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

Good morning. I'd like to welcome everybody dialing into the 11th Annual Québec -- National Bank Financial Québec Conference. I'd also like to welcome to the stage, if you will, Martin Gagnon, the Head of National Bank's Wealth business. Welcome, Martin.

Hey, good morning.

Good morning. So let's just kick off the Q&A here with a pretty big picture one, I guess. The Wealth business has had a really good year or half year, I guess. And we've seen some industry-leading AUM growth, AUA growth and earnings growth as well in the most recently reported quarter. Maybe you can give us some of the highlights and maybe the nitty-gritty stuff on what's been driving some outperformance.

So first of all, thanks for having us and having me to kick off the day, Gabriel. It's an honor. And I'm especially happy to talk about the Wealth Management business. It's been a great business. It is a great business. So we'll shed some light on this today. As you said, it's been a great year so far. We've grown net income for the first 6 months of the year, up 19%. And what I would say is, first of all, look at it over 2 years is really important. Last year, there was some pretty negative performance, a dismal performance in the industry in general. And we did well last year as well, 9% growth for all of 2020. So it is a good, steady business, providing some pretty nice growth. As you said, what was really interesting and what I'm really proud of for the last couple of quarters is the growth in our AUA and AUM. We posted 28% for both AUA and AUM growth for Q2 of last year. And that is, in itself, a pretty impressive number. The balance portfolio grew by about 18%, Gabriel, over the same period. So the tide is rising for all boats, let's be clear. But everybody is above budget. But what you really need to look at is how we are doing compared to the growth of the traditional balanced portfolio. So this 10% outperformance over the market growth was really strong and came from all of our channels. This is what's amazing. We're seeing record inflows at our private bank. The AUA growth at NBF is very, very strong, both from our existing IAs as well as billions coming in from new IAs joining NBF. So it is very strong. What is particularly strong is our National Bank Investment business. They're the one overseeing all of our -- most of our AUM. It is the backbone of our platform, and we've done exceptionally well. We've grown our AUA at NBI by 30% year-over-year. Specifically in the mutual fund complex, that puts us #1 of all the banks. We're in -- if you look at the IFIC numbers, we're really punching above our weight in terms of net new assets also in nominal terms. Our ETF complex is top quartile, even though it was launched only 24 months ago. So that's what I have to say about this. It's the key driver of our business. It's the AUA and AUM growth, which really shows how solid the platform is.

And just point of clarification, you referenced the balanced portfolio is up 18%. Can you just specify what you were referring to there? It's a big fund, I guess?

No, no, no. I'm just saying the market. When you're going to see what is related to market growth in your AUA and AUM, we just look at the performance of a balanced portfolio. And it can vary a little bit, Gabriel, between segments, but it's your typical balanced portfolio.

Got it. Now you talked about rising tide, lifting all boats. And there have been some very, very favorable markets, of course. What would be an area of the business where you think, okay, that's really been firing on all cylinders, poised for a slowdown here. If I think about the capital markets business, I think of FICC trading across the industry, anything in the Wealth business you can highlight as being maybe doing great, but just give a heads up, it might slow down?

Sure. So if you look, we have 3 sources of revenues. It's fee-based, represents about 60% of our revenues. And then it's pretty much evenly split between net interest income at 20% and transaction revenues at 20%. If you look at it over the long term, our transactional revenues have been steadily going down. And we've -- fee-based has naturally been going up. Transactional revenues, of course, were really strong in Q1 of this year. We are all aware of what happens with the meme stocks and so on. So we did see a bit of a reduction in our trading revenues in the second quarter of the year. But as I said earlier, what's much more important is the fact that we have $600 billion of AUA, which really is the backbone. It provides a very solid stability to our revenues. And at the margin, we're seeing those transactional revenues impacting a little bit at the margin the performance of each quarter, but it's not as important as what happens with $600 billion of AUA. So there was a bit of a slowdown in Q2. Now we're seeing a pickup. We're seeing a pickup. And it's not that simple when you analyze trading revenues. FX is part of this. So there's many components to this segment, Gabriel. And at the end of the day, it's not purely related to transactional fees at the direct brokerage platform or at NBF, for example.

Another big topic that's come up naturally is the interest rate sensitivity issue. And can you talk about the impact of -- well, maybe we do a retrospective, how much the cutting rates and the decline rates affected your business of the past year? And as we look forward and the rates are moving higher, we might see some central bank action in the next 1.5 years or so. Can you walk us through what parts of the business that affects? And if you can quantify any of that, that'd be excellent.

Sure. There's a lot to say. I'll try to summarize my thoughts, and let me know if you want me to expand on any of those points. But first of all, a couple of years ago, just before the pandemic, we took a long and hard look at the sources of our revenues. And we realized that net interest income was a good bet for us to make. Naturally, we have a large business for the high interest CashPerformer. So we're a natural provider of liquidity to the rest of the bank to the tune of $25 billion, and so we have many irons in the fire with regards to net interest income. So a little bit like Schwab. Everybody looks at Schwab. They have free trading. But the real underpinning of Schwab's success is Schwab Bank. So we embarked on a reengineering of all of our net interest income before the pandemic. Obviously, we put that on the back burner for the last 1.5 years, but we're now back looking at this, and especially in an inflationary environment, this could be key. And just to give you some metrics, we -- a 25 basis point hike in rates would provide us approximately $17 million. A 25 basis point drop in rates would cost us about $21 million. So you see the asymmetry in this, and that's because many of our rates are now at 0 or very close to 0. And that's the result of a lot of engineering of our net interest income over the years. And so you see this kind of convexity. Another thing that needs to be said is we're all exposed to overnight rates. So there's nothing on the curve for us. What really matters is the overnight rate in itself as well as the liquidity premiums. So that is -- those are the 2 key components for us to watch. Another thing to be said, Gabriel, is the fact that recently, we all know that the market is flooded with cash. And we work really closely with our colleagues in financial markets and in treasury and in P&C. And because we're flooded with cash, we purpose -- on purpose decided to take a step back and to not be very aggressive in the posting of our rates. And that's why you see that some of our deposit growth have been much lower than the rest of the Street in the last couple of quarters. And that's on purpose. We find that some of these were too expensive. At -- and in parallel, we didn't need the cash. The other thing that needs to be said is we're, again, working really closely with our colleagues. And I believe that we've been able to transform a lot of this excess cash and all of the reported excess savings in Canada that showed up initially in our cash levels. We've been able to transfer a lot of this into AUA and AUM. And again, you can see this in the fact that we had much lower deposit growth than our peers and much higher AUA and AUM growth than our peers. And the last thing that I want to say is if you want to dig into the NIMs of our business, I just want a little word of caution. We -- you really need to look at the combined margins and not the traditional margins as you would look at for the P&C business because we have a small loan book and a very large deposit book. So if you look at the combined margin, you will see that they dropped roughly 15, 20 basis points a year ago. And they've been extremely stable since then, actually going up a little bit by a few basis points in the last couple of quarters. So I've thrown a lot of stuff. I don't know if you want me to expand on any of those, but that's a big picture of our net interest income.

That was a very thorough overview. I appreciate that. And then just to clarify, you did throw a couple of numbers out there on the upside and downside to rate hikes. That was NII you were talking about on earnings? Or...

Yes.

Okay. And going back to one of the earlier topics where we were talking about trading commissions and how profit has been. It is an area where the competitive threat we saw it in 2019 a little bit, especially in the U.S., and there's been a lot of talk about 0 trading commissions moving into Canada. One of the big disruptors in that has a simple model, if you will, got a very substantial cash injection not too long ago. So I'm wondering if that revives and re-intensify the move towards 0 trading commissions in -- at least on the discount side in Canada. What are your thoughts there?

Well, first of all, we don't decide on what we're going to do based on what others do. We run a very tight ship, and we want to be leaders in the field. So look, we already offer free trading for ETFs, buy or sell, all ETFs. We're at $0.95 for trading for -- active traders, sorry. So that's as close to 0 as you can get. And there's going to be more downward pressure, I'm convinced. Now you got to be able -- you got to be careful when you compare models. We offer a full gamut of real-time quotes and U.S. dollar account, any type of registered accounts, any type of securities. Some of those free models are actually very simple, and there's a lot of restriction. You need to almost trade by appointment if you want to do it. So considering the fact that we don't have payment for order flows, it's very different in Canada than in the States. There's a lot to be said, but I believe that there's going to be more downward pressure on commission, and it's -- I think it's coming. And we have a well-diversified business. And I think we had the discussion in the past, Gabriel, you need to look at other things than just trading revenues. If you look at our average commissions, revenue per trade, it's been steadily going down for the last 3 years. And it doesn't show in the transactional revenue because we made it up in all kinds of different ways, and that's what we're going to keep on working, diversifying the sources of revenues. And this average commission per trade will keep going down. So we're -- we will be a disruptor, and we're ready to -- we're ready for what's going to come.

In your previous answer to the rates sensitivity, you did touch upon the cross-selling of excess deposits into wealth products, maybe from the Canadian banking segment into or your own -- within your own segment. I don't know if there's any highlights there you'd like to share as far as working with your partners within the bank to get some of this low-margin deposit money into something a bit more higher-yielding in the Wealth business?

Yes. It's a great question because being National Bank and being the smallest of the 6 banks, we need to be different. We need to work very closely with all of our colleagues. So we're closer than where we've ever been to our colleagues in the P&C and in financial markets. And especially in P&C, we've launched what we call a synergy program, where there are regional heads in each of the 26 regions that we cover. And they work together. We give them objectives regardless of the business line so Commercial, Wealth and Personal Banking is working together. We now launched even a new way of compensating them with pools of bonuses that are going to be distributed regionally and not by silo. So we're the first bank to launch a hybrid model, where we cover the smaller investors regardless of the jurisdiction, working together Wealth and Personal Banking. We launched our new platform in -- for investments in bank branches and together Wealth and Personal Banking. So -- and that's what we're doing, but it shows in the numbers as we have never had such a good performance again from all of our business lines. But particularly, the savings in bank branches, it's really been amazing, specifically -- not as much for deposit, but specifically for our mutual fund sales and bank branches. And you see that in the numbers.

The expense line, I just want to -- it's probably a quick one, but we've seen some double-digit growth in expenses on a year-to-date basis. How much of that would -- in your segment that is, how much of that is underlying expense, we're going to call it, versus production-driven performance and commission type related.

So yes, I'm happy you didn't use the word core because, again, we've had the discussion. We don't have a leisure line. This is National Bank. We run a very tight ship, and I'm a big, big fan of the dogma of operating leverage every quarter. Managing operating leverage is key. But to answer your question, Gabriel, we've had good top line growth, and 60% to 65% of this is directly reflected in our expenses. So there's the variable expenses that are directly linked. And there's always, as you know, what's quasi variable and at least not fixed. And so we -- it's as much as 2/3 of our expenses that are tied to volume. Despite us having a smaller footprint than all of our competitors, we managed to have either the best or the second-best efficiency ratio in the industry at 58.3. And the way we manage this is not with a target, a long-term target. It's by managing operating leverage quarter after quarter. And when we have good top line growth, we can invest a little more. And when it slows down, we put the brakes on. So that's how we manage this. And I would say that the $600 billion AUA, which is the largest AUA footprint in the business is really the underpinning of us showing such a good efficiency ratio.

When I think about wealth and retail orientation primarily, I think of trends that are out there that consumers are trying to tap into. How do you manage the demand for stuff like -- or how do you approach it rather, the demand for things like cryptocurrencies and other maybe inflation thematic asset classes, while balancing that against -- you don't want to be just tapping into the latest trend and there's risks associated with that. What kind of products have you -- or services have you offered to your customer base to let them go after things like that, but they might be interested in?

Yes. It's a good question, Gabriel. And I would say, let's start with some fundamentals. If you're worried about our Central Bank printing money, I think it's a legitimate concern. And traditionally, someone would want to buy gold if you're worried about that. And maybe crypto is just virtual gold, the virtual gold of the future. Now Louis has been very, very vocal about this. We are saying to our investors, be really, really careful. There's all kinds of scams and frauds, and stay away of everything that is nonfungible tokens and all of this stuff. But Bitcoin has held its own and has done fairly well if we can take care of the environmental issue. At the end of the day, there are now ETFs on this where everything is really checked, and there's a good due diligence that is being done, and you don't have to worry about your digital wallet. So we've opened up the door a little bit for our full-service brokerage business if someone wants to have a little bit of exposure to crypto. And -- but it needs to be done very carefully and not with any kind of proof-of-stake crypto out there. Be really, really careful.

We've got about 3.5 minutes left here. I do want to wrap up on a pretty big picture question. We talked about more -- some of the rearward-looking things, but the past 1.5 years has been topsyturvy, to say the least. How do you see the business evolving over the next 3 to 5 years? Is Wealth a 10% earnings growth business? And -- because the bank has a target range. How do you see yourself getting to that level if that's what the level is?

Good question. And look, we -- it's been -- I've been in the job for 5 years, and we're finishing our 5-year plan that we did in 2016, and we just did the review of it. You've heard me before talk about double-digit earnings growth, which was the big focus and this 10% objective. Well, we've realized 11% and change over the last 5 years. So we did realize our objective. If you look at the previous 5 years, we also achieved the 10% with acquisition. The last 5 years were done all organically. And by now, we're embarking on a new strategic plan. It's going to be a 3-year plan. And I'll let Laurent talk to you about this probably this fall, but a bit of a preview. We want more Wealth Management. It's a great business, and we want even more Wealth Management. We're the bank that's most exposed to Wealth Management at 24% of our revenues, and we believe that we can grow this business again in the 10%-plus range. So not only, as I said, are we the most exposed, but we want more Wealth Management, not less. If you look at the macro trends for Wealth Management, all the stuff we know, demographics we already know. But with the sharp increase in the savings rate in the last couple of years, there's good fundamentals for wanting to be exposed to this business. And then if you look at National Bank itself, we -- it's a good balance to our Financial Markets business. We don't use balance sheet. It's a very high ROE business. That has been a key component of our ROE over the years. We -- it carries very little risk. And we do believe we have seen some statistics that investing is a good anchor product. So if you have investments with your financial institution, the average age of the client sharply increases. So for all those reasons, we want more Wealth Management. We believe in advice. We've been really vocal about us believing in advice, and so we continue to invest in our advice business. We're mainly focused on growing revenues. We're investing in our IT platform. We're recruiting a lot of people. Essentially, we want more Wealth Management, and we're not done with this business. We may even start looking at acquisitions, which is something we have not done in more than 5 years. And I will already answer your question, Gabriel. Nothing too traditional, nothing obvious. We -- there's nothing imminent, but we're looking at all kinds of indirect ways to grow our AUA and AUM platforms, which are the key underpinnings of our business.

Martin, we could go on. There's a lot more to talk about, but we've run out of time. Appreciate you presenting today, learned a lot, and I know it's a big week for Montreal hockey. So if you have any final rah-rah messages you want to send, go ahead. But otherwise, I'm wishing you a good remainder of the week.

Well, thank you for having this great start to the conference. It's been a pleasure, and I will end like Louis ended our call for Q2, Go Habs Go.

Okay. Talk to you later.

Thank you.