Q3 2022 National Bank of Canada Earnings Call
This conference has been recorded. Cette conférence est en registrer. Please stand by. Your conference is ready to begin. Good afternoon ladies and gentlemen and welcome to National Bank of Canada's
Also joining us for the Q&A session are Stéphane Achard and Lucie Blanche, co-heads of PNC Banking, Martin Garneau, head of Wealth Management, Denis Girouard, head of Financial Markets, Jusle Taha, head of International and Jean Dagenet, Cenu VP Finance.
Before we begin, I refer you to slide two of our presentation, providing National Bank's caution regarding forward-looking statements.
With that, let me now turn the call over to Laura.
Merci et d'un d'etre and thank you everyone for joining us.
This morning we released strong third quarter results with free tax, pre-provision earnings up 9%.
driven by double-digit growth across all business segments.
This translated into an industry leading return on equity of 18%.
reflecting our disciplined approach to capital, risk, and cost management.
We continue to operate in an uncertain and complex environment.
dominated by elevated inflation, rising interest rates, and heightened geopolitical risks.
While headline inflation recently showed signs of deceleration, it still remains too high.
The Bank of Canada is expected to continue to raise rates in September to slow demand and tame inflationary pressures.
Given this backdrop,
A slowdown in economic growth is expected to persist through next year.
Although the probability of a recession has increased over the past few weeks,
It is not our base case.
Our economics team is currently calling for a soft landing of the Canadian economy.
In our view, inflation should continue to decelerate and interest rates should normalize this fall to just over 3%.
In this scenario, the unemployment rate should stabilize just over 5.5% in 2023.
In this context, the bank is on solid footing.
Our capital levels are strong with a CET1 ratio of 12.8%.
Our credit portfolios continue to perform well.
We are maintaining a disciplined and balanced approach in underwriting new deals.
and we continue to carry a prudent level of reserves.
Turning now to our business segments.
PNC delivered a record quarter with revenues surpassing the $1 billion mark for the first time in its history.
Pre-tax pre-provision earnings were up 18%.
supported by strong growth on both sides of the balance sheet, as well as expansion of net interest margin.
On the retail side, mortgage loans grew 8% year over year.
Given the rising interest rate environment, we anticipate the demand for real estate secured lending to continue to normalize back to pre-COVID levels.
Several factors continue to support the Canadian housing market, including strong immigration and unemployment at historical lows.
We also expect Quebec's housing market to be resilient given better relative housing affordability, consumer savings and debt levels in the province.
Commercial loans are up 17% year over year, with solid growth across industries and geographies.
While clients are being more prudent due to the economic context and higher financing costs,
We expect commercial law on demand to remain robust in the coming quarters.
Our wealth management franchise delivered a strong performance this quarter.
Pre-tax pre-provision earnings were up 11% year over year.
highlighting our diversified revenue mix.
We saw a significant uplift in net interest income, propelled by a large deposit base
and rising interest rates.
We also delivered strong net sales in all channels despite challenging market conditions.
demonstrating the depth of our franchise.
Financial markets had another strong quarter with revenues of $611 million up.
14% from last year.
Momentum continued in global markets with strong performance across most business lines.
Our corporate and investment banking franchise generated good results supported by domestic M&A activity and balance sheet growth.
Our performance track record in financial markets speaks to the
to the resilience and diversification of our franchise.
Moving on to our international segment.
ABA Bank had another strong quarter, with revenues and net income up 28% and 31% respectively.
This was driven by strong loan and deposit growth.
The underlying fundamentals of Cambodia remain strong.
The country is underbanked and benefits from strong demographics.
Also, Cambodia is a US dollar-based economy.
As a result, they are experiencing a level of inflation in line with Western countries.
Turning now to our U.S. specialty finance business.
Credigy's results continue to reflect strong underlying performance across asset classes.
rising interest rates, impacted revenues from assets at fair value.
this quarter.
Nonetheless, assets were up 2% on a sequential basis.
driven by higher utilization, new deals and extensions.
In the current environment, Credit Year remains highly selective and will continue to pursue a disciplined investment approach.
To conclude, there are several scenarios on the table as to the path of the economy.
Despite potential headwinds ahead, the bank is well positioned.
Our third quarter performance reaffirms the resiliency of our franchise.
our business mix.
and our strategic choices.
We have a defensive positioning with strong capital levels, resilient balance sheets, and prudent credit allowances.
This provides us with flexibility to grow our business and a buffer in an uncertain environment.
Our businesses are positioned to continue to perform well and generate attractive growth.
our personal and commercial franchise.
has an overweight position in secured lending and a disciplined approach to volume growth, margins.
credit quality.
The financial market has proven its resiliency.
with consistent performance over time.
with a focused domestic strategy.
Our wealth franchise is demonstrating the strength of its earning power through the cycle.
And finally, our international businesses remain well positioned to deliver strong growth.
and high return over time.
Looking ahead, we will maintain our usual discipline.
with a view on our longer-term priorities and growth objectives.
National Bank has a long-standing track record of delivering superior value to its shareholders over the long term.
This remains both our philosophy and our priority.
Before I turn it over to Marichantal.
I would like to congratulate Etienne Zibuc and welcome him to our senior leadership team as co-head of financial markets effective November 1st.
a responsibility he will share with the Nijeroy.
Etienne has been in leadership position with the bank for nearly 25 years.
including as head of equities for the last three.
Congratulations to Tim.
We are thrilled to have him on our team.
Mary Chantal, over to you.
Thank you, Laura, and good afternoon, everyone.
Turning to our results on slide 7.
Revenues increase by 8% year-over-year.
All business segments perform very well supported by solid asset growth, good client activity, and a favorable interest rate environment.
Pre-tax, pre-provision earnings grew 9% year over year.
Our strong performance reflects the resiliency and diversified earnings stream of each business segment.
We generated positive operating leverage of 0.6% this quarter, bringing us to 1.5% year-to-date.
We are well on track with our target to achieve positive operating leverage for the full fiscal year.
Turning now to expense management.
First, higher operating costs year over year are mainly related to investments made in our people over the past year to support the business and remain competitive in a tight labour market.
Our amortization expense also increased in line with the deployment of technology projects.
We are also seeing a return to travel and business development activities, which are contributing to the year-over-year increase.
Second, the other important component is our investment spend to support business growth and protect the bank.
This includes technology projects to enhance client experience and acquisition, and to expand activities in areas of expertise.
It also includes investments in our systems, processes, and cybersecurity.
This balanced approach continues to contribute to high pre-tax pre-provision earnings growth with our expense line tied to our business performance.
All business segments generated double-digit PTPP earnings growth in the quarter.
This was partly offset by our other segment.
As a reminder, the other segment includes our Treasury function and corporate investment.
In Q3, a number of factors impacted our top-line performance in this segment.
This included.
lower investment gains in the context of more favorable markets last year.
Unfavorable mark to market due to hedging accounting inefficiencies.
and the impact of hedging activity against a potential decline in interest rates reflecting our defensive positioning.
The banks approach has always been to target stable and predictable NII growth through the cycle.
We manage interest rate risk dynamically to balance the upside and protect against the downside.
This is consistent with the overall prudent positioning of the bank.
As demonstrated by our Q3 results, the bank is benefiting from higher interest rates.
On a total bank basis, NII was up 16% year over year, and our net interest margin, excluding trading, was up 9 basis points year over year.
In the current market condition,
We expect lower PTPP earnings for the other segment in Q4 compared to Q3.
This will be in part driven by lower investment gains.
In addition, we typically recognize higher expenses in the fourth quarter for this segment.
At the same time, all business segments are well positioned and we are seeing good momentum as we are entering Q4.
Looking now at expenses by segment on slide 8.
Each business segment remains disciplined in managing expenses, ensuring that the right investments in people and technology are made to support business growth. Our teams are also constantly looking at generating efficiencies, which is key in an inflationary context.
This has translated into best-in-class efficiency ratios in some of our segments, again this quarter.
Now turning to capital on slide nine.
We maintain the high CT1 ratio, ending Q3 at 12.8%, while generating strong organic growth.
Third quarter earnings net of dividends added 45 basis points to our ratio.
RWA growth represented 47 basis points of capital.
This was largely driven by asset growth in commercial and corporate banking, and by an increase in market risk RWA reflecting market volatility in the quarter.
There was no NCID activity in 2.3.
At this time, we do not expect any buyback activity in Q4, as we continue to see organic growth opportunities in our businesses.
In the context of heightened macroeconomic uncertainty, we believe it is prudent to maintain robust capital levels.
Once again this quarter, the Bank achieved strong revenue and PPPB growth, as well as superior ROE.
In an uncertain economic environment, the bank's strong fundamentals and prudent approach to capital, cost, and risk management position us favorably to continue generating business growth and long-term value for shareholders.
With that, I will now turn the call over to Bill.
Merci, merci et gentel and good afternoon all. I'll begin on slide 11.
Although fixed income and equity markets experienced significant volatility during the third quarter, underlying employment and economic conditions remain supportive of a strong performance across our credit portfolio.
Our provisions on impaired loans remained very low at just $17 million or 3 basis points.
Retail impaired provisions remain well below pre-pandemic levels. Provisions were stable quarter over quarter in the international segment.
And in the non-retail portfolios, we benefited from net recoveries, which can be lumpy from quarter to quarter.
Even excluding the benefit of these recoveries, our impaired PCLs would have still been low, however more representative of the normalization we expect to continue well into 2023.
Our provisions on performing loans totalled $33 million or 7 basis points.
The primary drivers of the Allowance Build Discordor were the update to our forward-looking scenarios reflecting a deterioration in the outlook.
an increased weight of the pessimistic scenario, and portfolio growth, which were partially offset in the management overlay.
Looking ahead, we've maintained our fiscal year 2022 guidance on impaired PCLs at below 15 basis points.
current underlying conditions, particularly the strong level of employment and consumer savings, support a slower rate of normalization of impaired PCLs than we had expected at the beginning of this year.
Our visibility on the outlook for performing PCLs remains more cloudy due to the significant uncertainties in the economy's path forward.
The same factors we discussed last quarter, inflationary pressures, supply chain challenges, geopolitical risks, and the direction and speed of interest rate changes, are still present and all contribute to a less certain outlook.
In these uncertain times, we remain very confident with our defensive geographic and business mix, as well as our prudent level of allowances.
Turning to slide 12, total allowances for credit losses increased to almost $1.1 billion, remaining more than 40% above the pre-pandemic level.
Performing allowances increased by 4% to $854 million, taking our coverage of last 12 month impaired PCLs to 9.7 times.
and coverage of pre-pandemic 2019 impaired BCLs to 2.7 times.
Our impaired allowance was stable in the quarter and provides a strong 51% coverage of gross impaired loans.
We continue to believe it prudent to hold these significant levels of credit allowances in the current macro environment.
Now on Slide 13.
Gross impaired loans were stable quarter over quarter at $615 million or 30 basis points.
net formations declined to $34 million, benefiting from net repayments in commercial and corporate loan portfolios.
As I mentioned last quarter, we had expected the expiry of moratoriums at EBA to generate an increase in impaired formations and that these should peak before the end of this year. The President and the Democratic Commonwealth provided the prioritization of this grant by implemented guidelines provided by fund departments for supporting the stabilize of gross income from their resource assistance and gross effort to provide funding audition on? concerns about low income rail payments and 70 states traffic payments on all signs of significant change in order for fiscal its development and increasing in scared formations, but these trees should peak before you
So far, the actual performance is matching our expectations.
These ABA loans are well collateralized and prudently provisioned.
Slide 14 provides details on our RESO portfolio.
The geographic and product mix has remained stable, with Quebec accounting for 55% and insured mortgages accounting for 30% of the total portfolio.
LTV on our uninsured mortgage portfolio you improved to 50%.
And on the HELOC portfolio, LTV was 46% based on authorized limits or 28% based on outstandings.
Approximately 31% of mortgages have variable rates and investors account for about 11% of all-resil boroughs.
While higher rates have already impacted the housing market through lower volumes and easing prices,
The resilience in our Resil portfolio remains strong.
borers incomes are rising. The link with these rates improve.
and clients have built up very heavy, healthy levels of equity as demonstrated by the Lowell TVs.
In summary, we are pleased with the credit performance again this quarter and remain comfortable with our defensive positioning, our resilient mix, and our prudent level of allowances. With that, I'll turn it back to the operator for the Q&A. I'll be back to the operator for the Q&A.
Thank you. Thank you. We will now take questions from the telephone lines. If you have a question, and you are using a speakerphone, please lift your hands before making your selection. If you have a question, please press star one on your device.
You may cancel your question at any time by pressing start 2.
Please press star 1 at this time if you have a question.
That will be a very small participant's register for questions. Thank you.
Our first question is from Gabriel Dorshane from National Bank Financial. Please go ahead.
Oh, good afternoon. Just want to ask about Critergy. We did see the assets grow 10% year over year. I'm wondering if some of the disruption in credit markets is getting us, you guys are more optimistic about growth of Critergy in coming quarters because it seems like that that might be the case. If it is, maybe...
where you're seeing this opportunity.
Thank you, Gabriel. This is just like as we discussed last quarter, we remain confident that the current environment will create multiple areas of opportunities for CRDG. I think it's more questions of timing now. So as you mentioned, in the third quarter, we saw a reversal of the trend observed in the first half of the year. So total assets grew, you know, compared to last year and last quarter. So which is...
very positive. But you know we may have more visibility in Q4 but in the current environment the business remains highly selective and prudent.
Good night.
ok.
The wealth business, we saw a big increase in NII in that segment, highlighting the rates and sensitivity there. I'm just wondering if, since we had the 100 basis point rate hike at the midway point of the quarter, is there going to be a similar bump in Q3? Maybe if you can talk about, further down on the outlook, what the deposit beta dynamics are in that business?
But they each have dynamics, the high interest cash performers at different dynamics, and we also raise GICs for the bank through the brokerage channel. So there's a lot of counter effects, but in general you're right in Q3, we had rates increase.
through in the middle of the quarter and we're going to benefit from this in Q4 for sure. I don't want to go any further than that but I'll just tell you this that we've been working on net interest income optimization for years where there's a lot of optionality built in our model and this quarter is a good example of this optionality.
All right, well last one more broadly for those, the bank, just wondering about, when we saw good mimic expansion, about the consolidated level, X trading, I'm wondering how you see that evolving over the next several quarters. When you start to factor in, you know, maybe some funding cost pressure, not, you know, across the industry here, the substitution effect people moving from, you know, zero cost deposits to, you know, term deposits and eventually having to pass through some of the, you know,
the rate hikes to your depositors as well. Maybe you can just share your thoughts on how you see the all-bank NIM evolving over the next few quarters.
Hi Gabriel, it's Marie Chantal. So I'll answer the first part of your question and then maybe Lucy can jump in. So on an all bank name outlook, we're actually very pleased with the level of the name at the moment. Good expansion here to date, 14 basis points. And we do expect it to continue to trade up if rates continue to increase. Of course, it's also dependent of the business mix, but we see a trend going up.
Do you see that you want to? Yeah, and if I can add to that, Gabriel, we don't really see a migration from core deposits to our term deposits.
So we don't really factor in any effect of that. As a matter of fact, we continue to grow our core deposit base.
close to high single digits.
So that's quite far from the tip on the margin.
All right, well, I'll leave it there. Thanks. Thank you. The following question is from many enrollment from Scotia Banks. Please go ahead.
Hi, good afternoon. Going back to credit G, you reference mark to market fair value asset adjustments. I'm just wondering if you give us a little bit more color on what exactly is going on there and also if you could scale it in terms of the delta with the prior quarter.
Yes, so this is Gisselin. First, I want to highlight that the underlying portfolio performance remains strong. We continue to be very pleased with the positioning of the portfolio. As you know, now 85% of the assets are secured. In terms of revenue drivers this quarter, we've had a negative impact from assets at fair value.
due to the rising interest rate environment essentially. The portfolio mix was also a factor this quarter. Of course 85% of the assets are secured, the type of assets generally offering a lower return than unsecured. Those two elements explain essentially what happened this quarter.
So there's nothing in terms of credit in that market market.
No, and as you know, market to market, it's essentially an accounting thing. The fact that we hold our portfolios to maturity, we know that it's temporary. We will get the value back eventually and as I mentioned, the underlying portfolio is still very strong. When the market's solve forYD spots in tools like this, we will have a good understanding of what's coming back. So once again, stop buying atall and then it's done and do your own thing. And stay tuned to help on that.
And then Marisanto, you talked about the other segment a little bit. You highlighted three factors. I'm wondering if you could scale them a little for us in terms of was there one that was particularly impactful this quarter as you look at the...
the difference between Q3 and Q2.
Hi, thank you for the question. I don't think there is any one of them that were more important than the other. As I said in my remarks, investment gains, mostly because of the higher market conditions in 2021, then mark to market because of the hedging position and the interest rate positioning. So, so basically the three elements that explain our...
lower revenues on the other segments. And then I caught a little bit of it, but I wanted to clarify in terms of the guidance you provided, are you suggesting that the loss could be bigger in Q4? I didn't quite catch what you were saying there.
Yes, yes, you've touched it right. We're expecting lower PTPP earnings in Q4 compared to Q3 mostly related to higher investment gains.
So we're forcing little, but given market condition, it's going to be lower.
And then if we look out to 2023, is there anything we should keep in mind? This obviously is always a hard line to forecast, but is there anything that's likely to change in 2023 in terms of those dynamics? I think there's so much going on, it's too early to say. A lot of moving parts, so we'll be able to give more of an out-list next quarter on that one.
Thank you.
Thank you.
Our following question is from Paul Alden from CIBC. Please go ahead.
Thank you. Good afternoon. Seems like you get this question every quarter, but I'm gonna take my turn this quarter and maybe get you to elaborate on the strength in financial markets relative to peers. What do you think were the main drivers that resulted in better revenue and earnings than what the other banks reported so far?
Thank you Paul, this is Denis. Yeah, good quarter, but when it stands out this quarter, it's not only one line of business like we saw in the first semester. Out of our 18 line of business that we're looking at, 12 shows positive results compared to Q3 last year. Two were flat and four were down. Then it's kind of a widespread result that we have. Something spectacular, but just kind of consistency about the revenue growth through.
many business you've talking fixed income commodities effects you know equity it's all from all the centers and back and forth then it's quite good very very pleased with when the results
Okay, good. Paul, Paul, Paul, it's Laurent. Just maybe, you know, adding to what, you know, the disciplined approach that Denis just talked about, one of the big differences that you should be aware of is we are focused on Canada. We have a Canadian platform and most of our peers have businesses in the US and I think that could be a big delta in the results that you're seeing so far.
That's helpful. Thank you.
Next question is with respect to the interest rate hedging that was mentioned earlier in the conversation. So hoping you can elaborate on that in terms of how you position the interest rate hedge. And then when I look at the disclosed interest rates on certificate in compared to last quarter.
It doesn't appear to have impacted that disclosure, so maybe you can help us understand why.
Hi, it's Marishant Aligan. So let me try to answer your question and if it's not sufficient enough. So in terms of hedging activity, it's really related to the normal course of hedging activities within treasury. So we generally aim to limit mark to market fluctuations over normal conditions through hedge accounting, but sometimes hedge accounting is not possible, therefore.
Mark to Mark impact goes through the P&L. And we did saw some of the accounting inefficiencies in the current quarter.
So this is basically what happened. Does this give you a little bit more details?
I think that answers a different question. I was under the impression that there is, out of those three components in the other segment, you mentioned there is the third one.
was the defensive interest rate position. Is that yeah? Yeah, it is. You're referring to, okay. Yeah.
That's good then and then last question for me if I may, Laurent you'd mentioned a positive outlook for commercial going forward and I guess one of the things I scratch my head a lot about is when are higher borrowing costs going to impact the commercial market? Seems like everyone's putting up strong commercial growth including national but have to think eventually higher rates do their job.
not just in resi mortgages, but also in the commercial segment also.
I think my comment is, you know, the trends are good. Obviously with rising rates and overall slowdown, we do expect the growth of that momentum to slow down. But maybe I'll let Stefan maybe give you a bit more color. Yeah, Paul, we're not overly concerned with that. We're seeing a couple of things. For one, our clients have already using rate risk management tools much more than they were.
Profits in 2022 among Scandinavian businesses will be lower than 2021, but 2021 was really a peculiar year.
Okay, I'll leave it there. Thank you.
Thank you. Our following question is from Mario Mandonca from TD Securities. Please go ahead.
Okay, after that, can we go back to Paul's question. Paul asked why the interest rate sensitivity didn't change from Q3 to Q2 to Q3. Is the answer as simple as the company actions to limit interest rate risk were not new in Q3 that maybe they'd already been, those positions that are already been put on in prior quarters. Is that the right answer? Mary, that's certainly part of it, it's Bill.
We refer you to what Lucy mentioned in some of her comments that we are still seeing good growth in core deposits. And the volume of core deposits certainly has an impact on the sensitivity number that's disclosed. So that's another important component.
So were there, were there actions taken in the quarter then that would have reduced the rate sensitivity, ignoring the increase in court of others.
No, your assumption is right. We did not change any hypothesis in Q3. I see. And when the bank says you take steps to protect the margin, is it also as simple as saying you're extending the duration of the liquid assets either in the cash market or in derivatives? Is that also an appropriate way to describe it?
Partially that would be aligned. Say that again? Yeah, I think that's part of it for sure.
Okay.
And then maybe Jessalyn's already answered this question. When you were talking about credigy.
And you were talking about how there were some mark to market charges in the quarter. So maybe it was less favorable this quarter than prior quarters.
Did that go through the net interest income line? Because I know you don't disclose a margin in that business.
But when we started to try to calculate our own margin, it looks like it was down fairly substantially from one quarter to the next. Are those marked to markets through the net interest income line and that's why the margin looks weak?
Yeah, thank you. You will let Jean answer that question. Yes, in fact, it goes into the other income, the market of the fair value to P&L portfolio. What will impact the net interest income will be more the mix of the type of loans that we will have on the book. That we will have on the book. That we will have on the book.
So the margin was down fairly meaningfully then, so it sounds like it is a number I can rely on if Mark-to-Markets are going through other income.
The mix, are you referring to mix in ABA or both? both.
Mick's incredible.
So that was a fairly meaningful drop from one quarter to the next. Is that all explained by Max?
Mostly
NIST and GASA Fund, it's all together.
Okay, so we shouldn't necessarily expect that to rebound abruptly next quarter. Is that fair?
We have new portfolios, so it will depend on the return on new portfolios. We have also extended a loan that is quite profitable that could improve the net interest income also.
Okay, thank you.
Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Hi, good afternoon. Just going to Canadian P&C Banking, the expense ratio 51.6. That's the lowest, or you can correct me if I'm wrong, but the lowest that I can remember. Was there anything unusual in the quarter? Is this essentially a new run rate? Just hoping to dig a little bit into what drove that.
Yes, it's Lucy.
The nature in expense increases is exactly related to what Marie-Chantal referred to in her script. 60% of that is related to wages and FTE.
And the rest is related to investments in the business, basically, and our transformation.
So we're very happy to deliver positive operating leverage in that context, and this is what we're really focused on.
But I was more thinking, not that the expense growth was big, that you actually did a really good job managing expenses and keeping expenses low relative to revenue growth. I guess that's where I was coming at that from.
So is this, trying to get a sense of, is there anything, it doesn't sound like there's anything unusual. Is this kind of a, you've got this business running at a 51-52% mix ratio, and that's what we should be essentially anticipating going forward? Would I read from that?
This is Laudag. I think we need to remain a little cautious about, you know, outlooks at this point time. There's still a lot of uncertainty in the market and uncertainty in also the path of the current macroeconomic environment.
So I can tell you what the objective is. The objective is always to continuously improve our performance. So from time to time, you will see some quarters where it could be a little bit more difficult. But whether you want...
But the idea is we do have targets to always improve our next ratio, but I think it's a little premature to do at this point in time to see that this level is...
is our run rate for the time being.
I was just wondering if there was anything allocated out to corporate, but it didn't seem like that was the case.
And then Bill, you talk 33 million performing loan bill. You gave a few different reasons for that. Can you kind of segment how much related to loan growth versus the FLI and the scenario weight changes? And then I think you also said, that was offset by overlay, meaning that you released an overlay. So that would have been higher net of the over. I'm just trying to get a sense of some of the move pieces there. I'm just trying to get a sense of some of the move pieces there.
Yes, your Doug. The vast majority of the driver of the build was the updated scenarios, the forward looking indicators. So that our baseline became more severe, our pessimistic scenario became more severe, and the weight in the pessimistic increase. So that was far and above the biggest driver of that. Long growth certainly is always a driver. I don't have the specific mix, but to assume that the vast majority was from the...
So there was a reduction in the overlay to offset that.
Okay, so there's a bit of an in and out kind of, okay, I get that. And then I think new growth and period loan formations, I think were 174, I think it was 134 last quarter. Is that mostly due to what you described as ABA or is there other items within the formation side? So on the formations, you'll see on slide 13, it was primarily ABA. And as I discussed last quarter and mentioned again in my prepared remarks.
The moratoriums at ABA will all be expired by the end of the year. Last quarter it was around seven, now it's around 2% are left. And as they expire, there'll be some that will move into the 90 day past due and that generates the formations. I had given color last quarter that we expected it to peak in the second half and that's still the case. So we're close to the peak in the formation level.
and it's following our expectations very closely. And then what we would expect to see in 2023 is, through 2023 would be a decline in the growth impaired in ABA. The rest of the businesses, you can see formations are very, very low. The current conditions with unemployment and the current GDP is, everything is very strong.
in the current conditions, that is what's generating really exceptional performance in credit, not just at our bank, but across, I think, the sector in parod loans. So the lengthensies remain low, savings rates remain high. It's a strange situation where current conditions are so benign and yet there's so much uncertainty in the forward views.
So that's why you'll see very low impaired and yet pretty significant build in performing provisions. Does that answer your question?
Yep, I appreciate the color. Thank you.
Thank you.
Our following question is from Nigel De Sousa from Veritas Investment Research. Please go ahead.
Thank you. Good afternoon. I wanted to follow up on Lowns' on Performing Lowns. I know I know that you mentioned that you released about 43% of the allowances bill.
during the pandemic and you're 42% above the pre-pandemic level. Just want to clarify that that's more so on an emotional basis. Do I look at your allowance rates relative to loan balances on slide 26?
Your ACL coverage relative to loans is just marginally above where it was before the pandemic. Is it fair to say that when you look at the allowances relative to loans, you actually aren't carrying substantial excess allowances?
Hi Nigel, thanks. So if you look at the table 26, and why we provide it so clearly is that it helps you see the impact of mix.
So while the, if you look at the total retail, while the total retail number, the total allowance over loans is less than pre-pandemic, that's primarily because of the mix of credit cards and mortgages. So we know that through the pandemic, excess savings built up, customers were free paying, they're revolving and lower use on the revolving and the credit cards. And this has the right to open up this pie, and, well even though I have the same cold case on a theme on the niche, I don't need that typically. But just it predominately changes your plan. As I see this book,
So at the same time, there was higher growth in mortgages, which is a less, a lower risk portfolio. So even though our mortgage line, you'll see that ACL coverage that you talked about is significantly higher still in Q3 2022 than it was in pre-bandemic. So that's a little bit more than it was in pre-bandemic.
taking into account the mix, you get the lower total retail. The metric which I point you to is, and I think I maybe I've had it in the earlier slide on the allowances, which is the total performing allowance over pre-pandemic impaired PCLs. I think that's a better, or it's a useful metric to look at because it does...
contain insights around the mix of the portfolios. And the way I think about that Nigel is, pre-pandemic we were end of cycle, we had been building up performing allowances and we had a ratio of about 1.7, 1.8 times our run rate impaired losses, pre-pandemic losses, normal course losses.
insights around the mix of the portfolios. And the way I think about that Nigel is, pre-pandemic we were end of cycle, we had been building up performing allowances and we had a ratio of about 1.7, 1.8 times our run rate impaired losses, pre-pandemic losses, normal course losses, impaired losses.
Currently, we are at 2.7 times our free pandemic run rate in carrot losses. So that gives you an idea of if we are going into a slow down.
We are even more prepared in terms of allowances for unperforming loans compared to our normalized run rate of impaired PCLs. That's why I look to the pre-pandemic number.
Does that help? Okay. Yeah, that's helpful color. And if I could just follow up on all of the indicators that you're using for performing PCLs on the slide, so you want to just want to make sure I understand what stuff is for housing prices. Can I see that number there, 6.8% for 22, and then 7% for 24, that's a few four relative to Q4. So is that assuming bad offensive leave?
Your housing price index gets back to where it was, excuse 421. Is that the correct interpretation? Is that the correct answer to your base case scenario?
Thanks to the, I don't know whether this will answer your question directly, but when looking at the disclosures on the forward looking indicators, there's a few ways looking at them. And sometimes the slicing and dicing can give, can not allow you to see the severity of some of the changes. So one thing I'll say is that when you look at it, and you can't see it in that disclosure, or what's in our MDNA, but you know the baseline is.
peak to trough change in the National Bank Taranet, HBI, of 10%.
And it's important to understand, as I'm sure you do, the nature of some of the indices on prices. So the Teranet HPI is one that really compares actual, changes in actual prices for the similar housing. Some of the numbers that you'll see in the press, the CREA number, which is very impacted by the value of the homes that actually transacted.
So you may see more severe numbers in the CREA index, and that could be simply because there are less high value homes transacting, longer sales periods and such. I think the more accurate in terms of our risk content for the forward-looking indicators is what we use, and I think it's consistent across the banks, is more of the National Bank Taranet Index. So.
That's a long answer, but does that help with your question? That does help just the minor clarification in terms of your out work. Does that incorporate an expectation for interest rates to decline in 2023? And the reason I asked that is because affordability is taking a hit with higher mortgage rates. So is that part of the scenario? And if not, then maybe some color on your rational for expected just the 10% percent.
decline in HBI.
Yeah, it does include the scenario is kind of complete, including rising interest rates. And I think there's some qualitative language you can see in the MDNA, which gives you a sense. You can see in the MDNA, which gives you a sense.
But since you've asked that question, I'll just give you a little color. I think I'm consistent with what you've heard today and yesterday from some peers. The Canadian consumer, the indicators of the Canadian's consumer financial health and the capacity to address increasing interest rates and increasing costs of living from inflation is pretty good.
the savings rates, excess savings, which we had expected to decline throughout 2022, have continued to increase in 2022 across income cohorts. In our portfolio, our client base, there was a slight decrease only in the top earners. So the highest earning cohort had a slight decrease in excess savings, and that was because of more comfort in the more...
consumption, so travel and spending across all of the others it continued to increase the additional commitment within this era do but it does retain it is not. However, this executive equipment should also have our costs under the personally hindrance food dentro of the community business training equipment and colleagues automatient monitoring and accomplalties delegations winding system to vernomitinto conduct transit to lazy books or sexual changes and bee standby decision hair pressures help Anthony hope you
The capacity of the Quebec consumer to absorb buyer interest rates and cost of living is even stronger for a few reasons. One, we've talked about a lot in the last 10 or 15 quarters of the Quebec households have got higher dual income households because of the very high participation rate of women in the workforce in Quebec. 19 a.m.
You know, of course, that the consumer debt to disposable income in Quebec is much lower than the average. That's because of affordability, lower house prices and such. But as well, in this environment where inflation is driving higher costs, an important factor to consider too is actually the cost of energy for households in Quebec.
is not impacted as much in the same way as the rest of Canada. In Quebec, the households, I think it's 70% of the energy costs of households in Quebec is coming from electricity, and the pricing of that has been quite stable, as opposed to 35%, I think, in the rest of Canada. So, some of the drivers of increasing expenses for the Quebec consumer are more tempered.
were up year over year and you called out before trading buckets but was there anything else in investment banking in terms of those buckets that stood out that you could help us out with?
Thanks Scott, that's Denis. Yeah, the investment banking side, in fact that market, as you all know, M&A was good for us. I think we have a, we see increases of 25% of revenue in M&A. The CCM corporate book, loan book increased by 14% year over year at good volume. And the other sectors who did not that well for the whole street, it's everything related to underwriting either or, it's the death capital market, either government or corporates, it's quite down compared to the market.
bigger in fiscal Q4 and that would affect the overall PPP at national.
That's correct. For Q4 compared to Q3. That's correct. Okay. Thank you very much.
Thank you. A following question is from a Jew hokem from Quiddeswitz. Please go ahead.
Hi, good afternoon and thanks for taking my question. Just wanted to ask on wealth management and if we saw a quick improvement in the efficiency ratio, much of this quarter, but over the past several years. And now it's reaching below 60% on a year-to-date basis by my math. And I'm wondering if we could continue to see this kind of improvement in the medium term and if there's a target sort of that you had in mind. And whether we would need sort of a favorable market condition to continue to see the improvement from here. Thank you. Thank you.
Well, thank you for your question. It's Martin. Yeah, we worked hard over the last six years on our efficiency ratio. We took it down by about 10% and...
Maybe early on there were some low hanging fruits.
But I would say that we don't have a specific target in mind. We want to manage the operating leverage. So it's quarter after quarter that we manage this very carefully. This time we benefited from net interest income, which comes with very little variable costs.
So all of this to say that the business mix will impact our efficiency ratio and if current trend continues there could be some further gains to come.
Thank you. And just last one for me. Just on the residential mortgage growth, you know, growth is still relatively robust this quarter. We're seeing some moderation in the year-over-year trend. I'm just wondering if you can expand on what you're seeing in terms of client activity and how should we think about the overall sort of housing market that's happening right now translating to the growth as you go forward. Thank you. Thank you.
Yes, it's Lucy. So definitely the past break heights add an impact on the demand. We have two years of unsustainable level in terms of transactions, so I think we're getting back to normal. And with the further hike that we expect this fall, we believe that originations will continue to grow at a slower pace in Q4.
And that being said, I think like Bill mentioned, we're well positioned because 50% of our rich nations are in Quebec and we see the market as being more resilient in Quebec.
So the outlook for Q4 is that we anticipate to deliver slightly lower growth rate in Q4, but still strong in the context. And beyond that......
I don't know if it's premature beyond Q4, but the trends that we see definitely is the market normalization. It's not a market collapse.
if it's premature beyond Q4, but the trends that we see definitely is the market normalization. It's not the market collapse. So when.
We think rising rates will continue to reduce the number of transactions, which should lead to more balanced markets across the country. House prices, like Bill mentioned, should normalize and come down from their peaks in most major markets.
So beyond that, I think the factors are there to be supportive of a mortgage growth that should normalize to pre-pandemic level over the course of 2023. When will that happen? This is the unknown. This is the unknown.
So beyond that, I think the factors are there to be supportive of a mortgage growth that should normalize to pre-pandemic level over the course of 2023. When will that happen? This is the unknown. Thank you very much.
Thank you. Our following question is from Mike Risvanovic from KBW Research. Please go ahead.
Thank you. Thanks. Good afternoon. Question for I guess for Bill or. For the wrong. I
If you can maybe just clarify, are you referring to just your own footprint? Is that mostly a Quebec dynamic or is that something that you're expecting for Canada? And then just maybe for Bill, like that does seem to be quite a bit of a contrast with your conservative approach on reserving, which you basically held since the onset of the pandemic. I'm just wondering why you need to hold excess reserves at this level when you're looking for a soft-type landing.
Thank you for your question. It's Laurent. It is... Good afternoon all.
Our base case scenario is for the Canadian economy as a whole. There is an increased probability of a recession. We know that, but it is currently not our base case.
Look, I think the fact that we have seen increased savings during 2022, the tight labor market will act as a buffer in a slowdown. So these are, I think, the two major forces right now that are, you know, increasing savings
playing out in our scenario and why we think that the most likely scenario for the Canadian economy is a slow down, soft lending. We think that the central bank will start to look at the impact on unemployment as rates go up and will potentially adjust accordingly. So those are some of the questions we have to ask.
The scenarios are, you know, Canadian economy is strong, there's excess savings, the unemployment level is very low, commodity prices that are up are, you know, a very good windfall for the Canadian economy.
So it's not a Quebec thing. It's a Canadian story.
And then Mike, if I just add on your question on the allowances and the reserving. So Lehan described the base case. We do also have a pessimistic case. And the pessimistic case is different. And it sees a possibility or that scenario is significant increase in unemployment, significant, 300 to 300 beeps increase in unemployment, GDP down 5.5%, and a percent pretty.
that the uncertainty is high over where the path will go and the different potential paths are quite different. So does that answer your question, Mike? Yeah, for sure. And so is it fair to say that whatever component of that is management overlay, that conservatism that you've sort of had since the onset of the pandemic, that's here to stay basically, that's not gonna change anytime soon?
the context? It does adjust. I think I mentioned it changed. It was increased last quarter because we felt there were some aspects of the context that weren't perfectly reflected in the models and the scenarios. It reduced a little bit this quarter because some of those potentials were incorporated into our scenarios and models. So it can move. Thanks for that.
benefit from a better Quebec housing market in terms of volume and should we expect that growth rate to maybe pick up and maybe even surpass peer levels in the next few quarters in a high-rate environment.
That's a good question. I would say that we need to look a little deeper into the numbers. So about 50 percent of our organizations comes from Quebec and when we look at that, definitely our growth rate in Quebec is higher than what we see outside Quebec. And when we blend that in, this is where you see kind of a...
a modest growth relative to peers. That being said, we are very comfortable with our growth trends this quarter and also in the past quarter and across the cycle as we remain disciplined as you know. And our discipline in terms of pricing is also guiding us and we have to realize that the spread on the mortgage business in the last year has been difficult and we've made some decision in the context of tighter margin.
Maybe I could add just one comment to Lucy's mic, it's Bill. Just that you've heard Lucy talk for many, many quarters about the balanced approach on volume and pricing and risk. And the numbers that you're seeing in Q3 are for mortgage volume is dispersed in Q3, however, were originated well before Q3. So with the balanced approach that we take on the mortgage growth.
you should expect to see when the market is more frenzied then the growth rate will be below peers. And hopefully in the opposite side, when the market is less frenzied, our growth rate could be higher than peers. So I think some of that, if you mentioned growth rate versus peers over the last three or four quarters, that's during times that Lucy mentioned where prices were peaking, spreads were lower and potentially some more risk that was seen. And then it was more
and I'm sorry I'm going to be that guy that beats a bit of a dead horse here because I want to I think we bounced around a little bit I really want to understand something so apologies for these questions in advance I've got a series of questions that will really help me understand the interest rate issue so maybe I can just draw your attention to slide 21
And the third negative on this slide is the impact of hedging activity reflecting your defensive interest rate positioning.
So my first question is the following. I read that to say you're starting to hedge against rates going down you lost a little bit of money on that and it showed up in the revenues here. I think I also heard you later on say however that when rates go up in the fourth quarter you will still benefit.
from a rising margin. So here's my first question, is just from a geography point of view, let's suppose the Bank of Canada raises rates by 50 basis points in the fourth order. I understand that there will be a wider margin bank-wide, but here in this particular business segment, would I expect there to be a bigger negative to the revenue?
This is LaRal, let me maybe at a high level answer a question. So, you know, overall, we have obviously, you know, positive impact from rising rates in all of our core businesses, as you saw.
And, you know, when we look at the current macroeconomic environment and the uncertainty around it, we have, you know, we took the decision to be a little bit more defensive in our positioning in our treasury.
So, yeah, you are correct. We're, you know, slightly long bonds and that impacted revenues in Q3.
But these activities are very dynamic, Darko. So it could change from quarter to quarter. We could decide to reduce our position. It depending on how we perceive the uncertainty and the risks in the market.
But these activities are very dynamic, Darko. So it could change from quarter to quarter. We could decide to reduce our position. Depending on how we perceive the uncertainty and the risks in the market. So it's not linear.
okay that yet know that that's helpful so i think i've got the geography right i don't think you're gonna help me with the quantum so uh... maybe instead of uh... attacking the quantum i do want to understand a couple of other things first is a minute
When I look at my coverage universe, your bank would never have screened for me as being the bank being the most sensitive to rates. In fact, it's the opposite.
So the question is, Laurent, if rate do go up, would your bias be to continue and maybe hedge more the downside or no?
If.
Again, it will all depend on outlook.
and our read of the economic situation. So if we do believe that there is increasing risks, increasing uncertainty, we might decide to hedge more. If we....
you know, don't see that and we do have, you know, greater exposure to rising rates.
we might also decide not to, you know, hedge that. So it's not based on our overall exposure. It's a mix of different things and...
What we believe the interest rate outcomes will be and will the forward rates realize themselves?
What we believe the interest rate outcomes will be and will the forward rates realize themselves to a specific level of risk and their time.
It's not a clear answer that I can give you on this one here.
There's not a clear answer that I can give you on this one here. Yes, so
Maybe give me the clear answer then and why you made a decision to to increase the hedging for this quarter that might help
I don't think we increased edging this quarter.
In fact, the impact of previous editing that was done sometime mid-2021, that is continuing to impact but not discord.
So it's just showing up this quarter for some reason and didn't show up in prior quarters? I mean, I'm just I'm trying
while rising interest rates had that impact? Yeah, it's showing up more importantly this quarter. Because what's so obvious is that, as you notice on the slide, we put three main reasons. And so in previous quarters, some of the other elements were offsetting the impact. So this quarter, the reason is that the three main elements are all together in the same quarter. That's why it's a bit more impacting. But in many cases, one will offset the other.
So is it because we've passed a certain threshold of rates that it's showing up more now? And then even without more hedging that it could still end up showing up more as rates go higher?
I mean, definitely, you know, the rates environment was very volatile over the past quarter. So yes, it did show up a little bit more, obviously. But it's not the only thing that showed up in the other segments, right? So there's hedging activity, mark-to-market impact also on some of our derivatives.
and obviously lower gains in investment versus 2021. I think markets are such that it's not, you're not seeing the same opportunities in terms of gains on investment.
and obviously lower gains in investment versus 2021. I think markets are such that it's not, you're not seeing the same opportunities in terms of gains on investment. So, I just wanted to talk a little bit about some of the area that we're seeing and what that is.
All right, well, thank you very much for extending the call and taking my questions. I appreciate it. And maybe, Darko, we could just conclude on the fact that total bank NII, like I said, is still up.
quite importantly, as well as total.
Total NIMM, All Bank.
Yep, no, I appreciate that. Thank you.
Thank you. Once again, please press star 1 at this time for any questions or comments.
The following question is from Lamar Persaud from Comrade Securities. Please go ahead.
I'll be quick here. Thank you for married content, Laura. How should we think about the appropriate CG1 ratio for national in light of the current macroeconomic uncertainty?
Hi, so as I said in my remarks, we're very pleased with our current capital level that does provide us with flexibility to support organic growth.
So, in terms of the level of capital that you could expect, the level that we are at this point of time is the one that we're very comfortable with.
I guess really where I'm going at is 12.8%. That seems to me like quite a strong CT1 ratio.
and one in which I think the bank should be able to pursue buybacks, notwithstanding the challenging macro backdrop and organic art of day growth.
What could go wrong to cause a significant drawdown in that 12.8% CT1 ratio? Look, it's Laurent. Buybacks, we just said that we did take a bit of a pause in Q3 and we're going to extend that pause, but buybacks are not off the table forever. They are always a compliment. You are right. We are at a good level in terms of CT1. Give us an thoughtful AMERICA.
But you know, in terms of a lower threshold, in our mind, right, it's...
We think that 12 is at a minimum where we want to be.
So, at this point in time, given the higher level of uncertainty in the market and market volatility, the economic path, we took that decision in Q3 and extended that through Q4.
Thank you.
Thanks. Thank you. Thank you.
We have no further questions, but just at this time, I would not like to turn the meeting back over to the
Well, thank you very much, everyone, for joining us, and we will speak to you at Q4 in December . Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.
It's my friend Catherine and it's been a while.