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

Good morning, ladies and gentlemen, and welcome to National Bank of Canada's First Quarter Results Conference Call. I would now like to turn the meeting over to Mrs. Linda Boulanger, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our first quarter presentation. Presenting this morning are Laurent Ferreira, President and CEO of the Bank; Ghislain Parent, Chief Financial Officer; and Bill Bonnell, Chief Risk Officer. Also joining us for the Q&A session are Stephane Achard and Lucie Blanchet, Co-Heads of P&C Banking; Martin Gagnon, Head of Wealth Management; Denis Girouard, Head of Financial Markets; and Jean Dagenais, Senior VP, Finance. Before we begin, I refer you to Slide 2 of our presentation providing National Bank's caution regarding forward-looking statements. With that, let me now turn the call over to Laurent.

[Foreign Language], and thank you, everyone, for joining us. Today, the bank reported strong first quarter results with pretax pre-provision earnings up 14% from last year. The market and economic environments were conducive to business growth and translated into continued momentum across all business lines. Looking at our fundamentals, we are very comfortable with our current position. We generated strong asset growth while reaching a CET1 ratio of 12.7%. We have prudent credit reserves and we delivered a return on equity of 21.7%, reflecting our balanced approach to revenue growth and cost management, our capital deployment discipline and credit quality. Our capital deployment strategy remains unchanged. Our #1 priority is to maintain strong capital ratios, allowing us to support our clients and generate solid organic growth. We're also actively returning capital to shareholders through sustainable dividends and share buybacks. In the first quarter, we repurchased 0.5 million common shares and we have 6.5 million shares remaining under our current NCIB program. Our credit quality is strong, and our portfolios continue to perform well, supported by the ongoing economic recovery. We are also focused on optimizing our operational performance to maximize value creation, delivering positive operating leverage in Q1. We will maintain our usual balanced approach to investment and cost management while remaining cognizant of inflationary pressures. Turning now to our segments. P&C delivered strong results with PTPP earnings up 11% year-over-year. Our performance was driven by strong growth across the franchise. The housing market remains robust with retail mortgage loans up 2% sequentially. We also continued to experience significant sales growth in investment products. On the commercial side, we benefited from continued momentum across industries with 3% loan growth quarter-over-quarter. Our Wealth Management franchise continues to perform very well and delivered a strong first quarter PTPP earnings up 13% year-over-year. We saw continued momentum in full-service brokerage and mutual fund sales. Client assets were up 17% year-over-year. Financial Markets delivered a record quarter with revenues of $661 million. Global Markets generated particularly strong results due to increased client activity and volatility. Corporate and Investment Banking delivered a resilient performance after coming off a record year, once again ranking as the top government debt dealmaker in 2021. ABA Bank continues to perform very well with revenues up 33%, loans up 38% and deposits up 38% on a year-over-year basis. Cambodia did well during the pandemic despite the hit to tourism. Growth outlook for ABA Bank continues to be very attractive. Cambodia is a high-growth economy with favorable demographics. It is an underbanked market with strong potential. We continue to expect double-digit growth for ABA for fiscal 2022. Credigy continues to perform well with strong portfolio performance in Q1 and a healthy investment pipeline. Revenues were up 26% sequentially. As mentioned on our last call, we expect revenues to be relatively stable in 2022, given the $26 million gain on the sale of our portfolio in the first quarter of last year. This translates into high single-digit revenue growth for fiscal 2022, excluding that gain. We continue to foresee double-digit asset growth for the year. I would now like to share an update on 2 recent changes. First, in support of enhancing our client experience, accelerating our digital transformation and gaining efficiencies, we are bringing together our operations and technology teams under the leadership of Julie Lévesque, who has been responsible for the bank's technology sector since 2020. Second, we are proactively leveraging our collaborative models between commercial and private banking, 2 client segments with natural synergies, namely, we are adopting a unique go-to-market strategy by merging the sales teams to enhance the overall client experience. Stephane Achard, Head of Commercial Banking; and Eric Bujold, Head of Private Banking, will now be co-responsible for this strategic initiative and will report to me. Before I conclude, let me share a few thoughts on the macro environment. We are obviously keeping a close eye on inflation, global supply chain challenges as well as unfolding geopolitical events, which could exacerbate inflation and volatility and potentially have an impact on the global economic outlook. That being said, our current outlook for Canada and Quebec is positive. The Canadian economy benefits from strong demographics, which supports GDP and loan growth. The price of commodities are at record highs, which also indicates potential growth for the Canadian economy. Quebec remains well positioned with household saving rates above the national average, low unemployment and a diversified economy. While Quebec did respond more aggressively to Omicron than other regions in Canada, most restrictions are being lifted and any impact will have been transitory. To wrap up, we had a very strong start to the year, and all of our businesses are well positioned to continue to perform well. In light of our first quarter results, we are currently tracking ahead of our mid-single-digit PTPP growth guidance for the year. At this point in time, it is too early to provide an update on that front. Overall, we remain confident in our ability to generate solid PTPP growth and positive operating leverage for fiscal 2022. National Bank has a strong record for delivering superior value to its shareholders over time, and that remains a key focus for the team going forward. Before ending my remarks, I would like to say a few words on the executive changes announced this morning. After more than 10 years as our CFO, Ghislain Parent will be taking on a new role as Head of International reporting to me. Ghislain's contribution over the last decade has been invaluable to the bank's success, and I am very pleased to be able to count on his continued leadership. Ghislain, [Foreign Language]. We also announced that Marie Chantal Gingras will become our new CFO, effective April 1. Marie Chantal is a strategic leader and she has held several roles in finance, internal audit and P&C Banking since joining the bank in 1998. I am confident that Marie Chantal will be an outstanding addition to the executive team. With that, I will now turn it over to Ghislain.

Thank you, Laurent, and good morning, everyone. Turning to Page 7. The bank delivered a very strong quarter with all segments performing well. Pretax pre-provision earnings grew 14% year-over-year, and we [Audio Gap] 3%. During the quarter, the bank reversed $20 million of the provisions for provincial compensatory tax on salaries. Without this reversal, PTPP earnings would be up 12% and operating leverage would be positive by 1%. Higher expenses during the quarter were driven by a low expense level in the first quarter of last year. Higher variable compensation due to our strong performance, continued investments in talent and technology to support growth across all segments, and expenses related to our new subsidiary, Flinks. As mentioned last quarter, we expect continued pressure on costs in the context of inflation. Nevertheless, expense management remains a top priority as demonstrated by our consistent track record. While it may vary from quarter-to-quarter, we are confident to achieve positive operating leverage for fiscal 2022. Turning to Page 8. Our teams are very disciplined and some of our segments achieved best-in-class efficiency ratios. As always, we are making targeted investments aimed at growing our top line and enhancing client experience. Looking at P&C, expense growth reflected higher wages to retain and attract talent in a tight labor market. In addition, we continue to improve client experience with recent IT investments aimed at improving automation of our processes and leveraging our data. With regards to Wealth Management, expenses increased mostly due to the solid growth in full-service brokerage and mutual fund revenues resulting in higher variable compensation. We also added resources to ensure a leading client experience in the context of above-average growth. Our Wealth Management segment efficiency ratio below 60% for Q1 is in the low tier of the industry. Turning to Financial Markets. Expense growth was mostly driven by variable compensation, reflecting strong revenue growth in Global Markets. In addition, our financial markets team continues to see opportunities to diversify our revenue streams and is investing in talent and technology accordingly. We ended the first quarter with an industry-leading efficiency ratio of 39%. With regards to international, while the segment continues to experience significant growth, it posted a low efficiency ratio of 28% in Q1 2022. To conclude on this topic, the entire team continues to manage costs actively with the objective to adapt rapidly to different growth scenarios and still be able to generate positive operating leverage for fiscal 2022. Now turning to capital on Page 9. We ended Q1 with a strong CET1 ratio of 12.7%, up 30 basis points from last quarter, positioning us well to generate strong asset growth. Our strong results net of dividends generated 58 basis points of capital. Excluding the impact of foreign exchange, risk-weighted assets grew amounted to 14 basis points of CET1, mainly driven by loan growth. And during the quarter, we repurchased 500,000 common shares as part of our NCIB program, which reduced our CET1 ratio by 5 basis points. Now turning to Page 10. Our total capital ratio stands at 16.1% this quarter. Our liquidity ratios remained strong with an LCR ratio of 149% and a net stable funding ratio of 117%. We are pleased with our capital and liquidity position, which allows us to support continued growth across our segments, and to return capital to shareholders. With that, I'll turn the call over to Bill.

Merci, Ghislain, good morning, everyone. I'll begin on Slide 12. The strong credit performance we saw in the second half of last year continued through the first quarter. Provisions on impaired loans totaled $24 million or 5 basis points, an increase of $5 million or 1 basis point from last quarter. Impaired provisions remained close to cyclical lows across both retail and nonretail portfolios. On performing loan provisions, we benefited from a $34 million or 7 basis point release. The primary drivers in our domestic loan portfolios were updates on portfolio quality, economic scenarios and portfolio growth. In our international sector, strong loan growth generated $4 million of performing loan provisions. Looking ahead, 3 main factors inform our expectations for credit performance during the rest of the year. The first is that underlying economic trends have been strong. GDP growth, employment rates, excess savings are all supportive of benign credit conditions. Second is the level of uncertainty in the future path of the economy that comes from the geopolitical risks, inflation, supply chain challenges and impacts from the pandemic. And the third factor is our bank's risk profile. Our resilient geographic footprint, our defensive business mix, our prudent provisioning and our disciplined approach to underwriting and risk management all position our credit portfolio as well in this environment of increased uncertainties. Considering these factors, we continue to expect a slow normalization of credit performance through the remainder of this year and into 2023. Given the strong performance year-to-date and the positive indicators in our portfolios, we've revised our target for full year impaired provisions to between 10 to 20 basis points and currently expect to end up towards the lower part of that range. As we've commented in the past, our performing provisions should be driven by changes to the macroeconomic outlook, portfolio growth and migration. Absent a significant deterioration in the macroeconomic outlook, we would expect additional releases from our performing allowance in the coming quarters. Turning to Slide 13. Our allowance on performing loans declined by $32 million to $847 million, which represents a strong 6x coverage of our last 12-month impaired PCLs. This takes the cumulative release from our pandemic build to 45%. We are very comfortable with this prudent level of allowances. Total allowances for credit losses declined by $83 million from last quarter to $1.1 billion and continue to provide strong coverage of our loan portfolios well above pre-pandemic levels. Now on Slide 14. Gross impaired loans declined further last quarter to $608 million or 32 basis points. Formations in our P&C portfolios increased quarter-over-quarter, but remained well below pre-pandemic levels. Financial Markets benefited from a net repayment in the quarter. Formations at ABA increased in the quarter as loans rolled out of COVID-related moratoriums and performance on these matched our expectations. On Slide 15, details of our RESL portfolio are provided. The geographic and product mix remained stable with Quebec accounting for 54% and insured mortgages accounting for 32% of the portfolio. Employment and demographic trends remain supportive of continued strong performance in our RESL portfolio. In summary, we are very pleased with the performance of our portfolios in the first quarter. We remain very comfortable with our portfolio's resilience, the diversification of our earnings streams and our prudent approach to provisioning. With that, I will turn it back to the operator for the Q&A.

[Operator Instructions] First question is from Gabriel Dechaine from National Bank.

Yes, volatility obviously helped the trading numbers this quarter. Given the backdrop we're in currently, I'm just wondering if there's such a thing as too much volatility and what that looks like? Is it mainly an issue of client activity pulling off or maybe positioning?

Yes. This is Denis. Yes, I think, in fact, you answered your question. Basically, yes, it's a combination of above-average client activity in Q1 and also our defensive position that all of you have known for many years, as we keep repeating that we have a vol position that we keep on when things are getting a little bit erratic out there. But also I have to mention that on the global market, the fixed income did fairly well also because they have a very defensive position, meaning very small position in credit spread and very small position on the yield curve. And all in all together, they made that quarter spectacular in terms of trading revenue.

The current quarter's quite early and of course, what happened yesterday is a bit of a twist, but are we still feeling good about the trading backdrop?

I'm not sure I understand what you just mentioned, Gabriel. Can you repeat?

We have a quarter. We're midway through Q2. And then yesterday happened, I'm wondering if you can make a commentary on what has been like so far this quarter.

Well, it's tough because the market is so erratic and so volatile that it's going to be, as you can understand, tough for me to tell you what I should expect for this quarter. Then things are going okay. But it depends on what type of volatility we're going to see also. Then there's some that we can do a bit better. There's others that will do okay. But right now, we're tracking okay. But that's the most I can say right now because the environment we're in, tomorrow can be quite different than yesterday.

Okay. Just switching gears to ABA, another business that's really humming along nicely. And I got to ask the sustainability question. And it's more of a -- is there a point at which you grow your loan book to a certain size, and then that kind of spurs an investment requirement to scale up again? Or have you built this thing because I know there was an investment phase a few years back. Have you built this thing for a very long runway of growth?

Yes, Gabriel, this is Ghislain. Thank you for your question. So with the improving economic conditions, I anticipate that ABA's expense level will return to where it was pre-pandemic. And that the efficiency ratio will stay in the low 30s. So we do not anticipate major investments in the branch network. And inflation level, as you know, in Cambodia was already high before the pandemic. So we expect that it will stay the same after the pandemic.

Okay. Well, very fitting that you answered that question, Ghislain. And congratulations and good luck in the new role.

Thank you, Gabriel.

The next question is from Paul Holden from CIBC.

So I want to ask you a question about the investments you're making in future growth, and I'd never argue that that's the wrong approach to take over time. But I guess what I want to ask is, why is it the right approach today given the tight labor markets, inflationary pressures? Like how do you think about the cost of those investments versus the potential future returns?

Well, this is Ghislain here. So I can probably start with an overall answer, and then I will pass it along to Lucie and maybe others. So to answer your questions, of course, we -- what we try to do essentially is to have targeted investments. So of course, we could probably do more, but because of what you just mentioned, we try to make our investments and talent and IT to support growth, and we want it to be targeted. So essentially, this is what I could say for the moment. But to sustain, to maintain long-term growth, we have no choice to maintain some investments in IT and talent. And this is why we're doing so. But once again, we are targeting these investments where we think they will benefit the most for the bank.

Maybe I could add, Paul, it's Laurent. Discipline is the #1 mindset that we have when we look at investing in our businesses. So we -- when Ghislain talks about targeted investments, so it's really focused in the areas that we believe we can grow. And I think we've demonstrated agility over time. So if there is a slowdown in terms of top line revenue, well, then we just reduced the pace of hiring and our IT spend and obviously, variable comp adjusts naturally. But if you look at our performance through time, I think we've demonstrated discipline. And also, if you look at the efficiency ratios of some of our businesses, I think our performance speaks for itself.

Yes, for sure. I agree with the historical tracker, not an easy question, but something I'm contemplating. And then perhaps my second one is an easier one. Just wondering if you can give us an outlook on your take for residential mortgage growth through 2022. One of your competitors yesterday kind of guided to high single-digit mortgage growth. Wondering if you're thinking the same or higher or lower?

Yes. Thank you for your question. It's Lucie. So I would say that we are in line with that. We are comfortable with our disciplined approach between balancing volume, margin and risk. And the way we see the market right now, we are confident to perform close to high -- into the double-digit, similar to what we achieved in Q1. And we think that the -- despite the rising in rates, the imbalance between supply and demand should continue to stimulate the real estate market in the -- during 2022.

The next question is from Meny Grauman from Scotiabank.

Laurent, interested to ask about Ghislain's appointment, that new position in International, does that signal a different phase in the evolution of the international business? What's the message for investors from that new role?

Nothing in terms of the strategy. I think in Q4, it was pretty clear. Our focus remains on ABA and Credigy. And the sector has grown enough that I think having an executive like Ghislain to be responsible for the continued growth of that sector is granted at this point. So that's the story behind that. But at this point in time, no changes in our strategy.

And just specifically on the moratorium in terms of new acquisitions in the international business, is there any sense that, that is getting closer to changing?

No. Not at this point.

And then just a question for Bill. Bill, when you see 21% year-over-year commercial loan growth, we've seen strong loan growth now, a very strong loan growth on the commercial side for a while. Does it raise your blood pressure? How do you ...

Thanks for the question, Meny. I've actually got low blood pressure, but the -- as you know, I'm paid to worry about lots of things. The loan growth that we've seen has not been a cause of concern for me, though. If you look particularly, you'll see it this quarter, and I think Stephane preluded to it last quarter, it's very diversified. I think this quarter, there were 5 or 6 sectors, which were above our average portfolio growth. And if you remember, too, before the pandemic, in '18 and '19 as we felt we were late cycle in the -- late in the cycle, we had been pretty disciplined at controlling the growth in the book, and particularly in some cycles. So that set us up to be able to seize opportunities, and we've got strong teams in those -- the sectors that we grew in, both in Stephane's business, but also in my credit shop, and we've been quite, quite comfortable with the growth. Does that answer your question, Meny?

Yes.

The next question is from Lemar Persaud from Cormark Securities.

When I look at your balance sheet, there's a big step down in the repo balances throughout 2021 and then a sharp step back up this quarter. Can you talk to, I guess, what drove the decline in 2021 and the step back up in Q1 '22?

Maybe I could start. It's Laurent. And I'll let -- so you have 2021 with the injection of liquidity by central bank's quantitatively easing. The whole sector of securities finance, which includes repo, the pricing went down significantly, and the demand for balance sheet went down significantly. And so with obviously, the change in the monetary policy across the world for 2022, we've seen that shift coming. And so there is more demand for -- I think, for balancing and financing securities. Denis, do you want ...

Yes. And specifically in equity market, we haven't seen that much in the bond side though, but on the equity market on the securities lending, yes, we saw an uptick. But that uptick was quite interesting. But I can tell you that right now in February, we saw that thing back to where it was last year, which is kind of mind-boggling right now, because it's kind of bizarre that we're seeing that. But things may change very rapidly, but it's probably a temporary situation. But yes, the first quarter, it was a nice uptick because it was pretty low, in fact, historically, last year in that particular business.

Okay. Great. And what about spreads in that business? Have they increased? Well, did they increase in Q1? And are they going back down as we look forward into Q2?

Yes, they did increase in Q1. They came back a little bit in Q2 at the start of February. But it's too soon to say if it's going to stay like that for a while. Because there's a lot of stuff in the market right now as you know.

Okay. Great. And then my next question is just on the domestic mortgage growth is perhaps a little bit softer than some of your peers this quarter. Can you talk to what happened there? Like is there -- is there some unique factors in the Quebec mortgage market, maybe increased competition, maybe that impacted [indiscernible]? Any comments there would be helpful.

Yes. It's Lucie. I would say that we've seen originations a little softer this quarter and probably link that with the increasing rate environment. But just as a reminder, originations have reached record high in 2020 and 2021. So it's nothing that we -- that is really material at this point.

The next question is from Nigel D'Souza from Veritas Investment Research.

I wanted to first touch on your performing loan allowances. You noted in your slide that there's been a cumulative release of 45% from what you built through the pandemic. And I'm trying to get a sense of the timing of when you think that could completely release? And when we have around the corner a return to office and a more broader reopening and the current credit environment is still fairly benign. So assuming that we don't get a deterioration in the economic outlook, when do you think your performing allowances might get back to a more normalized level?

It's Bill. I'll take the question, of course. The -- I think I referred to that in the script. And as you pointed out in your question, that absent a significant shock in the macro outlook, we would expect continued releases of those in the coming quarters. So the -- you've seen that over the past 3, 4 quarters, there have been releases. We want to remain prudent, and our prudency is linked to the level of uncertainty in the market. So the pandemic seems to be close to turning into an endemic phase, more back to the office. However, this is the first time we've been through a pandemic cycle, as I think I've commented on the past, and we think that it's prudent to remain well provisioned. Does that answer your question?

Yes, it does. It doesn't sound like you're going to accelerate that release. So that's good color. And if I could switch gears to your trading P&L and maybe ask it in a different way. When I look at daily trading P&L last quarter with elevated interest rate volatility in October, and you had some P&L losses there. When I look at January, you haven't had any P&L losses in January despite more elevated interest rate volatility in that month. So I think you touched on having, I guess, less exposure to the curve and spreads. But could you touch on your exposure to interest rate volatility and how that affects your P&L?

Well, the interest rate volatility is not affecting our P&L that much because, as I said, we're running very low balance sheet in fixed income right now. We have no exposure to the market as per se as interest rate. We're not betting on the interest rate at all. In fact, what we're doing is we're servicing the client on the trading activity and the business that they want to do. And on the credit side, we are -- on purpose, we keep our CS01 very, very low either/or in the corporate sector or the government sectors. Then we just do quite a lot of volume and activities with clients, but we keep aggregates and exposure at the minimum as we can right now. That's why we have not that much exposure to movement of interest rates.

Got it. And just last question for me. You mentioned that too much volatility could be detrimental in some scenarios. If you could switch to maybe the ability of go-to-market for equity or debt issuance. Are you seeing any challenges there in an environment where we have a lot of volatility, both in equities and interest rates?

Well, volatility can take the form of many aspects in a sense that you can have intraday volatility and long-term volatility where you have a market trading down. I would say that we haven't seen yet very, very long negative slope on, let's say, equity, let's say, being down 15%, 20%, 25%, okay? What we saw in the first quarter, it's more intraday volatility, where we can catch those movement through our vol position. The other one, the other situation, we'll see when we're there, and how it can affect positively or negatively the book. But right now, we're not in that situation at all. What we're seeing is just intraday volatility. And in that type of environment, we're doing quite well. Because of our positioning that we're very, very conservative the way we trade those vol and obviously those gamma position.

The next question is from Sohrab Movahedi from BMO Capital Markets.

I just wanted to also pick away a little bit at the trading results this quarter, very strong. Maybe ultimately, is it possible that if you have $150 million, $200 million swing in trading revenues to the upside, can we also see something like that from quarter-to-quarter to the downside? And would you say that -- how is the positioning to, I guess, to defend the downside or provide some downside protection here?

Maybe I could start, Sohrab, it's Laurent. And I grew up in Financial Markets with Denis. The Financial Market business is a client-driven business. And so when you have heightened levels of volatility, often, it does drive more transaction. So we did see more trading activity with our clients during the first quarter. And as Denis was mentioning, we trade -- we position ourselves defensively. That's the philosophy that we have, whether it's credit, whether it's equity vol, or interest rates. And so if you look at our past performance, we tend to do well when volatility increases, you can go back around all the numbers. And so that's the philosophy. Are we immune? No. No one's immune. But we -- the way we built the business is we want to make sure that through volatile times, we can keep growing our franchise, right? That's the objective.

Yes. And yes, you're talking a lot about the trading and the volatility that we saw in the first quarter, but also -- and I mentioned it earlier, our client activity was way above expectation. That means that our distribution channel in all the product that we're selling is more robust than in the past and much bigger than in the past, I would say, even outside Canada. And that's why we had a very, very good equity numbers in Q1. Then as long as the clients are active in different type of [ run ], we will do well, that's for sure.

I mean, not to belabor the point, but you had an exceptionally strong quarter because of client activity. If next quarter, for whatever reason, we have an exceptionally inactive client, could we be back down the $200 million or below from a trading revenue perspective?

$200 million seems to be a big number to me, but we can see the numbers being down with lower client activity, but not at that level. No.

Okay. That's very helpful. And then, Bill, if I can just come to you, obviously, I think, in pretty good condition as far as reserves and what have you. You mentioned that pre-pandemic for -- obviously, reasons unrelated to the pandemic, the bank had kind of started to throttle back a little bit from a -- maybe your risk appetite didn't allow for some of the growth that was available and now your blood pressure is low and all that kind of good stuff. But the -- what sort of stuff are you looking for to decide when is the right time for the bank to throttle back again, if at all? Like what are some of the leading indicators you as an experienced risk manager are paying attention to aside from the fact that you're well reserved and you've got good frontline originators and what have you? But what are some of the things you are paying attention to, to figure out when the blood pressure should maybe start going up?

I appreciate the question. I think it at a philosophical approach. What's important is the consistent discipline through the cycle, and that is the most important factor. So at points in the cycle, you should expect that where yields are -- where growth is low and yields are low, there could be pressure in the market to stretch. And those are the times when one must remember a disciplined approach to the cycle is very important. I think that's what you saw in the pre-pandemic late-cycle period. And you should expect that we'll continue to be disciplined. The balance that Lucie mentioned, it's the same in Commercial and Financial Markets as well. The balance between growth and spread return and risk is always on our minds. So I couldn't point you to any particular red flag or shining light that will be the factor. I'd just say that where we see some stretches in one of those -- the balance between those 3 factors, we're likely to be disciplined and prudent. Does that answer your question, Sohrab?

I think it does. And maybe if I push my luck, so would you say in that points in the cycle comment, where would you say you think we are in the cycle, early third, middle third or the final third?

That's another very good question, Sohrab. And related to -- we haven't been through a pandemic cycle. So this -- this is unlike previous cycles. There are some aspects of current conditions that seem more mid-cycle, some seem later -- or mid- to late and some seem early to mid, and that reflects the level of uncertainty in the forward view. So the -- I couldn't tell you exactly where we are in the cycle. But I'll remind you, as I said in my script, the underlying economic growth, the underlying conditions and employment in the economy are strong, and there is uncertainty about the path in the future. So I didn't give you a direct answer. If I was capable of telling you what inning we were in, I would, but that's kind of the balance as I see it. Does that help?

The next question is from Mike Rizvanovic from Stifel.

I want to go back to Lucie on your mortgage growth and specifically the Quebec market. So I do notice some pretty strong market share gains in Quebec for National, pretty much all the way throughout the pandemic. And then the last couple of quarters, you've actually lost a lot of that. I'm not sure how this quarter is going to shake out ultimately. But clearly, some of your peers have been more aggressive in the Quebec market. I'm just wondering, given that it's more than half your RESL book overall, like, I guess, for lack of a better term, do you have to defend your turf? If you do in terms of client acquisition, what does that mean potentially for your margins going forward?

Yes. Thank you for the questions. I think the mortgage market is always very, very, very competitive. And especially in a rising rate environment, the client rate lag a little bit and we see more market competitiveness. So we've seen some of that in the last quarter, last 2 quarters maybe. So that lag is really there. And this is where getting back to what Bill said, we are very prudent in our balance between the volume, the margin and the risk. So lately, I would say that margin has been tight, for sure, in the context of rising rate environment. However, we do see much more customer engagement coming from our mortgage activity. So we are -- I think we're very happy with our strategy, which is based on our internal channels in terms of growth. And this is also something that is very, very important in our strategy. So we're still confident of the approach we have on the client side. Does that ...

Yes, that's helpful. And then just -- I guess, I'm wondering also what sort of impact is the broker channel having in the Quebec market? Is it more so an impact there in terms of where the competitive pressures are sort of being exacerbated? Or is it your traditional channels?

70%, 75% is based on our internal channels. As you know, we made a big change on our strategy on broker a couple of years ago. And we are back in that channel now because it's a challenge that definitely customer, specifically first-time homebuyers prefer. So we are present, but our strategy is really based on our internal channel. Again, for long-term customer engagement strategy.

And so would you say you've lost a little bit of this market share predominantly in the broker channel or in your branch channel?

I missed the beginning of your question, sorry.

Just wondering, with respect to the recent market share losses in the last couple of quarters, would that have come in your broker channel or your branch source origination?

Broker.

The next question is from Mario Mendonca from TD Securities.

Bill, could we go back to you and focus on ABA for a moment? ABA -- loans to ABA are now about 1/3 of the company's common equity and you're growing those loans at -- I think it's around 5x the growth in GDP in Cambodia. So clearly, this has become a very important part of the overall business of National. Could you just remind us, how do you get comfortable with this sort of loan growth particularly given your comments about the uncertainty? We're really not sure where we are in this cycle. So how do you get comfortable with that kind of growth in this environment?

Thanks for the question, Mario. I'll start off with the macro picture and part of the rationale for the investment in ABA and Cambodia is part of the answer to your question. So it's an economy that is growing -- has a strong growth rate. It's an economy that is quite a young population. It's an economy that is underbanked. And so the relationship that you would normally find in, say, the banking growth and GDP growth in a developed economy like Canada, it's a different relationship in a country like Cambodia. In addition to that, we have had very good execution, very good strategy to be quite performing in that space. So the digital rollout, the execution on expanding disciplined approach and expanding the branch network, and maybe just pass it over to Ghislain. But the context is quite different than an economy like Canada where a comparison that you're making in terms of loan growth and GDP growth would probably maybe not give me high blood pressure, but would certainly generate some more concern. Ghislain, do you have any other comments?

Yes. I would add, probably, the country is still underbanked compared to other countries. So which is important to take into consideration. Also, we continue to grow in the same business model. So we haven't changed the business model, it's the same kind of loans. So it's small loans, small SMEs. The average loan balance is below $50,000. So we have a great -- we have a large diversification in terms of loans. And throughout the country -- we have 80 branches throughout the country. So the question is good, Mario, but at the same time, we're not growing in things that we don't know. This is exactly the same business model as we grew from the beginning.

So the lending is still very much tilted towards secured lending. That's true, isn't it? And loan to values, maybe you could give us an idea where loan to values are?

Yes. And I -- well, to answer your question, yes, it's secured business. And I think I don't have the number. Maybe we could come back to you on that, but it's very high.

The loan to values are very high?

No, no, no. No, in terms of secured. But I think that the loan to value is below 50%, if I remember correctly.

Okay. And then just one quick question on Credigy. Just looking at the credit performance there, there was a time looking back where Credigy loan losses, the loan loss rate was obviously much higher than where it is now. And as I think about the future, I obviously don't feel comfortable assuming that losses reach that level again. So just remind me, how has Credigy -- has the nature of Credigy's business changed to support the notion that we're not going to see credit losses the way we did in the past?

Yes. Bill, do you want to -- I will start and then Bill could complete. So I think that during the pandemic, the team showed its resilience and its capacity to change its business model. So of course, we changed completely the portfolio. The portfolio is more than 80% secured right now. Whereas before the pandemic, 5 years ago, it was 20% secured. So what you're seeing in terms of PCLs essentially is the reflect of the changes that we made in the portfolio. And of course, that portfolio has a short duration, so we could change our strategy very rapidly. So if we think that the unsecured business if we have more opportunities and the environment is better for unsecured business, then we would go in the unsecured business. And of course, I mean, we will see probably more PCLs, but a greater return on the assets though.

The next question is from Doug Young from Desjardins Capital Markets.

Most of my questions have been asked and answered. Just have a few follow-ups. On the current balances, they were up 5% quarter-over-quarter, which was double what we saw with some of your peers so far this quarter. Just curious what you're seeing on that front is I assume this is more transaction-related relative to purchase volumes? Or are you starting to see any return in the revolver side?

Yes. It's Lucie. So definitely, credit card will be part of the growth story in 2022. And what we see right now is all the credit card indicators are on an upward trend. So -- and that is very positive. So in Q1, I would say we add -- purchase volume reached an all-time high of the past 3 years. So definitely, there is that in the increase in balances. But also, we have active accounts that are growing faster than pre-pandemic. And slowly, the revolving balances are starting to creep up. So definitely, the business is going in the right direction.

Can you give a perspective of where the revolver stands relative to where it was pre-pandemic, like what the paydown rates are then versus now?

The paydown continues to be high. It is at the same level than what we witnessed during the pandemic. So definitely, there is still a lot of liquidity in current accounts that is being used for that, and we see the consumers being prudent on that front.

Doug, I'll give you -- it's Stephane. I'll give you the view on the commercial side. Pre-pandemic levels -- when the pandemic started, the revolver levels went down by 800 basis points. And we've recuperated $500 million of that, so at this point, and it's going up every quarter. But we still have, if I may say, money in the bank in terms of potential for growth because we're still 300 basis points behind pre-pandemic levels.

Now just to finish on the credit card. The way we see the revolving balance with the consumer being still prudent, probably the portfolio would be more up to the pre-pandemic level by the end of the year or early next year.

Okay. Perfect. And then just maybe lastly, Ghislain. I mean I look at the Corporate segment, and I know there's a lot of things that go in there. But if I reverse the $20 million unusual item that you kind of talked about, it still seems like corporate losses were lower than normal. And I'm just trying to understand, is there anything else unusual that went through corporate this quarter?

I will let Jean answer.

Well, there is no other unusual element. If you look at it in the last 3 quarters, it is pretty similar. So except for the -- maybe the expenses that were higher at the end of fiscal year 2021, which is the normal case, when you have projects that are being spent and they're mostly spent at the end of the year. So other than that, it's normal.

[Operator Instructions] The next question is from Darko Mihelic from RBC Capital Markets.

And sincere apologies if this has been asked, my phone went dead for a few minutes there during the call. So hopefully, I'm not asking a duplicate question. Laurent, you mentioned during your remarks that you're making some organizational changes. And from the outside looking in, it's a little bit hard to understand if this is material. Like when you're merging private banking and commercial sales teams and so on, is this material enough or big enough that we should expect maybe restructuring charges -- or -- and is there any kind of revenue upside you can provide for us or any way for us to size whether or not this is really going to move the earnings numbers? And I appreciate it may not happen immediately, but is there anything you can offer to us in terms of materiality and what you're expecting on the earnings front from this move?

Sure, Darko. Thank you for your question. So no restructuring charges. So that's to answer your first question. This is an evolution of the approach that we've had with our sales team. And we've seen over the past couple of years, we've, at the ground level, worked really hard to bring our bankers together in various business lines and work a combined approach towards our clients. So from our perspective here, it's early days, but we want -- we definitely saw a lot of natural synergies between private bank and commercial. When we look at the overall clients, there's clearly an overlap. So first of all, we wanted to send a clear message from the top and get our teams to work even closer together. So that's the objective. And obviously, I'm going to let Stephane and Eric work on this, but the idea is, yes, to drive a lot more top line.

Okay. And my follow-up question is just on market risk, again, similar to another bank that reported today, somehow in the middle of the volatility that we saw and very strong trading results, we don't see a change in market risk. Maybe you can just talk to that a little bit.

I'll take it. It's Bill. The -- I think as Denis mentioned, a lot of the volatility that we saw during the quarter was intraday, and it didn't -- our VAR numbers were fairly unchanged, I think, quarter-over-quarter. The market risk capital has got a few components as VAR, SVaR and interest rate specific, there's a few different components. The one this quarter was the SVaR, which was beneficial from a capital perspective, and that really just benefited from increased diversification across the risk factors this quarter. Nothing else to call out.

Okay. But I guess the other look to that would be given the strong environment and the strong results, I guess why not pack more on? Why not increase your inventory levels and so on for higher client activity? I'm just curious as to why you wouldn't go down that path given the strong results that you were actually having during the quarter?

Darko, I think I'll -- Denis may have some comments afterwards, but I'll flip that around. I think because it was driven by client business and client activity, it's activity that doesn't require taking big position. So the -- when it's -- when the more client activity, particularly when it's in -- transaction happen during the day with intraday volatility, it doesn't change your end-of-day position very much. So the -- that's -- I think we don't think about it in terms of building up more inventory to satisfy the flow if the flow is quite balanced. Denis?

Yes. Bill, you have the right answer is that with the volume picking up, the more volume, the more activity you have with client, probably the less inventory you have because you can turn that really much faster. And this is basically what happened in the first quarter. And there was no reason to have any balance sheet or exposure to the market, considering our prudent approach to that market, and we're still the same right now.

Does that answer your question, Darko?

Yes. I think it's helpful. And just one last one, I'll throw in there. Oil prices are rising. Does it change your business view? Does it change anything for you with respect to that particular segment in the marketplace?

No. This is Laurent. So it doesn't change anything, not at this point.

Operator, do we have any more questions? If there's no more question, back to you, Laurent.

Well, thank you, Linda, and thank you, everyone. Have a good weekend.

This concludes the presentation. Please disconnect your lines at this time, and we thank you for your participation.