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

Thank you. Welcome back, everyone, to our conference. We have with us Laurent Ferreira, the CEO of National Bank. And before we begin, I just want to remind everyone that Laurent's comments today may include forward-looking Statements. Actual results could differ materially from forecasts, projections or conclusions in these statements. Listeners can find additional details in the public filings of National Bank of Canada. With that, welcome to the conference, Laurent for the very first time.

Thank you very much. Good afternoon. Good afternoon to everyone online.

So unfortunately, we had to do this virtually, but here we are. So my first question is because this is your first time, I think I do want to get to capital and a lot of other issues. But first time here, newest bank CEO on The Street. So I wanted to kick it off with asking you what is your plan and your main priorities for National Bank?

Well, thank you very much for your question. And I clearly understand the question. So one of the big thing that we worked on in 2021 was our business planned going forward after Louis' departure. And as I work with the executive team on what are the few things that we should be focused on. One thing that was very clear to us, if you look at the bank's performance year-to-date, if you look at the bank's performance over the years, it reinforced our commitment to keep building and focus on our strengths. I mean these are the things that whatever direction we want to take the bank in that we want to keep in mind as we move forward. And so there are 3 things that are important to us. The first thing is culture. It is critical. You've heard it many times from my predecessor, you're going to hear it from me. We're going to keep emphasizing on our entrepreneurial and our culture. It is an integral part of our success, and we do believe that it has provided us with a competitive advantage. The other thing is our strategic position. I've been with the bank for 23 years. The management team has been established for a very long time. We have been part of the building of this bank. So we really like our business mix. But more importantly, our -- the focus within each segment, these are carefully chosen to be really like the way we think our bank. So our business takes strategic decisions that we've taken within these businesses is also very important to us. And the last thing is our discipline. So our discipline in terms of how we allocate capital, our risk assessment, our discipline around cost and the way we've committed to performance over the years. So those 3 things, whatever we like to do, the direction of the bank. So our culture, our strategic approach and decisions, and our discipline are going to be key going forward. Now as we look ahead, maybe I can share a few thoughts here. And there are maybe 2 things here that I would like to highlight, too. So the first thing is we're going to continue to focus on transformation. As you know, digital innovation and automation are key to commit acquisition, client experience and obviously gaining operational efficiencies. So over the past 5 years, when we started our transformation in 2015, 2016, we've improved the efficiency ratio of the bank by 500 basis. And we've also made significant strides in terms of client acquisition and retention, and particularly these starting towards the end of 2018. So investing in the ad technology is important to us because we do see some room to continue to improve on that front. So our #1 priority going forward is to keep focusing on optimizing the operational performance of our businesses to maximize productivity. The second one, I mentioned earlier, we like our strategic positioning we like our business mix. So we do see attractive growth potential in all of our businesses. But we will be looking to further leverage time overlap between our wealth, our private bank and our commercial banking platform across Canada. We like the strategic positioning of these businesses. We also see tons of potential and synergies and our intention is to get these business lines to work closer together. If you look at the data, we see a lot of potential when you look at the opportunity to cross-sell between all of these business lines. And we do believe that it has -- we've had numerous examples across the bank in collaborative models and it thus provide us with more of a competitive advantage on the ground. So those are the 2 main priorities that we're going to focused on in the coming months and the coming years, our transformation and synergies across businesses. So the team is working really hard on this, and I said -- as I said, our commitment to the performance of the bank is our #1 priority. So that's it.

All right. Great. What a great start. I want to come back to that in a couple of follow-ups. But first, maybe just to take a bit of a detour since we had the regulator here this morning, they talked about capital and how they sort of view things shaping up. One of the things with National Bank is the Tier 1 -- common equity Tier 1 ratio, 12.3%, well in advance of what was necessary. But a little bit on the lower end of the peer group. So how do you view your capital position? Do you think that you should be running a lower level to be optimal? And does it bother you at all to be at the lower end of your peer group and therefore, you wouldn't transition to a more optimal level faster than peers? Can you just give us some thoughts maybe on ultimately where you want to run the bank from a capital perspective? How fast do you think you can get there? And how you get there?

Sure. So in terms of capital, we're very comfortable with our current position. I mean we are -- our CET1 is yes, lower of our peer but it is the highest that we've had in [ pandemic ]. We have generated -- if you look, since the beginning of the pandemic, we have generated superior asset growth amongst peers. We continue to carry prudent reserves as we speak, and we generated an ROE of 20% in 2021. So in terms of capital, nothing really has changed in terms of our approach, right? Our focus, #1 focus is organic growth. That's our top priority. And as I just mentioned earlier, our focus is going to be on growing our franchise as we move along -- as we -- ahead. And we're going to keep on investing in our businesses in order to generate thoroughly, a superior ROE for our shareholders, that's the #1 priority. And we have flexibility, obviously, to return excess capital to shareholders. We just increased the dividend by 23%. You saw that. Our focus now is to maintain dividend increases that are sustainable to a point, dividend growth for our shareholders. And as you know, we just put in place a buyback program, which was with additional flexibility. So I would say that in the current environment, it is -- given the pandemic, there's still some uncertainty. It's still early to commit to what our new run rate will be. But I think we're quite comfortable with the way we've approached capital and it's been before. And we're going to keep the same approach going forward, which is middle of the pack versus our peers. That's sort of the place that we intend to be and that's where we're going to aim to be. So I don't know if that answers your question.

No, that's great. That's great. Now judging from your opening remarks, I mean it was very interesting to hear you say that the 2 focuses that you have as the new CEO of National Bank is to really continue on the path of transformation, which is great. And then to work on collaboration between your business units. Now as long as I've been covering the bank, and I've been covering the bank since 1999, I would read the annual report and almost every time I would read it, they would say, hey, one of the things that National Bank needs to do is to expand outside of Quebec. So am I sensing a slight shift here that you no longer feel it necessary to expand National Bank outside and more aggressively outside of Quebec. Am I right in sensing in that? And if so, why is that? Why is it no longer a strategic imperative for National to aggressively grow outside of Quebec?

well, look, thank you for your question, and it is an important one. So maybe I'll explain to you what our mindset is in terms of how we see growth going forward in our core businesses. So if we think about -- so you mentioned Quebec. Now we're well established here in the province as well the position of so, economically. Yes, I think you've heard it, the household financial conditions are good in Quebec. The -- on average, we have lower leverage, higher [indiscernible], housing affordability is great. Our economic structure of the province is more diversified, it's the second most diversified province in Canada. And additionally, in terms of adaptability to climate change and decarbonization, given the nature of the energy supply in Quebec, I think we are well positioned. So Quebec is a great place to do business. We're going to keep growing here and there is room for us to grow here to gain more market share. Now beyond Quebec, now I'm focused on Canada here, and I'm not talking about internationally, beyond Quebec, as you know, our capital markets franchise is well established across Canada. Most of our revenues in capital markets, each is going to have [indiscernible] outside of Quebec. Our wealth business is well established in Canada. Its leadership, position in custody, trade execution, brokerage and commercial banking platform has targeted specialization across Canada. Health, agriculture technology, creative industries, just to mention a few, and then expanding over the past couple of years outside of Quebec, and we've hired bankers in Toronto, Vancouver. So our focus in terms of the synergies that we want to put more emphasis on in our businesses is a Canadian focus, right? So we are going to put a little bit more emphasis towards our growth in Canada. And so we believe that there is room for us to take even more market share both in like Canada -- rest of Canada. So to answer your question, and you've been covering the bank for 20 years ago and know there's -- we have benefited from, especially in the past couple of years, a really strong economy in Quebec. So we're well positioned in Quebec. We're also well positioned to take advantage of certain [ falling ] segments across Canada with a greater integrated approach. So growing outside of Quebec, Darko is strategically important for us, and it's not an issue for the bank.

Okay. Great. So moving on to the topic de jure, apart from capital. We just had a wonderful keynote speaker for lunch, talked about inflation, and he's concerned that it's a very short window here for the Fed to get it under control. Now one of the things that your bank has suggested is, hey, look, positive operating leverage can be achieved in fiscal 2022. So the question is how much inflation have you baked in? Is it a concern for you? Do you see pockets of areas where you have expense pressure? And then on top of that, well, there's also the positive of higher rates. So maybe you could speak to both sides of that equation for us and how you see that developing in 2022?

Absolutely. So inflation is obviously in our scenarios, and we do expect some pressure on costs and pressure on wages as even the labor market remains tight as well. So there's a war on talent as well there, that's exacerbating the problem. So I do think that runaway inflation is a potential risk at this point. I don't think we are -- but there's lot of [indiscernible] and central banks are going to start raising rate this year. So we're going to be addressing the issue. Now the risk or inflation than currently anticipated because of a stronger recovery and more construction in the global supply chain, I think, is a potential risk. And that would mean even higher interest rate than anticipated going into or the end of 2022 and 2023. So Overall, the first scenario of the predictable inflation with the current potential rates or slightly higher, I think overall, those are good. I mean they're good for asset growth, higher rates are good for margin. And I think it would, at this point, compensate for higher rates. I think from -- as a business, we're well positioned, from an interest rate standpoint, we obviously expect increases in 2022. And we've looked at various scenarios, up to potentially 3 increases in Canada for fiscal 2022 and that will be obviously positive for the bank and for our NIMs in 2022. Now you mentioned operating leverage, and we did comment on our confidence in terms of what we would be able to deliver in 2022. And 2 things there that, why do we remain confident. One, constant discipline around cost management, that's something there. It's always going to be there with us and it's in our culture, our mindset. So I think that will not change in the current environment. And obviously, our positive outlook in terms of revenue growth, those 2 combined, those are the reasons why we have confidence in terms of our ability to be able to give an operating leverage -- a positive operating leverage for 2022. Now having said that, inflation is as well. So we have to keep an eye on excess in the future. We have to keep an eye on leverage. And if inflation does increase too much, what's important, and that's what we can do is we're going to stay close to our client and really monitor the path of inflation over the next year. So those are very important. But at this point in time, we are very confident in our ability to generate good revenue growth and positive operating leverage for 2022.

Okay. Great. Thank you. Now shifting gears a little bit, talking about credit quality. Your bank guided to 15 to 25 basis point range, and you expect it to sort of be in the bottom end of that range in 2022. So once again, a very benign environment on credit. But -- so what are you seeing that makes you feel so confident in the lower end of that range? And is Omicron changing your mind at all?

Not at this point. So yes, compared, in 2021, we're I think 11 basis points and that the trend in the credit performance remains very strong. So we're seeing the same trends in 2022, obviously, supported by the economic recovery. If you look at the sectors that were directly impacted by the pandemic and the recent new variant, it's more targeted towards consumer discretionary leisure. Those are areas that we have very little exposure. Most of our clients have excess liquidity at this time. Household savings are high, seeing it, obviously, in our data. Our commercial portfolio, we've had a risk degrowth in 2021, is well diversified. And the mass majority of it is secured. If you look at where we are in terms of the employment trends, the pressure on labor, GDP forecast, looking it in the system. So yes, I think we're going to be in 2022 at the lower end of a range, and I don't think going back to pre-pandemic level, and you'll see that before maybe 2023.

Okay. Great. And then so in such a benign environment, why are we hanging on to all these reserves? National Bank has a significant amount of reserves. I had that -- I think I had that debate with Bill, in one of the conference calls, I can't remember if it was Q3 or Q4. So how should we think about the performing reserves in 2022? The way -- for a bit of preamble, I have them running off in my model. But you tell me what's your view on how those reserves will behave in 2022?

Absolutely. So you know the approach, right? The philosophy on that, proactive. So proactive, we have a long history, even going back to a new -- you remember the story very well, back in 2016, even before the IFRS we really quickly, right? And in early in the pandemic, starting with Q2, we started building reserves. So very proactive when we see negative situations. Now with regards to release, I think our approach is to be prudent. And it's an approach to press in general and balance the approach towards the growth of our business. So prepandemic, and I'm sure you recall this, we were prudent in long runs, right? And then when the pandemic hit, we were very prudent by building a large amount of reserves. We saw opportunity to grow maybe more aggressively than our peers over the past 18 months, and we did that in our commercial portfolio. And I think you should expect us to remain prudent still even where we are -- the pandemic is not over. We still -- there's still a certain level of uncertainty. Now we do expect releases in 2022. But I think it's difficult to predict if we're going to be back to normal in terms of all the releases in 2022 or it could be stretched to 2023. I think it's a little early to call that at this point, Darko.

Okay. Great. Now you did mention earlier in your remarks that your capital markets businesses Canada-wide, a lot of revenues coming out of there. And it was quite a strong year in 2021. And I think it was strong for everyone. So the question then always -- and we get this all the time, right? So it makes up a big chunk of your earnings. And it sounds like you still want to focus on it. Do you think, though, that if you continue to grow down this path with capital markets, that it becomes a little excessive in size? Or maybe you can just touch on that? I myself have come around quite a bit on the concern with capital markets. I could see it now as a very countercyclical business. The risks don't seem to be there as much as I used to think in the past were there. But I'd love to hear, especially because your background is from capital markets. So I'd love to hear your philosophy on it going forward for National Bank?

Thank you very much, Darko, and it's a great question. What I think we've been able to achieve in financial market is that we struck the right balance between profitability, growth of the business and some risk profile. So we're in the business of capital models. And we don't try and do everything. And very focused, right, and the areas that we know we can compete, we understand, we understand the risk. So first of all, our platform is Canadian, we're going to continue to focus on Canada. We're going to expand activities only in the areas that are areas that we understand really well and we have expertise. From time to time, we try to diversify our revenue stream. If we look at what we did over the past 4 years in corporate and investment banking, we expanded significantly. We hired 100 bankers over the past 4 years to beef up capabilities. There's a strong M&A cycle we're able to benefit from that. Again, very focused. So we're not going to try to expand in areas that we know we're not going to have a potential competitive edge advantage. So we choose areas that we know we're comfortable with. If you look at our trading businesses, it's the same process. We don't try to do everything. And we built a very resilient franchise with a deep expertise in targeted niches, all right? And with that, we're able to manage overall growth, returns and the volatility in the market. So you know our niches are in structured products, ETF, secured finance, government debt. And so our approach, the business, so you know when I talked about strategic focus or strategic positioning is within the business line, but don't try to do everything. So in terms of the strategy for you to really understand that the approach, the philosophy behind financial market. It's very simple. We're going to focus on Canadian customers, commercial clients and governments. Now they're here of, a, do an acquisition in the U.S. that can help them through that process. And the strategy is also to support our wealth business on product manufacturing and technology, right? If you look at our wealth strategy, very focused on distribution, right, and select [ manufacturer ]. So financial market worked really well with our Gulf business when it comes to that. When you think about technology, we're very strong in terms of trading technology for our structured product business as well as our ETF business. That's the same technology that we will apply to the wealth business for our clients, so commission 0, for instance, and in the pipeline for RRIF and the independent network. So there are strategies that financial market brings to the table for other businesses. So there are opportunities -- we believe there are more opportunities for us to keep growing financial market, remain focused. And as I mentioned in my opening remarks, I focused as well as, our Canadian commercial is very well aligned with our financial market franchise. So that help us stay a little bit more -- our focus there, we're going to keep focusing on the business because we like it. If you go through the pandemic, it was definitely a resilient and a good contributor. So...

Okay. Great. Thank you. I think I'll move now to -- given the time, move now to a couple of questions that we're getting on the Slido from the Slido app. First question is what would it tends -- it's interesting because I asked you this before in a conference call, what would it take for you to change your mind and start deploying capital in the emerging markets?

We're very comfortable with what we have right now. So and reiterate what I said on the call, NA is delivering strong results throughout the period. So we're going to keep focusing on NA for the time being. So I don't think we'll change our mind on that.

Okay. Fair enough. And the other question that's coming from the audience is there seems to be a lot of restrictions in Quebec due to Omicron. Any impact to the economy so far?

I think it's too early to call at this point in time. But the latest statistics that we saw over the weekend is that most of the hospitalizations or 80% of them are people aged 60 plus, that represents 10% of the workforce. I believe that these were -- most of these restrictions are going to get lifted within the next couple of weeks. So I think that, as we're moving along, we're going to see that lifted. And so I think it's too early too early at this point to judge what the impact could be.

Are you seeing an impact of business wise, like card volumes or spend or anything like that?

No. No, too early.

Okay. And since I have a chance to maybe sort of ask you one more question. The wealth business, in particular, what caught my eye in 2021 was really solid results. It was PTPP up 22%. Now can you speak to what drove this result? And if anything, can we expect that kind of momentum to continue into 2022 and what are your thoughts on wealth overall because it was one of the more eye-popping things that I saw in the year?

Yes. And thank you. We're very happy with the results of our wealth business. if you look at the performance, AUM significantly up, exceeding the market appreciation so we got strong info. And for investing in our platform we also [indiscernible] in terms of cost management, we're able to reduce the efficiency ratio below 60. So in terms of -- so you look at the PTPP, it's great, but also in terms of operational performance we're really, really happy with what we saw and what we did. I think what's working will help for us, I go back to that very focused. So it's distribution focus, select manufacturing. The open architecture, you [indiscernible] you want [indiscernible] focused on advice. What are our advisers who are our independent network as we serve this well, and I think that that's going to continue going forward. I think the approach that we've had for many years now is starting to really bear fruit. And we are attracting investment advisers. We are attracting more and more advisers that want to be independent. And so going forward, I think we are going to keep focusing on this approach. We believe that it will continue to generate good earnings growth, and obviously, the ROE of this business is fantastic. So our forecast at this point in time is we continue to see [ double ] digit earnings growth for 2022.

Okay. That's great. Thank you for that. So we're butting up against the end of our time together. And like I've been doing with all the other CEOs, I do want to sort of hand the floor over to you for your final remarks and what your key messages are to shareholders and investors today.

Well, thank you very much, I really appreciate it. And thank you to everyone listening and the time that we spent together. So in terms of thoughts, our focus is to grow our Canadian franchise, the priorities, as I mentioned earlier is to continue on our transformation, synergies across our business line with a greater focus on wealth, our commercial platform. We believe that the greatest asset is our people. So we're going to keep on investing in them and providing winning positions. And we're going to keep naturing culture that focuses on performance and value creation. It's a hallmark at National Bank. So as we move forward, these are the principle that will guide us. So thank you, Darko, for your time.

Thank you very much for participating in the conference. With that, we'll close the session. Cheers.