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

Well, good morning, everybody, and thanks for dialing in to the National Bank Financial Markets Canadian Financials Conference 2021 Edition. I'd like to welcome our first guest to the stage, Mr. Louis Vachon, President and CEO of National Bank. And well, good morning, Louis.

Good morning.

Thanks for joining us. Let's -- how are you doing anyway?

Very well. How about yourself?

Thanks. No complaints.

I have -- I will start off with a question here. A good place to start, as always, is the -- your outlook for the Quebec economy. How has it been doing recently with the health situation improving and the bumps in the roads and all that, but things are generally improving. Vaccinations are progressing. Do you -- what is your view on the economic performance of Quebec in the next little while and beyond? So I'm sure there's lots to talk about there.

Sure. A little bit of a spoiler alert because Stephane, Manon and I will address that on the [Technical Difficulty] time. But just to give the quick version of it, I think, the economy is doing okay. Clearly, the lockdown of this winter has been much less severe than the lockdown of 2020. The economy and society was -- both were better prepared to handle the lockdown, number of companies had adapted and the lockdown was less severe. For instance, it did not impact the construction industry as it did in 2020. So as you saw, Quebec unemployment rate is back down to 6.8%. Construction is obviously extremely strong. Manufacturing is doing well. Most services are doing fine. So the issue -- the remaining issue is clearly the discretionary economy, which is about 15% of the economy. But even that segment has been somewhat better prepared for the lockdown. And I think to the extent that vaccination is progressing well and the variant issues remaining under control, we should see a good bounce back in the discretionary economy in -- later in '21 and in 2022. So by and large, I think, so far, we remain positive despite all the challenges that we see with COVID.

So still feeling -- I mean, you're pretty bullish in your commentary on the Q1 call about various lines of business and still about the same, I surmise?

It remains constructive. Clearly, the very issue is one that I'm not qualified to talk about. That is -- we -- Stephane was, I think, among the first ones to raise that as a scenario that new mutation of the virus could make the sanitary situation more complex. But even then, I think it's not going to defend the recovery. It's, kind of, may delay it. But -- so we remain, even in that scenario, quite constructive on the economy long term.

Not to be a downer, but what are your areas of concern. forbearance are obviously one big unknown, but there's a lot of liquidity in the system, creating distortions and asset prices. The housing narrative -- I mean, tied to that liquidity issue, the housing narrative is back. Public concerns are fleeting again. The public sector finances are stretched, I guess, one way to put it. What -- how do you see the dark spots, I guess, on the horizon?

Well, I used to call it challengers, perhaps. But challenges, clearly, I mentioned that on the quarterly call. I think the -- if we see a recovery and I think we will see one, the issue will be in an area of -- in a time of strong fiscal and monetary expansion. I think we'll see episodes and we are seeing episodes of irrational exuberances in some segments. And for us, as a bank, it's to navigate these waters and to be careful with those episodes of irrational exuberances. Housing, right now, we're monitoring housing, and it needs to be monitored because, as you know, single-family home and real estate is the largest asset for the vast majority of Canadian family. So it is a segment that needs to -- that has a huge social and economic impact, and it does need to be monitored very carefully. So far, though, yes, the market is extremely active. But it appears to be supported by excess savings, pent-up demand for real estate assets in a post-COVID world, parental support of all the BMD, the Bank of Mom and Dad, and not excessive leverage. So I think what -- where we need to monitor is to the extent at which the price and activity is fueled by excess leverage. Clearly, the B20 policy that was put in place by the Canadian government was -- I think, is acting as a useful guardrail for first-time buyers. And then I think we'll see at the end of the year and dialogue with the government, whether more macro prudential policies are required. But for now, I think we somewhat understand what's behind the housing activity. It does not appear to be excess leverage. One of the challenge we'll have, if the recovery is as strong or stronger than we're forecasting, is lack of manpower. And that could be -- we saw that in Quebec and other areas, Canada in 2019. I think we could be back to that issue quite promptly if the discretionary economy bounces back as fast as it potentially could, we could see a lack of manpower, both skilled and unskilled. So that -- I think that could be an issue in 2022 on the more positive scenarios.

Okay. I want to talk a bit about, I guess, this is more of a question about the stock that's done well. And I get a lot of investors asking me, "What's driving that?" And one thing I can point to is that the results are consistently steady and well balanced. I mean, in Q1, we saw one of the biggest takeaways, in my opinion, a positive pretax, pre-provision profit growth across all segments. I mean, that's not an easy task. So my question, given the importance of that type of performance, how do you think all of your businesses can maintain that type of performance over the course of the year? Because I know, on a consolidated basis, you're targeting positive PTPP growth. Is that across all segments kind of performance likely as well?

Yes. I think, clearly, it's -- I think we're very confident for P&C for wealth and for international. It's a bit more of a challenge for markets, given the fact that we had such a strong performance in 2020. But given the fact that we had a very strong Q1, I think, even in financial markets, we're well positioned to generate positive PTPP growth in 2021.

Now the top line is obviously a focus with all the margin compression and asset growth that's maybe a bit slower, but then expenses in the past year were used as a toggle to help the bottom line performance, and investors were seeing a lot of very low expense growth. My question is, as we're getting out of the downturn and you're starting to look ahead to better growth days this year, next year, especially, like, the discipline between improving -- sorry, the decision-making between improving efficiency and investment, how are you approaching that these days?

Well, the first statement, it's always easier to generate positive operating leverage and improving efficiency ratio when your top line is growing nicely. I think our focus is remaining -- continue to generate that top line growth, but to have discipline that if we see pretty decent top line growth, revenue growth, that it does translate into positive operating leverage. And so I think that's what's been our main focus. There's still a lot of transformation going on, technological transformation of our physical spaces. So you do need to invest right now. So yes, there's always room to improve and control expenses. That being said, investments do need to be made right now because we're -- the economy and consumers are evolving very quickly. And if you don't make those investments, midterm or even in the short term, you can get into trouble. So yes, there is some room. As you know, we've been steady as she goes in terms of revenues, but I think we've been pretty steady as she goes also in terms of control in expenses, quite systematically, and I would say, on a relative basis, quite good compared to our peers over the last 5 years. So that should continue. But at the same time, we do need to make -- continue to make the right investments.

So are you dusting off previous project initiatives that were maybe shelved last year and then seeing some new stuff come in and no or...?

No. I think we've had our game plan for a number of years. Of course, every year, there's always some priorities that changes because of either something we hadn't seen or change of perception. But the game plan is usually a rolling 3-year investment in terms of -- if you want to make in, and we usually would stick to that pretty well.

One business that doesn't get as many questions as it deserves is the wealth business. And National has got a differentiated business model, a few areas that may be less understood by the Street. Like, what would you highlight as your key differentiating factors in wealth domestically, obviously? And how that positions you for better growth this year?

I think our model has been quite differentiated. I think one of the biggest important strategic moves we've made in the last 14 years was a decision to get out of most of our manufacturing, get out of asset management and focus on wealth management and to move to open architecture, and whereby ourselves, our distribution force can sell our products but also other people's product. And we feel that long term, consumer preferences and regulatory preferences are moving in that direction. So I think we are -- we were the leader on that particular segment, and we continue to be on that front. Other businesses where, with that being said, we continue to invest a lot on advice. That's why we've made a lot of investments in our full-service brokerage operation, National Bank Financial and our Private Banking 1859. And that has served us well because we saw, with the growth of the entrepreneurial class and many of these people selling their businesses, that there was an opportunity there to manage wealth. And lastly, with National Bank Independent Network, we're very well positioned to benefit from another trend that we see in the wealth management space, namely the growth of completely independent [indiscernible] managers and a trend that's well advanced in the U.S., and that is starting to catch on in Canada. So that's a segment we have an 80% market share. And in the country, we continue to do very well. So when you look at how we're positioned, there are at least 2 or 3 areas where we're quite different than our peers. And hopefully, I think also our culture of collaboration and being a little bit smaller help us in some segment. I'll give you one particular example. We were the first or one of the first brokerage operation to offer free zero cost ETF trading. And that's possible because of strong collaboration between our capital markets group and wealth management. So all of that makes for a differentiated offering and one that I think is well positioned for the future. So we remain quite confident in that business.

Great. I've got a couple of questions here, good ones from the crowd. I'll start with this one here. One of the impacts of huge fiscal and monetary support has been very strong asset price inflation, evident in stock markets and housing markets. Is there any possibility of a wealth tax in Canada to redistribute some of this unequal benefit within society? If so, what shape could this be in? And how big of a challenge would it be for your earnings power?

Even I don't know. That's the short answer. I just don't know. I think historically, what we've seen is consumption tax or usually the sales tax are usually the first one to go up and taxes on higher income, I think, that's being discussed. A wealth tax in and of itself, an asset tax, I'm not familiar with that. I don't know whether that's been discussed or not. That's all.

Okay. The other one, does the Fed removing SLR forbearance for the big U.S. banks create a meaningful business opportunity for you as they need to manage their leverage assets more judiciously?

Not really. I don't think it makes a huge amount of different loans in and of itself. I think a lot of that -- it was the excess liquidity they were keeping in treasuries more than anything else. So the impact, I would think, will be -- if it's felt, will be felt on the treasury market and less on the direct customer business. So -- and I think the market was a little bit anticipating that. That's why the curve has been steepening over the last -- since the beginning of 2021. That, in and of itself, as you know, is a positive for the industry.

We'll get into that yield curve topic in a minute, but the loan growth outlook, I'm going to ask several of the presenters today about their loan growth outlook. And I'm seeing probably across the industry $100 billion of excess deposits from where we were last year. And it's great from a customer health standpoint for banks to have all that liquidity. But as an inhibitor of loan growth, is that something that we should be thinking of, whether borrowers just drain those resources before they need to borrow? Could that push loan growth back a couple of years?

It's obviously not -- that's not what's happening in the housing market, clearly. I think that's the excess liquidity is fueling equity deposits, which is fueling more demand for mortgages. So that's explaining, I think, this direct correlation between high deposits and high loans, actually, in the housing market. The relationship is more negative on the credit card, clearly. I think excess is leading to a paydown and has led to a paydown in credit card balances. And that segment, I think, is going to be a little longer in terms of coming back. On commercial, credit [Technical Difficulty] cash has led to a pay down in the credit facilities. We are having right now one of the lowest usage or credit facilities that we've seen in small businesses, but it had stabilized over the last quarter or 2. And in fact, it started to go back up right now. So that's quite encouraging that as the economy recover, we do expect credit utilization to go back up in the small- and medium-sized business segment. And we've seen early evidence of that in the last quarter or 2.

Right. And then that was my next question was National was one of the banks that had sequential loan growth anywhere in the Canadian commercial portfolio. Is that -- could we tie that into the relative strength of the Quebec economy? Or any other factors that you might identify?

A little bit, I would say. I think what we saw there is commercial real estate being quite active on 2 fronts, particularly. One has been warehousing, big box e-commerce-related construction and redevelopment; one source of loan growth in commercial real estate; and the other one has been CMHC-insured rental property development across the country. And so those have been the 2 big sources of growth in commercial real estate. And then the M&A pipeline. We've talked about an M&A super cycle. But if you read the headlines Monday morning, I think it looks something like an M&A super cycle. Every Monday morning now we have very large announcements on the M&A front. But yes, we -- the big deals make the headlines, but there's also a lot of activity with small- and medium-sized companies. So that's -- those 2 factors have been fueling the growth more than just pure economic. As I said, I think the pure economic recovery and greater usage of credit lines by small- and medium-size businesses has turned around, but I think it's still relatively small. So I think there's -- as the economy continues to recover, I think that particular segment should continue to grow. And that has -- I think that will have some tailwind to it.

Okay. You mentioned M&A super cycle. That's a good segue to the capital markets business, which has been on fire, like many others. But in National's case, I think the type of growth you've been delivering, not just last year but in prior years, it does dispel some of the concerns related to Canada-centric business model. Some people view that as -- it means growth is going to be lower, not the case. But longer term, you've got to start making plans today for what you see in the future. And I'm wondering if there's anything on the -- what were your expansion plans outside of Canada? Is there anything to talk about there in capital markets?

No. In capital markets, I think we're mostly Canada focused. We have a few niches that we operate in Europe and U.S., which is one is securities finance. But again, it's very niche-oriented. And in the U.S., we've had -- for the last few years, we've had small but very effective teams in 2 segments. One has been renewable energy, and the other one has been infrastructure and project finance. And that's an extension of our expertise in Canada. And initially, we basically followed our Canadian clients into the U.S., and now we're taking on more U.S. mandates. That's about it. I don't expect us to launch a full-scale assault, frontal assault on U.S. investment banking industry. That's not in the card. So I think we'll pick our spots and pick our niches and stick to the ones where we feel that we bring expertise and our shareholders are rewarded for doing what we're doing.

Got you. And ABA Bank, I think it's an interesting time to ask about ABA Bank, given that the year that we had was surprisingly, to many, how strong ABA did last year. And it's been strong for a number of years, and you're very cautious in your commentary saying, "Let's see how it does in a downturn before we make any bold statements." Well, we've had the downturn, I guess. What's your updated thinking on ABA? And whether you can maybe put more capital to work there or some other insight?

Well, we -- so the crisis is not over clearly. If you want to go to Cambodia, you still have to spend 2 weeks in an hotel room. So it's not great for the tourist industry. So it's not -- it's a bit early to for lessons because the crisis is not over globally or in Cambodia. But suffice it to say, so far, so good. I think the crisis, COVID crisis, has led to increased digitization and ABA Bank has been well positioned to take advantage of that. So -- and we say that in terms of our growth, in terms of deposits and the payment business that we have done there. So for now, I think our global strategy is very clear. We have 2 great performing assets, which are ABA Bank and Credigy in the U.S., and we're focusing on making sure that the execution remains very good and that the growth remains double-digit for those assets. That's it.

Okay. We've got about a minute left here. A capital question. And on the Q1 call, you were pretty very clear that once the restrictions are lifted, if and when, you're ready to jump back in with dividend increases and buybacks. My question is on buybacks. And historically, the Canadian banks have done it obviously, but just not massive programs as you might see elsewhere. Given the size of the excess capital positions and you don't have to talk about the other banks, obviously, but given the size of the excess capital position, is there any reason why we should expect a different, maybe more aggressive type of a -- level of activity on the buyback front in the next year or 2?

I think we've been clear on that, Gabriel. As you said, one is to finance our organic growth. And I think we're generating good loan growth. So first allocation of capital was there, and I think that's what the market wants to see. They want to see organic growth. So that's going to be the first thing. The second thing, which is dividend. And there, I think we could do something a little unusual, namely to have a slightly -- once OSFI gives its okay, I think our dividend increase will be probably a little slightly higher than usual, just to go back to the curve that we had pre-COVID. So again, just to make sure that we hit at least a 40% payout in our dividend payout for 2021, if that's allowed by OSFI. But then we'll see between -- we're not in the market for a transformational acquisition, as you know, never been. So we'll see between tuck-ins and buybacks what the opportunities are and we'll navigate those waters.

Well, I think that's a good way to end the discussion here. Thanks for coming again. Always great to talk to you, and good luck with your meetings today.

Thank you. Thank you very much.