Q3 2019 Earnings Call

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Good afternoon, ladies and gentlemen, and welcome to National Bank of Canada first grow results conference call I will not only to turn the meeting over to Mr., Linda lodging Vice President of Investor Relations. Please go ahead. This is watching.

Thank you operator.

Good afternoon, everyone and thank you for joining us for our third quarter Investor presentation.

Presenting to you this afternoon or do we have actual president and CEO . She said Bahar, Chief Financial Officer, and Bill Bonello, Chief risk Officer.

Following our presentation, we will open the call for questions.

Oh <unk> also joining us for the Q any session or is the finest Shaw and glossy who had the CNC banking not big on your head of wealth management.

Haha, Indonesia, who all co head of financial markets, and John doesn't <unk> Senior VP finance.

Before we begin I refer you to slide two over presentation, providing national banks caution regarding forward looking statements with that let me now than they are called over could we vessel.

No sudden Don Thank you everyone for joining us.

Today were pleased to report another quarter of solid results for National Bank.

The Canadian economy, economic fundamentals remain strong providing a favorable backdrop in our core markets again this quarter. Our performance was driven by positive momentum in all our businesses.

Disciplined cost management and strong credit quality.

Execution of our transformation continues to translate into significant improvements of our efficiency ratio I'm positive operating leverage for Q3, the bank posted a return on equity of 18.6%.

We are maintaining strong capital levels with our city, one ratio increasing to 11.7%, giving us the flexibility to invest in our businesses I return capital to shareholders.

Credit quality remains strong across our portfolio, reflecting our prudent approach to London.

The <unk> economy continues to be very resilient GDP has been expanding for eight months consecutive best performance and over 22 years.

Your today job creation and a promise to Quebec has been that's seen especially showing since 2007 and July the employment depopulation ratio for people, aged 15 to 64 stood at a record 76.5%.

Two points above the national average and more than five points above the U.S.

Unemployment rates remain at historical lows and we are sustaining growth in labor income.

In addition housing affordability remains better than the National average, Okay. Looking forward the outlook in Quebec remains favorable with accommodative monetary policy and fiscal stimulus.

Supporting domestic economy and labor markets.

Now, let me share some highlights of our business segments.

Our peers. This segment delivered solid results again this quarter.

Our with our retail and commercial businesses continue to have positive momentum on both sides of the balance sheet.

We are managing our cost effectively while at the same time investing in our business to enhance our customer experience.

In both commercial and personal banking, we strive to achieve the right balance between volume growth.

Good margins and credit quality.

Looking forward, we will maintain our overweight positions on the promise of Qubec as well as unsecured lending, which we view as favorable and it cannot current economic environment.

During Q3, our wealth management segment benefited from a solid increase in our retail assets, owing to positive flows and favorable markets.

As we execute our organic growth initiatives and remain disciplined on expense management, we are confident that our wealth management franchise and deliver double digit earnings growth throughout the cycle.

In financial markets, we saw a solid rebound in our global Rockettes franchise from soft quarters in Q2, and a year ago.

As mentioned on our last call, we saw activity picking up significantly, particularly in structured products and interest rate derivatives as well as in our securities Finance business. We're also saying to benefits from sustained investments in our platforms.

Corporate and investment banking revenues are down this quarter, reflecting lower is Sam activity industry wide. Looking ahead, our pipeline is solid for the remainder of the year and we are well position should primary markets normalize.

I would now like to take a moment to provide an update on our international strategy.

We have been invested in Credigy any U.S. for 13 years and in emerging markets now for over five years.

Looking back we are very satisfied with the overall performance of our international strategy, which generated strong growth and superior returns, we are particularly proud of credigy and it'd be a bank.

Both have greatly exceeded our expectations and we continue to see active growth potential for each platform.

As mentioned last quarter looking forward, we will concentrate our efforts and capital on those two activities.

At this point in time, our strategy for Credigy remains for disciplined growth as we are replacing assets coming to maturity.

For 2020 and beyond the outlook is very positive.

Turning to emerging markets, let me see if your words in our successes in Cambodia.

Our retail bank continues to expand at a fast pace.

In the last quarter alone it'd be a bank double its earnings from a prior year on the back of impressive loan and deposit growth.

Since our initial investment in 2014.

The number of employees has grown from 600 to 5000, the number of branches as move from 12 to 70. The number of clients went from 60000 to 500000.

Our market share more than doubled our profitability increased tenfold and we generate a return of equity on equity of approximately 30%.

We respect to other investments you can expect gradual disposals overtime.

This quarter, we took a $27 million write down enough in Africa, primarily driven by a decrease and NSC us bank market value since its IPO in 2017.

At this point in time, we're very pleased with our investments in Cambodia, and we're not seeking expansion in other countries in that context, where are maintaining our moratorium on significant additional investments in emerging markets.

Turning to capital deployment, our strategy remains unchanged our number one priority is to maintain strong capital ratios in the current environment, we are comfortable and lending capital slowly trend upward overtime.

Our second priority is to continue to invest in our business to fuel organic growth in our core markets with the objective of enhancing client experience and generating positive operating leverage.

Our third priority is to return capital to our shareholders through sustainable dividend increases and share buybacks during the third quarter, we repurchased one and a half million common shares.

As usual. We're also we will also provide an update on our dividend policy next quarter.

To conclude I am pleased with our performance this quarter, our credit quality is excellent we have strong capital ratios, allowing us to create value for our clients and shareholders. Our transformation is progressing well and continues to translate into substantial improvements in efficiency ratios across the bank.

In an environment of macroeconomic and geopolitical uncertainties, we are comfortable with our prudent risk positioning.

Our objective remains to position the bank to perform well through the complete cycle and I am pleased with our performance in that regard.

In that context, I am confident that we'll be in a position to deliver EPS growth within our mid term target range for the current fiscal year.

On that I will now turn the call over through this thing.

Thank you, we and good afternoon everyone.

During the third quarter the bank delivered a solid performance driven by good business momentum disciplined cost management and our strong credit quality.

Before commenting on efficiency and capital let me go over the various one time items of the third quarter.

As shown on page seven.

The bank recorded gains on the sale of shares and the sale of our head office in Montreal debtors to step towards or relocation to our new edifice into any 23.

These gains were mostly offset by first and adjustment to the fair value of one of our investments in Africa has commented on by a week earlier.

Second the provision for lease cancellation of future Vic and premises due to do relocation of our banks at office in 2023.

And third the write down of ups elite technology as we move forward in the transformation of the bank.

These items resulted in a 25 visits point increase to our Cetone ratio.

Essentially driven by the gain on sale of shares.

We expect savings of three to four cents per year over the next two years as a lighted in our presentation.

Turning to page eight on efficiency.

Our transformation continues to deliver tangible results translating into significant improvements to our efficiency ratio.

Good momentum in our businesses resulted in solid positive reducing leverage this quarter.

Expenses were up 3.1% year over year, and 1.6% quarter over quarter.

Our consistent expense performance originates from our firm wide disciplined approach to cost management and from our continued investments in efficiency initiatives.

As we are progressing to our transformation journey.

Maintaining the right balance between investing in people customers experience and technology, while managing our ruckus prudently remains a key priority for the bank.

Higher expenses for financial markets. This quarter were mainly driven by increased investments in technology and various growth related expenses.

However, our refundable market segments remains very performance.

As evidenced by its low efficiency.

Efficiency ratio of 41.5%.

Year to date are all bank operating leverage is neutral with current positive momentum through all segments. We remain focused on delivering positive operating leverage at the bank level for fiscal 2019.

Now turning to the capital review on page nine our Cetone ratio increased to 11.7% during the quarter with strong earnings growth sustaining 41 basis points of internally generated capital over the quarter.

Risk weighted assets increased by 2 billion or 25 visits points, primarily driven by solid growth in commercial and corporate loans.

As mentioned previously the sale of yet at a 25 basis points to our Cetone ratio in Q3, partly offset by Remeasurement of pension plan in the context of falling interest rates and the repurchase of 1.5 million common shares.

At the end of the quarter, our total capital ratio stood at 16.3% and our ability and our liquidity coverage ratio at 154%.

We are pleased with our capital and liquidity positions, which we view as prudent at this stage of the cycle.

Regarding the accounting and regulatory changes expected for Q1 2020, we expect the implementation of IRS 16, and a change to the securitization framework to have a combined CTC one impact between 15 and 20 basis points.

On this I'm turning the call over to Bill for the risk review.

Messages that and good afternoon, everyone I'll start on slide 11.

Good economic conditions in Quebec, and the rest of Canada continue to support a fairly benign credit environment as reflected in strong performance across our portfolio.

Provisions on impaired loans totaled $75 million or 20 basis points in the quarter lower by three basis points quarter over quarter and by five basis points year over year.

Impaired loan provisions in our domestic businesses declined to 15 basis points or $53 million, which is close to cyclical lows.

Our international segment had $22 million of impaired pcls, mainly driven by Credigy, which continues to meet our performance expectations.

In Q3 provisions on performing loans increased by $14 million. This quarter, we adjusted our forward looking macro outlook to reflect greater uncertainty and this along with portfolio growth were the key drivers of our performing PCL.

Total pcls were stable at 23 basis points for $86 million and looking ahead, we maintain our fiscal 2019 total PCL target range and expect to be close to the middle of that 20 to 30 basis point range.

Turning to slide 12.

Gross impaired loans totaled $674 million or 44 basis points, an increase of two basis points from last quarter and flat on a year on year basis.

There was one new impaired formations in the corporate portfolio in the healthcare sector.

In the PNC and Credigy portfolios impaired formations declined on both a quarter over quarter and year on year basis.

On slide 13, you'll find details of our retail mortgage and HELOC portfolio the portfolio remains largely weighted Quebec at 54%.

As a modest proportion in GCA and GBA markets and their proportion of insured mortgages was stable at 40%.

I'll conclude with now with a few comments.

Being conscious of the uncertainties in the macro environment, we are being prudent in our risk reward discipline and our loan growth targets.

We remain very comfortable with the quality of our portfolios and with our geographic and product mix.

And good economic conditions in Canada, particularly in Quebec are supporting our strong credit performance and providing good opportunities for further prudent growth.

With that I will turn the call over to the operator for the USA.

Thank you.

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Please press star one at this time, if you have a question.

There will be a brief pause for the participants register for questions.

Thank you for your patience.

Our first question is from many women with Cormark Securities. Please go ahead.

Hi, good afternoon.

Question on.

The write off of the.

Obsolete technology Im just wondering if you could give us a little more details it is specific project and.

Is it more recent technology investment that's being written down and then finally the potential for more of these kinds of write downs or is it a pretty thorough.

Examination of of what you have.

Yes, I mean is this is a slaying so thank you for the question as I said earlier with the transformation of the bank, we implement new technologies to replace existing applications and systems. So.

So and those older applications are not necessarily fully amortized.

So the last time, we did such a write down in investments at two or three years ago. In 2016, so with the current transformation. We think it's normal to review in the value of our assets the value of our assets. You know every probably two three years. So we cannot say today, if there will be more in the future, but it's slow it's likely that you know in two three years from now we will probably review once again the portfolio and if we if we have to do so of course, we will do it.

But and then to answer maybe the first part of your question, it's not related to one or two applications you know.

It's it's it's.

I think that covers 15 to 20 applications.

Okay. Thanks for that and then in terms of the that other amount at the severance.

Is it related to a specific area of the bank.

I will well it's.

It's I would say, it's mostly people.

And and we have not done well.

It's important to mention that we have not done.

Two generic efficiency.

Yes.

You know, it's essentially you know.

We need employees with different skill sets. So its employees you know that we have to replace so the the transformation of the bank requires an adjustment in terms of talent and experience and skill sets.

So for your information we have 440 450 jobs currently posted internally and externally so its more to replace a skill set of some of our employees.

Thanks for that and then I just wanted to ask on the.

International strategy the dispositions.

In Africa is that a function of just the strength.

Relative to what you have.

In Africa or is it something you saw on the ground there that makes you want to.

Concentrate on treat concentrate on AB and kind of just wondering this ics. This focus on Cambodia now is that something that you.

Is that a long term strategy here or do you still reserve the right to to kind of look in other areas.

As you build out international plan.

I know, it's Louis I think we.

I think we stated in my opening statement we.

We have a relatively small international team and.

We don't want to be the focus by too many investments.

So we have two winners with we credigy in us and Cambodia, clearly so for US given the performance of these assets, we want to focus our time and effort and capital frankly on on those two we've known all along that you know the one of the reasons. We did three investments was that.

We weren't sure that.

We would have all winners by we figured that probably added a three we could have something we could built on strategically.

Which ultimately thats what occurred with our emerging markets investments. So I think over time, it's normal that if we Don interested in taking majority control.

That we would look to dispose and redeploy our time and capital and focus on what we're doing in Cambodia.

Thanks for that.

Thank you.

Our next question is from Steve Theriault with Keybanc capital. Please go ahead.

Thanks, very much first maybe starting with one another question on international I think you've got somewhere over 100 million remaining.

In terms of carrying value on the Ns investment can you just remind us.

On what assets are there outside of the bank just I guess trying to reconcile the.

What I think it looks like a 20% write down of the stake versus the bank asset itself being down appreciably more than that yes.

Good question, Steve I think theres, a slowing or does that answer because we have both banking and insurance assets within an SCR I think they are saying to us.

Hi, Thank you too.

We have invested in what we call and Thats site participation, so which is the old being sold the building is comprised of two main assets one in insurance and the other one in banking.

So essentially and.

And if a bank is listed on the Ivory Coast stock exchange.

So essentially we have written down you know the devalue of the bank not not the insurance.

So for I think that we have $120 million left in that 28, Canadian 128, Canadian lift on that asset into books.

And the insurance business is private and its intended to remain that way as far as you know.

Yes, yes, yes.

Okay, and then secondly.

Your main competitor in Qubec outside Montreal had.

Big Security issue recently, so if it's sensitive and maybe it's a bit early but I'm wondering sort of big picture. If you expect that this is a large enough event, where you might see some benefit on.

Market share outside Montreal or inside Qubec generally or are you seeing any of that already.

It's I think it's a bit.

Submit early.

On that particular episode.

But I think generally.

You see us some insight as to.

What's going on in terms of.

Generally client experience on client acquisition, which is not really necessarily related to to this particular types. So yes, so and thank you for the question. So our focus is really on our organic growth and we've implemented many initiatives since the beginning of the fiscal year to support that and all these initiatives were implemented before the season isn't.

So.

Definitely we've seen good customer acquisition momentum, but we can't really tie it to the theories and then.

Okay. Thanks for that.

Thank you.

Our next question is from Mario Mendonca with TD Securities. Please go ahead.

Good afternoon, just a follow up to that question.

Is there any need to spend more aggressively now in light of what you learn from the dividend.

So as you call it like or have you essentially put in place what you need to to make you satisfied.

I think we're we're satisfied with what we've done every time, there's an episode like that.

Globally or locally we always do a lessons learned exercise Mario and see what what can be learned from this and so we moved very quickly on that frontend.

I think we are satisfied with the level of security that we have in place.

Regarding that particular incident and then just quickly just last so there is a.

$128 million in.

Book value lets call. It now that you've written down the debt portion of Ns.

Would I be correct in suggesting that 40 million of that relates to the bank and the remainder to the insurance business. I know you arrive at that just simply by taking the 24% of the market value of the bank.

Yes, well after the write off it would be 37, so 30% for the bank and 70 40 insurance company.

30% and okay. So that works out to roughly what I suggest.

And then.

Then just finally real quickly here.

Are you seeing any issues at the insurance business that would cause you to revisit that valuation.

Not at this stage no I think the.

The driver of the write down was obviously the decline in market value of the listed shares into into bank subsidiary.

And that was unique to that banker like I guess, obviously don't follow African banks, what happened there was it something specific to that bank or just all the African banks I think there was both their Mario I think the zone was a little bit more under pressure after 2017 and 18.

And.

And SCR Bank had.

One loan issue, which I think impacted.

The the value of the stock they made one loan to.

Hi Tech our producer that went sour and I think that that that may have caused also.

The decline in the value of the shares Okay. And then just one final thing I'd looking at nationals liquidity ratio not in 54%.

And.

Yes. It is the bank just different from your from the other peers, because I looked around the others and I see numbers like 123, 122, 113, why Wouldnt nationals, B 20 points plus higher than everyone else is there just something different about your bank.

I don't think so I think we've certainly strategically and I think we've been very consistent on that Mario we've been putting a lot of effort and emphasis on on on growing both sides of the balance sheet.

And as you know.

That has that had some positive impact.

In terms of our.

Certainly our perception by credit agencies, because a lot of them were historically comparing our gaps too.

In terms of funding gap compared to some of our peers. So we've made a very conscious effort in the last three four years to close that funding gap, obviously with our customers, so retail commercial and corporate and reduced our our presence in the wholesale market.

So thats that aside from that we're not we've been prudent in terms of.

Of risk management, but.

You know that number fluctuates from from one quarter to the other and there is nothing particular about that but as it stands right now you don't see.

You don't see yourself.

Reducing your liquidity ratio back to where the group is you're comfortable with where you are.

I think yes, I think we'll probably stay a little bit above our peers, but I wouldn't say I want 50, I don't know it may decline a little bit.

But.

You know Thats, where we are and I think we're quite comfortable with it then.

As you can tell it's not impacting our results to negatively.

I always find everything is good I just wanted to just seemed that stood out that's all.

Yes. Thank you.

Thank you.

Our next question is from Robert Sedran CNBC capital markets. Please go ahead.

Hi, good afternoon.

Both Luigi's Glen talked about investments in the financial markets segment, but.

I noticed the ft eases up some 11% both quarter over quarter and year over year I'm just wondering if there is some.

Seasonal element to it or if there's something unusual going on.

Or if this is just part of that growth and we should see the non interest expenses start to grow a little faster as well.

I think last time, we'll give some visibility on that ship at her absolutely. So there is seasonality. There's all the students that we hired during the summer that are included in those numbers. So it's going to come down.

Next quarter.

But I mean, it's up on a year over year basis, the same amount, which is why I didnt think it was seasonality. It was it just a particularly active year. This year is that was.

Yes, absolutely we made a conscious effort to hire more students this year.

And so when the discussion about investments in the financial market side is had where it's literally talking about technology spend and things that are sort of embedded now in the run rate expenses for the for the segment is that does that correct. There was a bit of both so there are some onetime and some that are going to be are included in the run rate absolutely.

Okay, and they're all in line with our growth plans.

Okay.

Thank you.

Thank you. Our next question is from Sumit Malhotra with Scotia capital. Please go ahead.

Thanks, Good afternoon, just start with international you'd given us is probably for just let on the numbers you've given us some disclosure a couple of years ago that summarize the.

Investment and any capital that you had.

Put into these these businesses and so just so we're clear the divestitures that were talking about obviously, we have and I say that you've mentioned today. You also had the marine business and Mongolia are those three.

Businesses that we're talking about and if I was to say aggregate.

Equity investment in the neighborhood remaining of 200 million is that is that the range, we should be thinking about.

Yes, yes.

This is a good range.

And.

So there's a there's a change in market value that youve mission for and as a.

What about the other two is there any indications you can give us as to how those have performed I mean, we get the net income number.

For the aggregate businesses, but are you anticipating a loss on divestiture of these or is it too early to tell.

I think.

I think we'll take our time in terms of disposing of the assets some of it but I think it looks as though the market value appears to be.

Slightly above book value from Mongeau area.

And market value appears to be significantly above book value our book value for malicious.

Okay, so that you're giving us exposure to that and frankly, you've mentioned in the past that we were centering around data and Credigy. So this is just.

Yes, more officially signaling to the divestiture station that is correct and and Weve signal. Obviously I think it's been mentioned, we've signaled to to our partners there that to our intent was to dispose and now we will be patient enters disposing, obviously, those and other liquid assets and there is no rush here.

But I think thats the intent is quite clear over the midterm.

And as we said I think we you know I think if we don't get a gain.

Some gain in Mongolia, and the larger gain and malicious I think we'll be disappointed given what we see right now in terms of performance and.

And valuations.

And then if we move to the.

The buy side of the trade if I can call it that when we spoke about.

We had an update in the fall you had mentioned that.

Bye.

By this summer you may have the opportunity to.

Acquire the balance of the BA was hoping you could give us an update on how and if that is proceeding that is that is signed we have purchased and we're still waiting for the last.

Part of the story is getting regulatory approval from the Central Bank of Cambodia, which we expect.

And the next coming weeks.

Okay. So that.

Has that had you you announced letter.

I don't know I think we were waiting for regulatory approval and SMB.

I think we need to get to that letters before we say anything okay, just making sure I'm, mostly be on the job of your engine misled.

Okay. So we'll look for that different different topic bring it back to to Canada.

And I wanted to talk about your commercial loan growth.

It's obviously been a area of strength for the industry as a whole when I look at nationals numbers.

And we will focus on this quarter, but I think it's been the chain it's in the base for a while.

Your commercial balances in Canada are up about 7% year over year very good number but still a number that is below.

All of your peers that we've heard from so far this quarter and I wanted to ask given the fact that you've historically been a bank thats been overweight commercial you're operating in the part of the country that for a few years now has had the strongest economy is there something deliberate about your commercial loan growth being below some of the peers in the industry or is it just a reflection of the opportunities you're seeing in the market.

There is something is submitted to find there's there is something deliberate in the sense that we have said over time that we do not want to grow the real estate.

Book faster than we develop the rest of the market. So it's very easy to.

The rollout of the overall asset. So we are real estate operations and as you will see this quarter again at 8.3% growth of the real estate book very much in line with the rest of our assets and we strive to develop both sides of the balance sheet. So we don't mind being lower than our peers in the overall asset growth.

Last question is for Louis on your comments on.

Growth rates and you mentioned that you're comfortable that you'll be in.

To the targeted range for 2019.

Obviously, we're getting closer to 2020 now and I wanted to see if we can get a head start on.

How you feel the targets are shaping up for next year as you do your business plan, particularly with.

Some of the changes we've seen in the macro backdrop.

Well I guess, given the given the macro and geopolitical.

Backdrop, I I'd, rather take the fit for this quarter.

Yes.

It's a great question for next quarter, I mean that Theres a lot of moving parts. We are looking at different scenarios I think I'll hopefully be able to give you a more complete and certainly more intelligent answer at Q4.

Uh huh.

I might try you in a different forum next week so.

Let's see if we can execute the.

[laughter].

You may want to cancel my appearance.

[laughter].

Your next week and the data thanks.

Thank you. Our next question is from given the Shine with National Bank Financial. Please go ahead.

Afternoon, I do want to revisit that a expense question, Rob was asking earlier, but more on the PMC side of the business.

It's been running Oh.

Quite low for a year or more and I'm just wondering because we've seen some banks talk about stepping up.

Initiative spending and others, mostly most banks actually pulling back after a extended period of.

Elevated cost inflation, just wondering where you know nationals outlook.

For what national the outlook is for expense growth in that business.

In the next year.

Yes. Thank you again, and if you Steve So we've been quite consistent in managing our expenses and PMC growing in a range of 3%. So we expect to continue with the same.

We are seeing trends.

In the coming years, Okay. So steady as she goes and I assume the transformation plan is underlying that.

But type of outlook.

Yes. It is we are we are going very well and our transformation journey and we're making great progress on the digital front and improving the customer journey. So it's all embedded in the outlook nine to date.

Great.

And then moving over to the wealth business. Thanks.

I just want to connect some dots here the rate environment.

Tailwind for your business.

17 and 18.

Obviously the story with Jane has done.

Well this quarter, the the and I was flat for the first time in a long time and just wondering how can you maintain positive growth in this business if we see a.

Several bank account a rate cut over the next year or is simply a rates or your market rates are subdued.

Thank you again for years, so yes were maintaining the same guidance as weve given in the past our objective is to do a double digit earnings growth through the cycle. So keep in mind. The last two years weve compounded at 22% so its a little softer right now.

Because of market conditions that you are well aware of.

But the long term plan is still the same as the market gives us a 4% to 5%.

Organic growth initiatives of 2% to 3% and positive operating leverage is the long term recipe for us. The last couple of years, we've benefited from interest rate increases.

And it represents 26% of our revenues. So we did all kinds of initiatives to benefit from that right now we're not even though cash is increasing especially in the cash performer rates have gone down their compensating and were flat in net interest income, but we have other ways of.

Achieving the objective and I'll point, you to 13 and 11% growth in a you weigh in the U M, which points to a very solid underlying trends.

Thank you.

Thank you.

Our next question is from Doug Young with potential New capital. Please go ahead.

Mr. Young your line is now open.

Sorry about that good afternoon.

Just going to slide 17 of your presentation package, just looking at the expected pre tax savings.

Just wanted to confirm is this incremental in that two cents four cents three cents or if it's not incremental why would it be going down in fiscal 21, just wanted some clarification on that.

For years, so each year you have one in this year. It's two cents next year is four cents. The third years. So it is it is incremental okay exactly right.

I'm a little slow today.

Second is just you talk.

A boat updating your macro assumptions in what goes into.

Getting your Pcls are allowances for performing loans and I just noticed on page 64, and your Mdna and one of the exhibits that goes through the stage one stage two stage three that there is a change in model and I'm, just and it's out of your credit card component and I. Just wanted to understand was there actually change in inputs that go into deriving that or is this just part of the change of forward looking indicators.

Hi, Doug It's Bill I'll answer your question. Thanks work.

For the slide said, you're talking about in the Mdna I think the you will see quarter to quarter noise in some of those numbers some of which are regular updates NIE for us nine models I think the one you called out some changes in the credit current models, but I would I wouldn't read too much into that.

The performing Pcls were really driven this quarter by us.

The two sides of the of the view in the economy current economy is very very strong as you've seen and I think we recorded during or written remarks.

The.

The strong economy is coming true showing up in our impaired loan losses.

And delinquencies, which are stable or even improving however, when you look outside you look at the signals from the bond market and you look at uncertainties and geopolitics, if theres, a real divergence and and so when we looked at our forward looking macro assumptions, we thought it prudent to adjust those a little this quarter and.

Time is a prudent to continue to build allowances for.

Now the good times are good and continue to build allowances for the eventual change in the cycle does that answer your question. It does it's just that it was so the change in models isn't like you're not putting new inputs in to the models, that's not what that is indicating.

I would now like sorry, I see the chart youre, referring to I think is on the capital.

Hi, I know, it's on the PCL anyway, we can take it offline I just wanted to know if there was it doesnt sound like Theres, new inputs being put into your models, it's yes, or no no no new inputs, but there'll be regular our first line nine miles like the capital models have have regular updates on the various different aspects of them and those can generate some some noise and probably even more during the first nine models are relatively new so yes, I would I would say the.

Theres some noise that you can't really take signals from in some of those charts, but overall the looking at the size of the performing loan allowances I think thats the real number at the end of the production stream, that's the number that counts.

Okay, great. Thank you.

Thank you. Our next question is from Nigel This is a fair guess please go ahead.

Good afternoon, and thank you for taking my question if I could refer you to slide 11, if you're a investor presentation I wanted to clarify first just a point of guidance you're at the PCL total PCL target range of 20 to 30 basis points for F 20 sort of confirm that that's your full year PCL.

Target range guidance is that right.

That's correct.

Okay. So the question I have no defaults and that is.

I'm wondering why or is there a reason why that range hasn't come down maybe 20 to 25 basis points and the reason I asked that is because.

Oh, you are running below 25 basis points on that ratio for the first three quarters. So Steven.

Exceed the 25 basis points for the full year, you probably need.

Fourth quarter PCL ratio to be close to or above 30 basis points, which should be a pretty substantial sequential increase so are you expecting.

T cells to move the ratio move higher in the fourth quarter or maybe two to performing loan losses or is there. Another reason why that a that range of guidance hasn't come down.

Yes, Nigel and you might have missed my my written remarks, but its been consistent that we expect to be close to the middle of that range and that's been a consistent message for the last few quarters as well. So the answer is no. We don't expect the fourth quarter to be significantly higher I think there were quite comfortable talking about arriving for the fiscal year close to the middle of that range.

And we're fairly close to right now.

Okay, so that would imply it incrementally higher pcls in fourth quarter to bring you up to the middle that'd be fair.

I would say for going back between 20, 324, I'd consider all of those and close to the middle of the range as well Nigel.

Okay. Thank you appreciate the color. Thanks.

Thank you.

Our next question is from Darko Mihelic with RBC capital <unk> capital markets. Please go ahead.

Hi, Thank you just a first question how many employees do you have in Quebec.

Kristen.

11, 10000, 11000, there's 25000 employee all banks or 5000 in Cambodia.

In conclusion, it must be like 12, 13000, yes, 12000, Okay. I mean, the reason why I ask is I mean, I'm, just trying to get back to the whole expense discussion and.

If I look at the compensation expense year to date, it's only up 60 basis points, that's all bank and that would include.

And I realize that there is a few fewer employees in PMC, but but losing it in your opening remarks, you talked about the strength of the of the Quebec economy, and the unemployment now or sorry, the employment figures and I just I'm just thinking to myself as I think forward looking for it why should we not think about wage inflation hitting especially when you will be fighting for talent.

Predominantly in Quebec.

It's hard for us to get our heads wrapped around why there wouldn't be.

A bigger expense bump going into 2020 can you help me understand.

That mechanic.

That's a good question.

I think we are certainly seeing in some.

Segments in some specialties, which as you would see too.

So there are those are the specialties like cyber security and digital marketing, which in any markets in any geography as right. Now are are pretty hot so we see some.

Inflation there.

And but generally.

We're managing down and we're monitoring that very carefully and we're monitoring also our our turnover employee turnover very carefully so far Darko I think we've seen no indication that that is a major probably have to remember we wanted a few.

Private employer left as a defined benefit plan then that we you know we have I think we are very very attractive as an employer remember our head office is in Montreal, So for anybody working in Quebec.

If you want to gravitate and go up in the ranks and do different things and.

You know we were by definition also a very attractive and floor. So all of these reasons I think help us I think keep keep a lid on on compensation, but at the same time, we saying some wage inflation and some specialties absolutely.

But net net I think we're being continuing to be very disciplined on this but at the same time I think I want to be very clear I think where we are investing appropriately in our staff in our personnel.

We've.

Our increasing the budgets for.

For trading and.

Better expertise and so forth and so I think we are we have the right balance between.

Investing for the future and just making sure we staying disciplined and remember Darko I think you're probably getting set up to hear us the banks say to us, but theres. Good cost control. He also means good risk controls. The two are equally very very important particularly in the late stage of the cycle. If you don't keep a good control of your cost you guys you run the risk of losing control on the risk side. So I think we're very disciplined on that front too.

Okay. Okay fair enough that that's that's helpful. And then just I just have one weird question for you as well.

It requires going to the regulatory supplemental and looking at him specifically looking at page 23.

Yeah and the capital.

Supplemental capital disclosures.

Okay, and what I'm, specifically looking at is the exposure to the UK has jumped quite a bit.

And in total was 30 billion most of Thats repo I'm just curious what's happening there because you mean, it's typically.

Sort of gone between 21 to 19 billion is really jumped a lot in the quarter just curious I mean, we're going into.

Brexit for lets say October so just curious what's what's going on there thats just an up market opportunity or is there anything that I should be a alluded to there I think low has the answer to that.

Sure we saw opportunities specifically in the repo securities lending market.

And our Dublin operations, so a lot of that comes from there.

And that's something that that will continue and going forward or is that something that's just worked very well continue going forward. We're very flexible when it comes to capital allocation. So when we see opportunity we moved quickly when we.

See the time to retrench, we do the same thing so if the opportunities are in North America, you might see an increase in North America, followed by a decrease in Europe . So we're when we allocate capital specifically in securities business, we do it in a way where we go.

And optimize the balance sheet.

And this is in no way related to the to the high liquidity ratio you're running at the bank or is no no no no no no. No. This is our securities finance business, it's not related to liquidity management Darko. Okay. Thanks, very much and it's only it's only repulse right theres nothing yet.

And Scott.

I figure it out.

I realize it was mostly people just could just very curious I'm not I'm not development. So thanks a lot.

Thank you. Our next question is from Sohrab Movahedi with BMO capital markets. Please go ahead.

Hey, Thanks, I just wanted to maybe a couple a few quickies.

Bill Youre I as far as Snine.

Model is it does it have any am out outsized exposure today qubec economy or is it that sorry outside your weight to the cutback economy.

I think the impact on the Pcls is driven by the performance in our Quebec portfolio given that makes up most of the credit exposures. So I wouldnt say that the models themselves outsize weight.

Our cut back exposures is very very relevant to the size of the excellent.

Okay I just found it. So so then you know given the favorable outlook for the Qubec economy. You know. The addition to the performing loan is or is it performing loans, how should I think about that is that more because if the growth in.

Outside of Qubec 10th.

I think in my comments are up I mentioned two points. One is the natural impact of portfolio growth, which does generate a performing loan PCL, but in this quarter and specifically, we adjusted our forward looking macro outlook I would impact the entire portfolio to make it they take into account a little more pessimistic to take into account the uncertainties that we see going forward.

Well the uncertainties that would be specific to qubec no no no no I'm going to be.

The uncertainty there where you see I think during the last quarter you had a significant drop in the yield for 30 years, but the signal you see increased uncertainty about what the outcome will be from some of the international trade negotiations those although they are not.

You might not see the direct tied to Quebec, They do certainly impact global financial markets global economic growth and that will impact.

Our Canadian economy as well.

Okay, and then maybe just on some of the adjusting items that are not as you stand kind of had highlighted just then what would the timing of some of these remeasurements and call. It a.

Headwind was that just fortuitous that it was around the same quarter that you had if he ever again and or was there. Some control over that is that it was this time is on your part so to speak.

It was.

It was a happy coincidence or up.

Okay.

But in fact.

What what clearly was related was the fact that we sold our old building.

And we took the write downs on all leasing because thats clearly related one to the other.

And for the others I think clearly we.

We used a gain to to do things that we felt we needed to do essentially and the fact that we had gains allowed us to do that.

So should I would just add.

You know this that the issue of the technology obsolescence. This wasn't an accounting driven.

Something outside of your control. This was just the degree of management judgment on that is that fair, yes, some extent and we knew we had gains and as you know, we well positioned on on capital and so we figured that.

And we wouldnt be rewarded anyways for.

Onetime onetime gains that are decided to.

To make sure in the spirit of being very conservative.

As we are also in credit and everything else just to do what we have to do right away when we had gains.

Right understood and then just two more quick ones that treating was particularly strong from a trading revenue perspective, I mean, I, we have some data going back at least maybe 10 years probably the.

The best quarter in equities and and overall going back 10 years is this do you view this as sustainable.

So sorry this is long.

The the growth.

Yes, so structured products is strong we've been investing on on our platform and.

If you go back 10 years, we used to sell locally.

Quebec, Ontario, now we sell globally and so we are selling structured products to all of Canada US and also Europe part of Europe , So where we feel comfortable in terms of.

Expertise and managing risk, we felt comfortable with.

Expanding.

This business so in terms of.

Growth, obviously, it's market related its investor sentiment.

Dependent so.

We have good markets, we were very comfortable.

And.

With that the sustainability of the growth of that business. We also did really well in terms of overall managing.

Balance sheet through securities lending and deploying capital through that so thats clearly another area that depending on the opportunities we feel very good with the growth prospects.

So a little bit related to dockets question I guess, the UK was part of that depends on the opportunity or the Dublin operations would have been part of the opportunity 100% right and then I guess lastly, I mean first quarter, probably in about three or four that the ROI, we had got back to that 18% level you're talking about.

You know, obviously, well managed capital levels, but allowing that to.

To drift higher.

Do you have an eye on that our OE or I mean, your medium term targeted range you know its comfortably within that but do you think that's going to trend lower from here.

This and other were very happy with the R. or we are always obviously, a way above a global standards and above our peers now I think we you and I have discussed that many times, we're not we don't run the bank on one single number.

We run the bank on a on the on the balances of stakeholders.

And so I think it'll depend a little bit on a couple of things. One I told you that we will we're looking to to let the capital drift up a little bit in line with.

With the macroeconomic uncertainties and also as you know I think we've disclosed that.

We're going to have a we'll make more contribution to the RF a as far as the accounting.

Reality and Q1, so a that there has to be taken care off also.

For the rest I think it will depend on.

On what happens and.

In terms of the economy, and a 2020 and 2021 and see how we go from there.

But I think.

We definitely want to continue to keep a right balance between our stakeholders or would be a shareholders clients and employees that I think thats been.

What we've we've tried to do.

Last 12 years at least and I think it's it's working out fine.

I appreciate the color. Thank you.

Thank you.

Our next question is from Scott Chen with Canaccord. Please go ahead.

Good afternoon, I just wanted to go back to wealth management and think about the double digit earnings targets for the cycle on you kind of talked about the fee based on the revenue side and the net interest income, but what about the transaction and others. Martin is there I mean, it was flat basically flat quarter over quarter and year over year. I was wondering if you could just kind of offer some.

Colour on that I'm, not particularly a revenue item and perhaps an outlook there.

Well it now represents about 16% of our revenues, it's gone down and.

It's hard to say, but even though we did a lot of switch.

In full service brokerage from transactional to fee based.

I wouldn't be surprised if it keeps going down it's a I think the nature of where the business is going.

This specific quarter, new issues was very quiet industry wide. So.

It represents about.

John I think under 20% of our transactional revenues at full service. So it impacted this quarter, but I think we're on a longer downward trend.

That's helpful and just lastly, just going back to the PNC side some of your peers have offered.

Kind of margin guidance in the face of probably a couple of bank of Canada rate cuts over the next year.

Your NIM has been pretty stable over the past years is there any guidance you can offer heading into 2020 or are things that we should think about.

Yes. Please when he may be is a nice refund uncertain at this point. So I would I can talk about Q4, where we expect the Lewis will launch another sequence the leases.

Neutral in Q4, but nothing for 2020 yet.

Okay. Thank you very much.

Thank you.

Once again, please press star one at this time, if you have a question.

Our next question is from Mike Sullivan with credit Suisse.

Hey, guys. Good afternoon, just a quick one for me on your residential real estate secured loans.

Just noticed that your your growth rate looks like it decelerated a little bit in the quarter from from where it was last quarter on a year over year basis and that's in contrast to most of your peers and when I look at your regions it looks like only Quebec.

Accelerated for your portfolio. So I'm just wondering if you could give us a bit of context on why you are not may have lost a little bit of market share in the quarter and sort of what your outlook is going forward.

Yes. Thank you for the question, it's Lucy So I would say further we're quite pleased with our mortgage growth.

Through the last four quarters were very strong so I'm not too worried about this slight decrease that we aren't in Q3.

The markets remained good in LTL gimmick, as you know and come back and we can we still well positioned in terms of rental growth.

So that's the one thing in terms of the region.

To get make is performing very well and the important thing is that outside get Max it's operating in line with the market conditions in Ontario NBC.

And what happened is that our internal channels are performing relatively flat compared to last year, which is quite good in the circumstances.

I would say that the origination coming from paradigm Quinn.

Are the one that took a hit in those markets and that's what you see in the numbers.

Got it thanks for the color.

Thank you.

There are no further questions registered at this time I would like to turn the meeting back over to you Mr. Musharraf.

Thank you everyone and we'll talk to you next quarter. Thank you very much.

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No as you put all this at coffeehouse at that level.

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Okay opinion, not because it had been for Tommy see for pick a question about funding.