Q1 2023 National Bank of Canada Earnings Call
Speaker 2: And.
Speaker 2: And.
Speaker 1: We pray you to be well, to be able to wait a few moments and we thank you for your patience.
Speaker 2: The pro P C.
Speaker 3: momentarily. All participants, thank you for standing by. The conference is ready to begin.
Speaker 3: Good afternoon, ladies and gentlemen, and welcome to National Bank of Canada's first quarter results conference call.
Speaker 3: I would now like to turn the meeting over to Mrs. Linda Boulanger, Senior Vice President of Investor Relations. Please go ahead, Mrs. Boulanger.
Speaker 4: Thank you, operator. Good afternoon, everyone, and welcome to our first quarter presentation.
Speaker 4: Presenting this afternoon are Laurent Ferreira, President-Ciw of the Bank, Marie-Chantel-Jangra, Chief Financial Officer, and Bill Bonnell, Chief Risk Officer.
Speaker 4: Also joining us for the Q&A session are Stefan Achard and Lucie Blanchet for personal and commercial banking. Martin Gagnon, Head of Work Management. The Nigerian War and it ends the book co-heads the financial markets and Gisem Pa-Han, Head of International.
Speaker 4: 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 Loha. Yes, sir, Dhan. Thanks, everyone, for joining us.
Speaker 5: The bank had a good start to the year with strong results across our business segments and robust margin performance.
Speaker 5: We generated superior return on equity above 18%.
Speaker 5: highlighting the strategic diversification of our earnings dreams.
Speaker 5: In a highly uncertain macro environment, we are maintaining a defensive positioning with a disciplined approach to capital, risk, and cost management.
Speaker 5: Our capital level is strong with a CET-1 ratio of 12.6 percent well above regulatory requirements.
Speaker 5: This places us in a very good position to deploy capital in our businesses and drive superior organic growth.
Speaker 5: On Capitol Deploinette, our priorities are unchanged and in line with our strategy.
Speaker 5: First, maintain strong capital ratios.
Speaker 5: Second, invest in business growth, and third, return capital to shareholders when appropriate.
Speaker 5: On credit portfolio, continues to perform well.
Speaker 5: Underlying credit conditions remain strong in Canada.
Speaker 5: Nonetheless, given the uncertain macroeconomic outlook and consistent with our discipline approach, we are building additional reserves.
Speaker 5: Turning now to our business segments. Personal and commercial banking delivered a strong performance in the first quarter.
Speaker 5: Revenue's were up 17 percent from last year, mainly from the positive margin expansion and balance sheet growth.
Speaker 5: While our outlook remains positive, we are seeing a slowdown in retail and commercial loan growth with higher interest rates impacting client demand.
Speaker 5: That being said, we are pleased with the sustained momentum on the customer acquisition and satisfaction fronts.
Speaker 5: with strong digital onboarding and engagement, key drivers, decline experience, and efficiency.
Speaker 5: We are also seeing tangible results from our commercial and private banking differentiated model implemented last year.
Speaker 5: Wealth Management delivered a record performance in the first quarter.
Speaker 5: net income increase by 16% year-over-year, reflecting our well-diversified revenue mix.
Speaker 5: Again, this quarter, we delivered very strong NII growth supported by higher interest rates and a strong retail-based deposit franchise.
Speaker 5: Financial markets generated strong results in Q1.
Speaker 5: reflecting broad-based strength across the business.
Speaker 5: Corporate and investment banking delivered their second best performance on record, propelled by robust lending demand, M&A mandates, and sustained performance in DCM.
Speaker 5: Global markets performed well.
Speaker 5: led by strength in our rates, commodities and foreign exchange businesses.
Speaker 5: This is on the back of an exceptional performance in equities last year. The performance of our financial markets franchise demonstrates its resiliency, earnings of diversification, and ability to adapt to market conditions through the cycle. Turning to our international segment.
Speaker 5: ABA Bank had another solid quarter.
Speaker 5: generating strong balance she growth.
Speaker 5: Strategic investments in business growth are bearing fruit.
Speaker 5: In the first quarter of 2023, ABA's climb base surpassed the 2 million mark.
Speaker 5: representing a 39% increase over last year.
Speaker 5: While global economic growth is moderating,
Speaker 5: The underlying fundamentals of Cambodia are strong and China's reopening is expected to be positive.
Speaker 5: In this context, we expect double-digit growth for ABA for fiscal 2023.
Speaker 5: Longer term, the outlook for Cambodia remains very attractive.
Speaker 5: Finally, Credigy experienced continued momentum with assets up 5% sequentially.
Speaker 5: This was driven by the acquisition of high quality, longer duration, secured assets.
Speaker 5: The portfolio remains defensively positioned with 92% secured assets.
Speaker 5: Taking into account the Realized Pipeline, we are well positioned to deliver double digit asset growth.
Speaker 5: for the full fiscal year.
Speaker 5: Moving to the macroeconomic environment.
Speaker 5: While labour markets remain healthy, macroeconomic uncertainties are growing with persistent inflation and rising interest rates. We are also starting to see the impacts of monetary policies on consumer behaviour and business investment.
Speaker 5: At this point in time, the path of interest rates, inflation and economic growth remain uncertain.
Speaker 5: Having said that, the bank is on solid footing.
Speaker 5: While NII tailwinds from interest rates are subsiding,
Speaker 5: and growth in some sectors is normalizing, we continue to see attractive opportunities across our business. With our strong capital position,
Speaker 5: the quality of our credit portfolio and the diversification of our business model, we are well positioned to weather the uncertainty ahead and generally continue profitable growth.
Speaker 5: Let me now speak to the recently announced senior leadership changes made in support of our strategic priorities.
Speaker 5: and as part of our succession planning process.
Speaker 5: Martin Gagnon is retiring from the bank on April 1st.
Speaker 5: Under his leadership, our wealth management business experience significant growth.
Speaker 5: cementing this segment as a key growth pillar for the bank.
Speaker 5: Upon Matin's retirement, Denis Giroir will be taking the interim leadership.
Speaker 5: I will also retire later this year.
Speaker 5: after 13 years at the bank, including 10.
Speaker 5: 13 year at the bank, including 10 as chief financial officer.
Speaker 5: Giseline has played an invaluable role in the bank's performance through the years.
Speaker 5: Notably, in the achievement of solid financial results.
Speaker 5: In the context of Giseline's retirement, CreditG will return under the leadership of financial markets.
Speaker 5: and Stephane Achal will transition to a new role to lead our international activities, namely ABA Bank.
Speaker 5: I am pleased to welcome Michael Denham to the Senior Leadership Team as Executive Vice President and Head of Commercial and Private Banking.
Speaker 5: Michael joined the bank a year and a half ago as Vice Chairman, Commercial Banking and Financial Markets.
Speaker 5: Previously, Michael was President and CEO of BDC.
Speaker 5: where he was instrumental in doubling the commercial franchise in Quebec and across Canada.
Speaker 5: I look forward to working with Michael on growing our position in Quebec and in Canada.
Speaker 5: We have a strong bench and leadership team at the bank and these changes underpin our vision for the bank.
Speaker 5: I would like to sincerely thank Marta and Gisla for their outstanding contributions during their respective tenures. I would also involve the very best.
Speaker 5: With that, I will pass it over to Maritio Antal. Thank you, Aran, and good afternoon, everyone.
Speaker 6: Turning to slide 7, the bank delivered a solid performance in Q1. Revenues increased 7% year over year, with a strong top line in all business segments, continued balance sheet growth, and strong margin expansion excluding trading.
Speaker 6: Pre-tax, pre-provision earnings grew 5% year-over-year, with continued organic growth in all business segments.
Speaker 6: Expenses increased by approximately $120 million over year.
Speaker 6: Part of the increase is attributable to the reversal of the $20 million provision in the same quarter last year related to a provincial salary tax.
Speaker 6: Excluding the reversal, expenses grew by approximately $100 million, or 8% year-over-year.
Speaker 6: This was largely driven by talent acquisition and inflation in 2022, as well as higher technology expenses related to fast and new investments, supporting continued growth across the bank. Our balanced approach to business growth and investment
Speaker 6: continues to generate a strong all bank efficiency ratio, which came in at 51.7% with best-in-class ratios and select business segment.
Speaker 6: For fiscal 2023, we continue to work towards achieving positive operating leverage and mid-to-high single-digit PTPP growth.
Speaker 6: For the second quarter, however, we foresee continued pressure.
Speaker 6: In this context, we will be strategic and selective in managing expenses, notably related to new hiring, technology investments, and discretionary spending. Now turning to slide 8.
Speaker 6: Total net interest income excluding trading was strong, coming in at $1.4 billion this quarter and up 29% from last year reflecting solid volume growth and margin expansion.
Speaker 6: For PNC, net interest income was 23% year over year, mainly driven by higher deposit margin and balance sheet growth.
Speaker 6: Well, management continued to benefit from a strong deposit base in the context of increasing interest rates, with net interest income up 75% from last year.
Speaker 6: Net interesting come increased 11% year-over-year for USFFI. Balance sheet growth and prepayment revenue as credit-gy contributed to the increase partly offset by lower margin.
Speaker 6: Total bank NIM excluding trading was up 15 basis points on a sequential basis, reflecting higher deposit margins following interest rate increases, and partly offset by lower loan spread.
Speaker 6: Total bank name of 2.19% reflects non-recurring revenues representing approximately 4 basis points.
Speaker 6: These include a prepayment revenue at Critty G, as well as an interest recovery on a previously impaired loan and corporate banking.
Speaker 6: including these elements, total magnum was 2.15%.
Speaker 6: We are pleased with the strength of our Margin profile. It is underpin by our long standing balance approach to managing volume growth, profitability, and credit quality.
Speaker 6: Moving on to our balance sheet on slide 9. Flones were a 12% year-over-year.
Speaker 6: Ascic growth was strong in corporate banking and USSFI, while long growth is moderating in commercial banking.
Speaker 6: The man for retail mortgages continues to slow down, driven by real estate market condition.
Speaker 6: Deposit, excluding wholesale funding, grew 16% year over year. A good reflection of our diversified model and focused on deposits in all segments.
Speaker 6: Term deposits grew significantly in light of client preferences in a higher interest rate environment.
Speaker 6: Looking forward, we remain disciplined on both sides of the balance sheet, balancing growth and margin.
Speaker 6: Now turning the capital on slide 10. We maintained a strong CT1 ratio ending Q1 at 12.6% while generating solid balance when she wrote across the franchise.
Speaker 6: First-quarter earnings net of dividends added a solid 44 basis points to our ratio. This highlights the capital-generation capacity of our diversified business mix.
Speaker 6: Excluding foreign exchange, RWA growth represented 61 basis points of capital.
Speaker 6: This was largely driven by balance sheet growth in corporate banking, commercial banking, and USFFI, partly offset by a reduction in counterparty credit risk.
Speaker 6: During the quarter, we recognize unfavorable credit migration representing seven basis points, largely due to declining housing prices and impacting LTVs.
Speaker 6: Model and methodology of dates represented three basis points of RWA increase. We're pleased with our current capital position. It provides us with the flexibility to deploy capital across our segments and return capital to all of your holders.
Speaker 6: In conclusion, the bank delivered a strong Q1 supported by organic growth across our businesses.
Speaker 6: solid balance sheet growth, and margin expansion.
Speaker 6: With high capital levels, a divisified earnings dream, and a resilient business, we entered a second quarter in a solid position.
Speaker 6: With that, I'll turn it over to Bill.
Speaker 5: Thank you, Mayor Chantal, and good afternoon all. I'll begin on slide 12.
Speaker 5: While the future path of inflation and interest rates continue to add to uncertainties in the macro environment, strong employment and saving levels supported another period of solid performance across our credit portfolios.
Speaker 5: In the first quarter, provisions on impaired loans declined to $20 million or four basis points.
Speaker 5: Retail impaired provisions were stable at $24 million, remaining well below pre-pantemic levels.
Speaker 5: In the non-retail portfolios, we benefit it from net recoveries, which can be lumpy from quarter to quarter.
Speaker 5: and provisions decline quarter over quarter in the international segment, as ABAs moratorium-related impairments peaked as we had expected in the fourth quarter of last year. Our provisions on performing loans totaled $58 million or 11 basis points.
Speaker 5: The primary drivers of the allowance bill, this quarter, were portfolio growth, updates to our forward-looking scenarios, and we increased the weight of our pessimistic scenario again this quarter to reflect heightened macro uncertainties.
Speaker 5: Looking ahead, we've maintained our Fiscal Year 2023 guidance on impaired PCLs at 15 to 25 basis points and currently expect to be in the bottom end of that range.
Speaker 5: Current underlying conditions, particularly the strong level of employment and consumer savings, are supporting a slower rate of normalization of impaired PCLs than we had expected. In the normalization we are seeing in the retail credit portfolios is occurring at different speeds across products and geographies.
Speaker 5: The same factors we discussed last year, inflationary pressures, geopolitical risks, and the direction and timing of interest rate changes are still present and all contribute to a less certain outlook.
Speaker 5: In these uncertain times, we are very comfortable with our defensive geographic and business mix, as well as our prudent level of allowances.
Speaker 5: In these uncertain times, we are very comfortable with our defensive geographic and business mix, as well as our prudent level of allowances. Turning to slide 13.
Speaker 5: Total allowances for credit losses increased to almost $1.2 billion.
Speaker 5: Performing allowances increased to $946 million, which is just 11% below its pandemic peak.
Speaker 5: This improves our coverage of last 12-month impaired PCLs to 7.1 times, and our coverage of our pre-pandemic level of impaired PCLs to 3 times. In the current macro context, we believe it is prudent to hold these significant levels of credit allowances. Now on slide 14.
Speaker 5: Gross impaired loans declined quarter over quarter to $793 million or 38 basis points. Net formations declined significantly to $21 million, benefiting from net repayments in the corporate loan portfolio and stable retail formations.
Speaker 5: In prior quarters, I mentioned that we expected ABA's formations to peak at the end of last year. An actual performance in the first quarter was better than expected, leading to negative net formations of $13 million.
Speaker 5: Strategy formations increased in the quarter primarily due to normal seasoning in the consumer unsecured portfolio in line with their expectations.
Speaker 5: Consumer Unsecured accounts now for only 8% of Crategi assets. On slide 15 and 16, we provide details on our Resil portfolio.
Speaker 5: The geographic and product mix remains stable with Quebec accounting for 54% and insured mortgages accounting for 29% of total resul.
Speaker 5: House price declines caused an increase in LTVs on uninsured mortgages and HELOCs to 57% and 51% respectively.
Speaker 5: about a third of mortgages have variable rates and investors account for about 11% of all reservoirs.
Speaker 5: When looking across the portfolio for tail risks, we see that uninsured borrowers with a credit bureau score of less than 650 and LTVs greater than 75% represent less than 50 basis points of total resol. While higher rates have already impacted the housing markets through lower volumes and easing prices,
Speaker 5: The resilience in our Resil portfolio remains strong.
Speaker 5: Delinquency rates remain well below pre-pandemic. This is particularly the case in our Quebec portfolio, as the province is benefiting from better than national average rates of unemployment and savings.
Speaker 5: This resilience is translating into mortgage delinquencies, increasing at a slower rate and Quebec than in other regions of our Canadian portfolio.
Speaker 5: In summary, we are pleased with the credit performance again this quarter and remain very comfortable with our defensive positioning, our resilient mechs, and our prudental level of allowances.
Speaker 3: And with that, I will turn it back to the operator for the Q&A. Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your hands before making your selection.
Speaker 3: If you have a question, please press star one on your device's keypad. You may cancel your question at any time, but pressing star two. Please press star one at this time. If you have a question.
Speaker 3: The first question is from Paul Holden from CIBC. Please go ahead.
Speaker 7: Thank you, good afternoon. So, Laurent, you had pretty cautious outlook in your prepared remarks and then Bill highlighted that there was an increase waiting towards the pessimistic scenario. And I don't disagree with that view at all. In fact, I'm completely aligned with it, but just wondering if there's anything you're seeing currently.
Speaker 7: in experience today that justifies that position or really is just based on a forward to look.
Speaker 5: Paul, thank you for your question. We are definitely seeing the impact of the monetary policy, the impact on mortgages, commercial loans. We're clearly seeing normalization in terms of growth versus what we saw. We're really seeing the impact of the monetary policy.
Speaker 5: in 2021 and throughout 2022. And we are also near the end of the positive impact on deposits from rising interest rates. So those are the things that we have in mind. Now, having said that, did you look at our business model?
Speaker 8: I think we're really well positioned, one defensively, across all businesses.
Speaker 8: So, in terms of potential downturn, but also more on the offensive side. Our capital position, our capital's strength, I think provides us with opportunities to keep growing our balance sheet across Canada. We see opportunities in financial markets, commercial as well.
Speaker 8: part of banking in most sectors, but it's not just about balance sheet growth. We also think that there are opportunities for us to keep growing our well-franchised.
Speaker 8: So, you know, we are, we are, you know, I think it's, we...
Speaker 8: We see the impact, obviously, of interest rates, but at the same time, we know that there are opportunities for us to keep growing.
Speaker 7: Second question is with respect to net interest margins. Your NIM looked quite a bit different than peers this quarter and don't expect you to comment on the peer results but in terms of your own results, can you talk a little bit more about the shift in deposit mix you highlighted.
Speaker 7: strong growth in term deposits. Why didn't that have the same kind of drag on NIM as we would have seen with some of your pairs? What do you believe was the offset there was a just your ability to deploy that into higher yielding, has it growth or is it something different?
I'll stop with PNC and make some compliments for the rest of the bank.
So yeah, we're pretty happy with our margin resiliency this quarter. I would say the increase in deposit spread mainly on the demand of non-sensitive deposit spread represents the main lion's share of that, so it's about 60% of the increase.
On deposits we also benefited from reprising some of our fixed-term deposits.
while the migration from demand to fix deposits has been somehow limited.
And we expect that also to continue to diminish until the rest of the year.
And on asset spreads, I guess our discipline is paying off in making our assets spreads a little more resilient, reducing the drag on margin while it has certainly impacted some of the long growth. And there was a little bit of the business mix also with assets growing.
outpacing deposits. So that's basically the story of this quarter for P&T. Many times you weren't at anything for the risk of the bank. Well, maybe what I can add is our strong deposit franchise and wealth management also contributed to our name expansion this quarter and as Lucy.
from SM, which represents about four basis points.
So, we are very happy with the NIMx expansion that we have demonstrated so far. And going forward, we continue to focus on our balanced approach in managing NII with respect to volume growth, margins, and credit quality.
Okay, final question for me and this one's probably directed to Bill. Any update you can ride on experience with your variable rate mortgage customers just in terms of how they're handling the higher monthly payments in any notable change in client behavior among that cohort.
Thank you. Sure, Paul. Thanks. I mentioned in the prepared remarks last quarter that I kind of expected to see some dispersion of performance across products geographies. And I mentioned in today's prepared remarks a bit of the same that we are seeing that. So I think the story in
in their retail credit portfolios is one of normalization and it's happening at different speeds. If I look at the byproduct, the products that are normalizing most quickly would be the consumer insecure. So credit cards, certainly on the impaired and stage 3 losses is still well below pandemic. But when you look at 30-day delinquencies,
It's back pretty close to pre-pandemic levels, and a little bit below pre-pandemic levels and go back a little bit above outside go back. The next product would be the variable rate insured mortgages. So those are the higher LTDs of course, and we are seeing an increase to above pre-pandemic levels for that.
And in the other variable rate and the fixed rate mortgages, it's largely a geographic dispersion. So again, for the whole portfolio, well below pre-pandemic levels. However, normalizing a little bit more quickly outside Quebec.
So, to answer your question, Paul? It does, but helpful. Thank you, and that's it from me. Thank you. The next question is from many, Grauman from Scotia Bank. Please go ahead.
Hi, Gavtrenun. I want to stick to margins and just better understand the dynamics in the PNC segment. Appreciate the answer to the previous question. But when I look at the loan to the pause array show in your PNC segment and stack it up to peers, it looks like it's the highest.
I guess common thinking suggests that that should be somewhat related to relative margin performance. I'm just wondering how to think about that. How does that gap get filled and could it be the answer is the wealth business?
So I'm just curious about that. Well, it's just the start and I'll see if my colleagues want to compliment. I think it's really happening in first in the deposit, in the deposit spread dynamics.
We may have seen a little lower shift from demand to fix deposits over the past quarters and we've seen that also start to normalize.
Also, this quarter we have some government deposit that's mature, which were at lower margin, so that may count in a little bit. And definitely, I think we have less of a drag on the asset spread.
So that's all overall the margin expansion. But can I think about that there's still a reliance on wholesale funding in that segment in order to bridge the gap between the loans and the deposits?
How does that work? Okay, can you maybe expand a little bit on the question I'm not sure I'm getting the sense of it? Sorry. Just in terms of like I would have expected that there is no more on wholesale funding in PNC.
You are seeing some ups word pressure but then what you highlighted is offsetting that. How do I think about that?
So maybe the last thing I can maybe add as a compliment for the PNC is that we've also benefited from the tractors of our non-sensitive deposits.
already in our name so maybe that could explain a little bit of the name expansion on the PNC side.
The other thing I had had many is the fan here on the commercial side. There's no really reliance on wholesale funding. If you go back and you look at LARS, last six years, the positive growth actually faster than the asset side on the commercial side just as an example.
So, it's really much more how we play with the deposits, be it on the governmental side and attract or let go of the margins that are not playing in our favour at various times. And Lucy as well explained that.
Got it. And then if I could just follow up just in terms of guidance on the margin, apologies if I missed it, but just especially at the top of the house what what should we be thinking about as we move through the year in terms of how the margin develops.
Hi, it's Mastchata. So on the outlook, as you know, environment is quite uncertain. So making name predictions is quite difficult to do with precision.
There are many moving parts, so interest rate trajectory, balance, mix, competitive dynamics, but what we see today considering no further increase in rates.
NIMS, all back NIMS, excluding trading, may subside in the next few quarters. Of course, as I said, absent of any further interest rate increases. That said, we still expect to maintain a strong and healthy NII through 2023.
And as communicated in the past, we do not look at NIM in isolation. So our primary focus is on growing the franchise, deploying capital organically for our clients, and generating strong NII while balancing margins and credit.
We do not look at NIM in the high salation. Our primary focus is on growing the franchise, deploying capital organically for our clients and generating strong NII while balancing margins and credit. Thanks for that.
You're welcome. Thank you. The next question is from Gabriel Deschenes from National Bank Financial. Please go ahead. Good afternoon. We don't see any questions. We'll be back in a few minutes. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Goodbye to just me yeah, he's still here till q4 I guess
Okay, on ABA, I saw the expenses tick up quite noticeably there and I'm just wondering is this a one-time kind of step up in investment or are we entering a phase here where that could continue because of the growth that's taken place over the past few years and you got to kind of buck up your back office or something like that.
I'm sorry for the interruption. The monitor is disconnected, so I'll have to dial in back. Please tell me.
participants please continue to stand by.
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Got a hot mic moment here.
Please go ahead, you are back on the phone. Mr. Edition, maybe you could repeat your question. I'm sorry, disconnected while you were asking.
I was wondering if it was something I said. We were wondering the same thing Gabriel. The awkward feeling there for me. Anyway, so I was asking Gisney about expenses at ABA. We saw them.
jump pretty materially year over year and I'm wondering if we're entering if this is a one quarter kind of thing or if there's a phase there where
You need to step up investment because of the growth that ABIA has had. Oh, it has few years. Back off as compliance whatever.
Thank you, again, so I would say that there's two main reasons. The first one is if you remember first quarter last year, we were still in the COVID, so it was a COVID quarter, so the level of expenses was low.
And Hazla mentioned in his prepared remarks, you know, ABE continues to expand its client's base.
39% increase, year-over-year, and 9% increase quarter-of-requarter. So the expenses are more linked, I would say, to the asset decline growth than the revenues. So as the COVID situation improved, we ramped up investments to support recent and future growth of the franchise.
Mainly by adding more people, you know, more than a thousand people in the past 12 months. We have invested in our branch and self-service banking network as well in our leading mobile solutions. So if you look at the efficiency ratio, Gabriel, it's still very good at 35 hour look.
In fact, it's below 35%, so a healthy low level, I would say. And for the rest of the year, Gabrielle, we expect expenses growth to decline in Q2 and more importantly in the second half of the year. So you could say that Q1 is...
is a special quarter in terms of expenses and you won't see that that kind of growth into coming quarters. You got it. And then I guess more broadly on expenses. I'm getting the message on you know the environment's slowing the tailwind from margins is debating and
more cautionary on some of the top line items. On expenses, I'm not quite sure. I got what you were saying there, whether we could still have another big quarter for investment spending. So operating leverage will be tough and Q2 and then moderating moderation thereafter or something else. Maybe you can help clarify that. Yeah, hi Gabriel, it's Matthew Shantan. So just as a reminder, our expense.
related to talent acquisition and retention and we have stabilized those investments made to support growth and client experience.
So, well, grade down from this level, perhaps? Is that how it should be? Q1 level is not expected to remain.
at this level for the next following quarters. Okay, and I said, yep, sorry. Yeah, so as I said in my remarks, we continue to work towards achieving positive operating leverage for the year. So continue to our discipline.
Perfect and and quick one for Bill. I saw it. Credigy the PCL number was almost matching last year's entire total and I think most of that's performing now as she can maybe break it down a little bit.
Yeah, sure Gabriel, you're right, most of it is performing, I think two-thirds was performing. And then in the script I talked about some expected seasoning in what's now a relatively small portion of their book of consumer unsecured.
Okay, enjoy the rest of your day. Thanks, Gabriel.
Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Hi, good afternoon. Just on the selling ratio on the risk-weighted asset movement, it looked like market risk. I mean, your trading was quite good, but looked like market risk RWA was down and your counter party.
9 or 8 basis points or 6 if you get what it was, but when I look at your stats supplement, just that it's about 1.5 billion of increase in our WWA because of deterioration of quality. And I would imagine some of that's migration, perhaps some of that is the addition of the portfolio or credit, just hoping to get some clarification on that.
Thanks Doug, and maybe I'll start on your last part of your question on migration and then hand it back to Mary Chantal for the first part. I think Mary Chantal under prepared remarks called out that migration was the biggest part of migration was related to higher LTVs in the mortgage portfolios. So as you know capital calculation includes loss of capital and loss of capital.
we did reflect the house price decline in our models for resill capital, credit capital, and that's what was the main driver of the migration.
So that helped answer that part of the question and I'll pass it back to Mary Shantalisso. Yeah, then just the quality though, it looked like it was more than that in terms of the deterioration and the quality. So I think the migration was part of it. Is there another part of it that caused the quality?
to help answer that part of the question, and I'll pass it back to Mary Shantalusso. Yeah, then just the quality though, it looked like it was more than that in terms of the deterioration and the quality. So I think the migration was part of it. Is there another part of it that caused the quality to increase RWA in the quarter?
Anything else to call out, Marissa? I'll tell you besides, don't. No, maybe I'll jump in with the counter party risk. So the variation was driven by a market change in the derivatives mostly. And in terms of book quality, just a compliment on Bill's response, still on the CCR.
It was driven by normal course hedging in the CBA desk and some positive counterparty credit migration. Okay, and anything on the market risk RWA side?
Nothing special to call out at the end. Anything?
No, it's really a reflection of the increased deployment in our corporate lending portfolio.
Okay. And then second, just maybe kind of put this together on the NIMS side. It sounds like in terms of your outlook that you're expecting NIMS to kind of come back a little bit. I mean, excluding the two unusual items, use that as the starting point and then come back over the next few quarters. Should we anticipate no real NIM expansion from this level?
throughout the year or is the back half looking better, just trying to get a sense of how this will evolve through the year. And then the well-management and II up 75%. I mean, I don't think that gets swept into PNC banking. You can correct me if I'm wrong. Is that, you know, been a big... Can you maybe dive a little bit into that?
Yeah, so maybe I'll start with the first part of your question and then Martin could compliment on the wealth side. So in terms of NIMS outlook, as I said, there are so many moving parts coming up depending on interest rate trajectory. Balance should mix. Lucy mentioned that our migration between demand and terms.
was not as high as maybe we could have expected. So depending on how it goes, it's really hard to say. So for now, we think it may subside a little, but I think it will be in better position next quarter to give a more precise outlook.
was not as high as maybe we could have expected. So, depending on how it goes, it's really hard to say. So, for now, we think it may subside a little, but I think it will be in better position next quarter to give a more precise outlook. Okay, and then on the wealth management NII.
No, there's no, the wealth, this is Martin, so the wealth management net interest income is not included in PNC, so it is distinct. We are a large contributor to the all-bank NIM because National Bank is the most exposed bank.
to wealth management and then when you look at our business we have a hundred percent retail business we don't have asset management or anything so that brings a lot of demand deposit, retail demand deposit that I've talked about in the past brings a lot of optionality and we're capturing our net.
I'll jump in. I think in our message overall is you've seen grades go up by 400 basis point in 2022.
We're not expecting that this year and you've heard Tifa Clance say that rates are probably on pause. So I think our message overall is we're near the end of at least the expansion from interest rates.
But as we mentioned in my remarks and I think Maishe and Thad just mentioned, there's a lot of uncertainty still in the market and it will depend, right? It will depend on the business mix. It will depend on markets. So I think, you know, our overall message is that daughters get to play sports.
we do feel like you know we had significant expansion and we're not going to see the same kind of level obviously this year but it's too early and too much uncertainty to give you more precise information at this point. I don't know if that helps you.
No, it does. I appreciate the call. Thank you.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Good afternoon. As you can probably tell from the nature of the questions, we're all sort of struggling to understand how national can deliver such strong margins, especially in the context of many's first question where, I mean, I think all he was highlighting there is that the gap between your deposits and loans in domestic retail is large.
there's a very big funding gap in this bank. And you would have expected some dynamic that was reminiscent of what we saw at another bank earlier this week, but we're not seeing that. So let me go about this a different way. Can we look at your securities yield?
What I'm getting out here is the growth here is interest at the bank reports because we don't have to look at NIM by second. We can just look at these individual components.
The security interest for this bank relative to those securities that you're holding. That return has increased by leaps and bounds and I've tried to compare it to what we're seeing at your peers.
And in National's case, the security yield is well above any of your peers and has been increasing far faster than your peers. And I'm happy to share the numbers, but certainly not right now.
Could you help me understand what national does differently that allows for this kind of security deal? And why it's increased so substantially, but we're just not seeing that your peers. Is there anything you can offer?
me understand what national does differently that allows for this kind of security deal and and why it's increased so substantially but we're just not seeing that your peers is there anything you can offer maybe
Maybe Mario, it's Bill. I'll just take a first indirect. I think for going through the details of security yield, maybe we'll do that offline because I don't know that we'll see what your numbers look like. But I think one part of many's question, one part that you were describing that's missing from the equation is it's your fruit.
forgetting about the well-franchised that we have, which is very different. So looking at PNC alone does not mean that everything outside PNC is wholesale funding. And I think that's the missing piece and I understand when you're comparing, trying to compare apples to apples.
It's our wealth franchise, the nature of the business, and the weight of the business requires a broader look across. And I think that's why Mary Suntal brings it back to the top of the house, all bank, NII, and NIMX trading. But my suspicion is that's what generates the
the confusion when you're looking to try to compare. But that may be Mary Santel, anything else to add? I think that some resumes it well. Thank you. Bill, would you then suggest that it might be wise for us to look at that funding gap in domestic retail? And I'm just using the numbers right out of your supplement. Like the $60 billion funding gap in domestic retail.
And essentially look at that in the context of the 40 some odd billion dollars of excess deposits in your wealth management business is that a more sensible way to look at your business just say hey those both management deposits they're valuable and they help close that funding gap is that right.
Pardon? Yes, you're absolutely right. Yes, for sure. Thank you.
Okay, so that solves one part of a mystery for me. So if we could then go back to the initial question. What I'm getting at here is, let me give you some numbers to think about. Your securities interest, this is the gross securities interest, and hey, I know that a lot of that relates to your trading book too, but unfortunately I don't know securities interest X, the trading book. It's not disclosed.
But that's the securities interest hit $600 million this quarter. That's a very big number in the context of the security buff.
So what are you investing in? Like how do you get in? That's a big number.
Mario, are you referring to the number that's next to our NII, like the non-interest income?
Nope, securities interest, the gross securities interest is $596 million. Your loan interest is $2 million.
2.9 billion, your securities interest is 596 million. And listen, I know I'm looking at this different from the way the banks talk about margins. Normally we talk about domestic retail wealth or whatever margins, all bank margin, but that's not the way I want to look at it anymore. I don't find that helpful. I find it a lot more helpful to look at the component parts of a bank's NII, frankly, the way it's done in the US and the security for this bank is huge.
Mario, we would love to continue the discussion on this here, but I think we should take this offline because we're not quite sure exactly what you're referring to. I think we'll take that conversation with you, no problem. So I think I'd like to stop it here because we're not quite sure how to answer your question here. Okay, but just for the record, this is your disclosure. This is nothing.
Maybe not. This is right out of your disclosure, but I'll happily take it up with the bank. Thank you, Mario. Thank you.
The next question is from Darko Mihalik from RBC. Please go ahead. Oh, hi. Thank you. I wanted to actually talk a little about a few things other than margin, also related to NII. I'm looking at
here are loan world statistics for Canada P&C. And I'm looking at virtually every category.
year loan growth statistics for Canada P&C. And I'm looking at virtually every category. So for example, mortgages.
5% growth for year over year, personal loans, credit cards, commercial 12. In each and every category, your growth is the lowest.
amongst the companies that have reported so far. And that was not the case a year ago.
year ago you were actually in many places the highest growth in many different categories.
were actually in many places the highest growth in many different categories. I'm wondering if
If this sort of slow down or tapping of the brakes on on loan growth is intentional, is it being done through pricing terms or is it just maybe just in heaven? I mean, it looks like it's been happening now for some. I watched the loan growth sort of slow over time and I'm just curious if it's intentional and if it isn't, then that's fine. But wondering if you could just comment on your loan growth relative to industry. Can we taishaheavy Lober Bread.
Right, thank you, Dorothy. So it's Lucy. So some of it is intentional, some of it isn't. So if we take, for example, the mortgage book, I assume the mortgage book, we like our strategy, which is focused on our proprietary channels.
which is allowing us to anchor the relationship with our customers. And our internal channels, the decline in our destination, we observe is in line with the market decline.
However, the portfolio growth is impacted by the white label channel, which have really been challenged with the market condition. And since 2022, I mean, every quarter of 2022, we've slowly ran down that channel considering the margin compression we were facing. And it came to the extent that in Q1...
For example, that channel did not contribute to origination. The one it represented is historically about 10% of our origination. So it does have an impact on our growth rate.
That being said, that channel remains important, but it's just the market conditions that are not there. Again, I think also on the mortgage growth, you heard me talk about our balanced approach, and I think we benefit from lower pressure on asset spreads. On the credit cards, the credit card portfolio is growing according to our
our anticipation except that the payment rate of the credit card business remains elevated, which is good on the credit side, which is dragging down the revolving balances impacting the NII a little.
And the Auto Loan Book which is the other big portfolio in the retail business, actually the Auto Loan Book is doing quite well. It did last year. It continues to do it this year with double digit growth, good margin, stabilized margin.
So that's the positive. Stefan, do you want to comment on the commercial? Yeah, I'll just mention that you're right as to what you saw, Arco, with regards to the growth in commercial, for example, during COVID, we outpaced most of our
most of our peers because we decided to deploy capital on the insured real estate market as Canadian businesses have lots of liquidities and we're not necessarily borrowing all that much. We've reverted back to deploying the capital to Canadian businesses and lesser on the real estate side, the insured real estate side.
over the last few months. And you're also right in the second part in seeing that there's been a slowdown over the last two months. We'll see how that reverts. I think January was a peculiar month, it's not a full month, lots of people and businesses on vacation. So we're really anxious to see the following few months how demand is going to pick up with the long-growth. But historically, we always wanted to be middle of the pack in asset growth.
combined with good margin controls and sound cost management. That's been a recipe. Okay, thank you. That's very helpful. Thank you. Thank you. The next question is from Joho Kim from Credit Suisse. Please go ahead.
Just following up on that seasoning discussion on the portfolio at Credit Jute, I'm just curious if that process is finished or could we see losses increase on the impaired side as the portfolio matures further from here? Thanks, it's Bill. I'll take the question. We expect that it will continue.
And when the assets are brought on, the Stage 1 PCLs come up front. So that's what we expect to drive most of the PCL growth this year at Credigy. Maybe, this is just a time, maybe I just want to add, you know, what we saw in Stage 3 this quarter and what we expect for the next quarters.
is in line with expectations on the unsecured consumer loan portfolios. It's in line with the expectation. Got it. Thank you. And just the last one that, you know, just a growth outlook overall.
I'm hearing sort of more normalization and growth from the domestic P&C business, not just for national but I think overall industry, but the growth outlook seems much more robust, as you mentioned, from credit and also ABA. So just curious what's driving that sense of optimism for those businesses specifically and how we should think about growth from there in a slower sort of a macro environment. Yes, definitely and thank you.
Yeah, this is just line. So I will start with ABA. You know the midterm economic potential of Cambodia is still very positive on many fronts. First, you know, the, there still have strong drivers such as, you know, high growth economy on the bank market for verbal role demographic. So it's still there.
roads and ports. So this is the global economic picture I would say. However the current economic growth in Cambodia is impacted like we are in Western countries you know by global uncertainties, geopolitical tensions.
supply chain constraints and high inflation. So we continue to see double-digit growth for loans and deposits, and this is what we see also for the rest of the year.
And so this is, you know, so the country is slowing down in terms of, you know, economy, but once again, the midterm potential is still there. So the bank is doing very well in these conditions. So this is why.
the current context, especially the context or the economic environment at the end of 2022, beginning of 2023, is very good for Criagi. You know, we made a lot of investments over the last six months. During the quarter, we invested more than 600 million US dollars. So it's been a very good...
But at the same time, we are very comfortable with the defensive portfolio and the team is still very prudent in its development.
But at the same time, we are very comfortable with the defensive portfolio and the team is still very prudent in its development.
Thank you. This concludes today's question and answer session. I would like to turn the meeting back over to Mr. Ferreira. Thank you very much. On behalf of all employees, I'd like to thank again Martin Gagnon and Justine Baron. This is their last call. Thank you very much for everything that you did for the bank.
and we will be back in the second quarter. Thank you.
I have you.