accelerated the substantially since the the cobot environment. So I hope that answers the question.
Okay. Thank you.
Thank you.
Following question is from Mario Mendonca from TD Securities. Please go ahead.
The question was asked and answered thank you.
Thank you very much.
We have no further questions from the just I'd.
Now I'd like to turn the meeting back of victims the vessel.
Please go ahead.
Thank you everyone for listening to the call and a happy holidays and stay safe and we'll be talking to you for the first quarter results and the in February.
Good day.
Thank you.
The conference has now any day.
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