National Bank of Canada (NA) Earnings Call Transcript & Summary

Thank you, and welcome to the 23rd Annual National Bank Financial Services Conference. As JP mentioned, we got a good crowd and a lot of interesting speakers. So I think we're going to be learning a lot over the next few days. And Mr. Ferreira, welcome to the stage again.

Thank you.

To kick off the day, let's start with a big picture question as we typically do. On the Q1 call, in your opening remarks, you listed a series of policy decisions that Canada should make to improve the resilience of our economy, help us navigate the world in which we find ourselves today and make a stronger economy ultimately. How confident are you that we're in an election now situation. But regardless of the party that policymakers are willing and capable to deliver on some of these suggestions, which I agree with entirely.

No, it's a really good question, and thank you for everyone for being here. I think the sense of urgency is there. I think you're hearing it from all stakeholders, businesses that are being much more vocal. Obviously, government, you're hearing it now from both parties. I think we are heading, I think, in a more business-friendly environment. So -- and the reason why I talked about these steps is I think that the biggest risk we have right now are not tariffs. I think we'll get to a stable place there at some point. But it's really falling back and being complacent as a country and not taking the opportunity to step up. And it boils down to a couple of things, and I mentioned a couple of things on the call. But the first is, I think we need a major tax reform. Taxes are too high in this country for both individuals and businesses. We need tax incentives. We need tax to be friendly to capital, and it hasn't been. I mentioned a couple of things like accelerated deduction for capital investment, capital gains for risk takers, business owners, I think, should be lower than for trading, for instance, and investing in liquid -- with liquid stocks. And I think also we have a lot of business that are transferring. We've seen a lot of sales of businesses in the province of Quebec. There's not one business in the province of Quebec last year that transferred -- that didn't have a U.S. interest coming into capital. So I think if we want to incentivize investment, maybe putting in incentives for business transfers for Canadians so that we keep businesses here in Canadian ownership. The other thing that we hear about constantly across the country also is regulatory, so it's very complex. And one of the things that I mentioned is, I think, we should -- at both government levels, the provincial and federal, we should have a head -- a nonpartisan head of deregulation. And I'm not referring to the Elon Musk mass firing here. I'm referring to getting permits out to businesses so that we get back on the track of economic growth. So I think looking at what is complicating the lives of our businesses and addressing those things and getting rid of duplication, I think, is something we should address as well. And I think whoever the next government that's in, I think we have to repeal certain policies that I think are really detrimental for our country. C-59, the Greenwashing Act; C-69, the Impact Assessment Act. And I think we need to repeal also the proposed oil and gas emissions cap. Regardless if it's liberal or conservative, these things are not good for our country. So you ask if I'm hopeful -- I'm hopeful, right? All these things are going to be done. There's definitely a sense of urgency. We're seeing a lot of the debates now around those things. So yes, I think there is a sense of coming together, working together. So yes, hopeful.

So there has been a lot of negativity around this situation with -- there's also unawareness that maybe we've been asleep at the switch too long, and this is actually the kick in the posterior that country needed to put us on a different trajectory. Do you have an idea of what sort of economic potential there is if we do even half of the things that we need to be doing?

I think it could be significant. It's not going to be simple. This is -- these are complex issue. When we talk about deregulation and getting things simpler, it's not easy. So lots of coordination between various governments. I didn't talk about it, but also interprovincial trade -- sorry, interprovincial barriers, right? There's -- it makes absolutely no sense that within the country, we restrict flow of goods. We stop ourselves from being much more efficient. And in a country where it's energy and natural resources, right, that are going to get us off the ground, I think seamless regulation across the country is going to be very important. We have to build infrastructure, not just energy and mining, but also roads, right, to get our product out. So I think it could be very significant. But we have to get our act together. I think we need very strong leadership in Ottawa, and we need to bring together the leaders of the various provinces as well to the table and get this going.

And I guess, anecdotally, and that sometimes helps illustrate the issue. You mentioned deregulation as a priority. Are there businesses that you -- or business leaders you talk to that would be today, they're responsibly well, it's easier for us to go build our plant or invest in the U.S. because of XYZ. We would like to do it in Canada. It's just too difficult. Is that part of the issue?

Yes, so part of the issue for sure, and it's not just with the new administration. I mean, it started with Biden as well. The IRA has put restrictions on U.S. content for strategic assets. And so it has made it difficult for a lot of our businesses here in Canada. So you hear that, you might as well just go and set up in the U.S., so that's not a good thing. So we have to look at that carefully. We've made our governments aware of that. And I mean you do have to have some of your operations in the U.S. But then how do you also think about growth in Canada and other markets is something that we need to talk about now.

So bringing back to the management of National Bank itself, one of your mantras ever since you've been CEO and prior to that as well is risk management is the key priority for day-to-day operations and your philosophy in running the bank. In this situation where the risks are evolving on a daily basis, like how do you navigate that environment? And from a balance sheet standpoint or capital allocation standpoint, what's the strategy?

I guess now first, being long wall on equity and fixed income as is something we have a bit of experience on. The other thing I would say is, look, there's a lot of uncertainty here, who knows where this is going. I mentioned, I think at some point, the Canada-U.S. tariff relationship will get to a stable place. But it's very unpredictable. I like where we stand in terms of capital liquidity, our business mix, our credit as well. Having a strong balance sheet, being ready for these types of situations for our clients is the most important thing. Right now a lot of it is staying close to our clients because they're the ones who are feeling the brunt of the concerns right now and being there for them, being their solid rock and our focus is on the Canadian economy. And I think in the current context, we're actually very, very happy to be domestically focused. But our clients are resilient as well. A lot of them are -- initially, the shock was brutal. But a lot of them are talking about, all right, let's -- we're going to start investing. Let's look at procurement inside of Canada. Let's look at the ways to be more efficient, and let's look at it in other markets, so we're going to help them and support them there.

Okay. Another big part of the National story is the CWB acquisition, which closed on February 3, I believe. And one aspect of that transaction, I mean, expense synergies as an analyst were like, okay, that's kind of a given. But the more important and interesting element of an acquisition like that is the revenue synergy opportunity. It's not been quantified, I get that. But it's something -- it's the promise of something that I think investors value a lot more. On the other hand, it's something that's a little viewed with more skepticism because it's harder to track and measure, frankly. So what's different about the National Bank and CWB situation such that investors should be more confident that there's a material revenue synergy opportunity, and we'll be able to see them, I guess.

And I understand the skepticism because it's hard work. You've got to be focused, plan correctly, which we're doing. It's early days. We just -- as you mentioned, February 3 was our legal day 1. March 3 was employee day 1, so we're not even 2 months into integration. So a couple of things and why I'm excited. So there are 2 blocks, right, commercial and then retail wealth. On the commercial side, NII, ancillary business. NII, it's first, cost of capital and funding. CWB is more competitive now, right? So -- and funding, I'm not talking about funding synergies that we disclosed. I'm talking about being more competitive. So with the existing clients, the book of business could grow much more because larger holds, larger holds, we are more competitive. And we can attract more clients to the platform now because bigger balance sheet and much more competitive on capital and funding. So that's -- first is NII boost with existing clients and attracting more clients. On the ancillary side, look, for a long time, and I'm sure you've heard [ Chris ] talk about that in the past is they want to do more with their clients, they want to do more fee-based. If you look at fee-based revenues for National Bank on our commercial side, it's approximately 25% of our revenues, CWB 12%. So it starts with cash management platform, which attracts deposits. It's foreign exchange, it's interest rate management, risk management, it's advisory, ECM, DCM. So all the products that you bring to commercial clients, which we do. And then on the flip side, they have an equipment finance business, which we don't have, which we can bring to all of our clients. So NII, boost and ancillary business with all of the commercial clients. Then retail, retail was really nonexisting with CWB. So we have 39 branches that we are incorporating. We're going to bring these products to all of CWB clients, and we'll be able to do even more. And we have a great retail product. We have a great, great digital platform. On the wealth side, they started, right? They had a little -- a few investments. I think we're going to be able to make it much more efficient and attract a lot more and bring the National Bank model, which is collaboration between commercial and wealth. And so we've got all the CWB client and then a bigger footprint Out West that's going to be able to attract assets much faster.

And if I could pause you there because your wealth business is an interesting angle because the HSBC Canada, the advisory acquisition years ago, Wellington West, it's a bit more Western skewed than the rest of the banks.

40% of our wealth business is outside of Quebec, so we already have a presence, but now we have a larger footprint. So we're -- and we're starting to feel it, right? We're going to be more visible. We're going to be able to attract more assets. So it's early days, and I understand and we're -- right now we're focused on integration, cost, funding synergies, those things are all coming in. But we're actively working on these. But towards the end of 2025, I think we're going to be able to provide much more color on that, and they're really going to kick in, in 2026.

Okay. And switching to the provisioning strategy. So the day 1 provision is a pretty hefty number. I guess what was the philosophy? Or how would you describe that provision? Is it one where you're taking a worst-case scenario kind of perspective given the economic backdrop we've got today? And if that doesn't actually play out, we should probably expect some releases over time or...

So we took a conservative approach. You're absolutely right, and which is typical in National Bank. We're also in a credit cycle, and we have this uncertainty with tariffs and the current environment. So on performing provisions, we took $230 million. We took $378 million credit mark for the portfolio. So on the performing provisions, we -- National Bank, our own provisions, we were skewed towards a pessimistic scenario, so we have applied that. And on the credit mark, look, the CWB portfolio is commercial loans. So -- and when there is uncertainty, when the possible range of outcome could be a little wider, we think probability of default in a certain sector is a little bit higher. So we took the opportunity to move some of the performing to impaired. But I think what you're mentioning, are we being conservative? Yes. And we prefer to be conservative in the current environment, and we'll see.

You mentioned that near the end of 2025, you'll give more detail around the revenue synergy potential at CWB. Another update, at least that's what I interpreted your comments to indicate is that your capital management strategy, you'll be giving an updated perspective or strategy, I guess, sometime this year. How could the priorities change? I mean, you're running at a very strong capital level now. Do you need to be at that level? Or maybe you do because of the macro backdrop or maybe you don't? What's your -- outside of organic growth, which seems to be the #1 priority and dividend increases and buybacks, is that order going to change? It seems...

No, we're -- look, we're pretty boring, I guess, right, conservative, prudent and the order is not going to change. So CET1, 13.6% Q1. We mentioned the impact of CWB about 15 basis points. So let's -- 13.5%, let's say that's where we are approximately. So priority, the first thing is we're integrating CWB. This is a large transaction for us, so the focus is on that. The focus is on getting all the benefits and making sure that it's a success. So that's the #1 priority. Second is organic growth, as you just mentioned, on all of our businesses. You saw the momentum in Q1. So we're doing well across the bank. It's integrating CWB into that model and pursue organic growth across everything. You mentioned, obviously, dividend growth, but delivering premium ROE. Above all that, it's how do we keep delivering premium ROE, which we've been doing consistently and we're going to keep doing and including with the acquisition of CWB. As for buybacks, it's not going to happen this year. It is a 2026 story. They will be more material because you're right, we have 13.5% roughly. And we haven't factored in yet the benefits of portfolios being transitioned to a National Bank platform, going to advanced model. We haven't disclosed what the positive impacts are going to be, but they are going to be positive, obviously. So our goal is by Q4, we're going to provide a better picture of what that entails and what we're going to do next. So buyback is for sure on the table in 2026.

Is that AIRB transition possible in 2026 or...

I think it's going to be gradual. I mean we're working with our regulator. You've got to go portfolio by portfolio. I mean we have some of the similar portfolios, National Bank, and we have -- sometimes we have the same type of business. So take, for instance, real estate, so we'll go industry by industry, work with them. My guess, I don't want to get into trouble, but by this time next year, we should have a very good idea of what that -- those benefits are.

So we've got 6 minutes left. I've got enough questions, but I do want to make sure we cover off Credigy and ABA. Credigy, the loan book, at least sequentially, there was a bit of moderation in the portfolio growth there. You talked about market conditions not being ideal from your risk-reward standpoint, which we've heard in the past on a few occasions, and I think investors appreciate that disciplined approach. Maybe you can talk about what are the conditions at play now that make it such that...

So we're seeing business, right? The flow is there, the issue is pricing. They're not -- it doesn't meet our risk/reward standards. And when this happens, we step aside, right? Credigy is not a volume business. It's not a volume mindset. It is RAROC and ROE first approach, very disciplined. It's -- we've done well with that approach, and we're not about to change that, so we'll see. The year is still young. We have some uncertainty in the market now. If it turns out to be very positive and there's M&A activity in the banking sector in the U.S., we'll see asset sale. If it turns negative, we could see asset sales as well. So patience is very important in Credigy, and our focus is accretive ROE, not volume.

Yes. No, I get that. And it's more like there's too much liquidity and too many buyers kind of a thing. That's...

So yes, so we're seeing a lot more competition in the market. So private credit, insurance company that have interest in consumer loan and mortgages, so there are more players in the market right now.

Okay. Moving to ABA. I've got kind of a contemporary question and then a long-term one, but the contemporary one is on credit received a lot of attention over the past year plus. This past quarter, we saw some moderation of new formations. Do you think that trend has legs? Are you seeing some stabilization in the credit performance?

Yes, it does have legs. I was there last week. I spent some time with the Board, management, various teams as well and met with Governor of the Central Bank, which is our regulator as well as the Prime Minister. So a couple of things. First, on the economy, it's much more positive. What we're observing right now. If you look at January, February, international trade in the country is up 16%. Foreign dollar investment, which has been a focus of the government is at a record high for those first 2 months, it's over USD 1 billion, which is -- this is a small country. So these are big numbers for Cambodia. Tourism is also picking up. Now we're entering into a slow season. Tourism is between September and sort of approximately now. But the first month, we're really strong. And we're starting to see interest rates come down as well, which is going to be good for investments in real estate. So -- and in my meetings with local authorities, they are focused on growing the economy. So all my discussions were very positive in terms of what they're working on, bringing on various sectors. The tariff is possibly a positive for Cambodia as we're seeing some manufacturing move into the country. They're looking at vertical integration of the food industry. A lot of their products -- their raw products are exported. They're looking at manufacturing in the food industry and obviously promoting tourism. So a very pro-business environment. So that's very, very encouraging as well. Now on the formations themselves, so I talked a lot about that, looked at and educated myself a lot more on what's going on and what's the process. So the core process is very bureaucratic. It takes a long time. So we've got formations that have been going up and the resolution process hasn't picked up as much, but the one thing I can say is, yes, it's bureaucratic. It's a lengthy process. But on resolution, it is the rule of law, right? And I've had these discussions with the Prime Minister as well as the Central Bank. I really don't have any concerns there, right? The issue -- one of the issue has been, right, that the real estate market has slowed down a lot, right? We've had interest rates that have increased between 2022 and 2024. We've got savings that are up significantly, 7 billion -- these are big numbers for the country, 7 billion in 2023, 10 billion in 2024 that are stuck in deposits and savings. We saw it in our numbers. We see last 2 years, loan growth has slowed down and deposits have just skyrocketed. So rates coming down is going to have, I think, a positive impact on the real estate market and should move a little bit there. So overall, like I see definitely, I think, formation trend slowing down, and I see resolution at some point also picking up. Now you talked about longer term.

What's the next phase for ABA?

Next phase for ABA. Look, great performing, a phenomenal bank. The way we, I think, executed as well, I'm very, very happy with the team. We'll see. If the next phase of growth, if we need a partner in the country, if we think we could take the digital platform, which has been phenomenal in acquiring deposits, their leadership in payment also, if there's a possibility that we could take that outside of the country, we'll do that with a partner. We'll open up capital, and we'll see where it takes us.

Well, that about wraps it up. Thanks for kicking off the conference. It was a great discussion.

Thank you.