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

Hi, my name is Jean-Philippe Cousineau. I'm incharge of Institutional Equity sales at National Bank. I would like to welcome you all to this 20th edition of the Financial Service Conference. As you all know, COVID started 2 years ago exactly in March. This was the first conference to be presented on a virtual format 2 years ago. And today, I'm very happy to say that it's the first conference to use -- to be back on to a live format or hybrid format because it's important to have those in-person contact. We've been very, very happy with the response so far. We have 21 companies presenting over the next 2 days. 19 of them made it live. We have over 150 people that registered for the conference as investors for the conference. So overall, we're talking about 250 people coming to the conference, with half of them being in person. And on behalf of National Bank, I want to thank you all for making it down, especially the people who came down into a live format. It's funny because right now, we're seeing the S&P TSX hitting 52-week highs. It certainly doesn't feel that way. It's certainly a very challenging time for all our financial institutions. So the next 2 days should be very -- enlight us on the strategies and how they're going to cope with that going forward because right now, we're seeing a worldwide tightening of monetary policy at a time where inflation hits a 40-year high. At the same time, we have a high level of consumer debt. Not only that, but we have supply chain issues. We're coming out of a pandemic. And at the same time, there's major military conflict started over in Russia. And on that, I want to send our thoughts to all the innocent people that are suffering into that conflict. It is very hard to imagine what these people are going through. As for the format of the conference -- the 2-day format of the conference. As you can already see, it's going to be fireside chat hosted by our two analysts, Gabriel Dechaine and Jaeme Gloyn. They will be asking questions, but we encourage all the people in the room if they want to ask questions, feel free. It's an open format I want this to be interactive. For our luncheon speakers today, we're going to have Stéphane Massé, our esteemed colleague, one of the best economists in Canada, giving a state on the economy. And tomorrow, very topical, Angelo Katsaros or geopolitical analysts will give us his view of the situation in Ukraine and the possible outcome towards this terrible conflict. So on that, that will be all for me. I will leave it to my colleague, Gabriel to introduce and host the first fireside chat with Laurent, who I believe, is first also in-person conference attendee. On that, have a good conference all. Thank you.

Well, I'd also like to [Audio Gap] coming. We really appreciate that, and everybody is signing up. It's nice to transition back to normal. Before -- well, I'd like to introduce our first presenter here is Laurent Ferreira, CEO of National Bank, who's been with the bank for just going on his 25th year now. So gives hope to all the young people out there, you stick with it long enough. Before I jump into Q&A, I believe you'd like to say a few words.

Yes. So thank you very much for being here, [Foreign Language]. People here, people online as well. So we're very, very happy to have you here. Just a few words on the current situation. We -- obviously, our heart and our support is with the people who are suffering with the current crisis. We provided some support to the Red Cross, and we are actually looking at further helping the current conflict, whether it's with refugees. And so I just wanted to just put it out there.

Well, thank you for that. Well, sticking with the topic, the geopolitical and macroeconomic backdrop. As CEO, what is like the I mean that's a pretty broad question, but the factors on which you focus to assess and manage risk and navigate this climate, what are some of the key priorities for you?

Yes. Good question. So our platform is Canadian. We're mainly a Canadian bank. So we don't really have any material exposure or impact to the current conflict. Now having said that, you do have market volatility that is impacting us all. I think it is definitely putting a pause on deal flow. So M&A is affected, new issue business is obviously affected. But this conflict has really like broader ramifications, and it adds a lot of complexities. One, the length of the conflict, I don't think we -- first, the surprise -- the length of the conflict; and the second thing is, regardless of the outcome, we do believe that there is going to be heightened geopolitical tension afterwards and further divide in the world. So the risk of sticky inflation, global supply chain problems, I think, are just going to get worse. So these are things that you have to have in mind. The economic outlook is much more difficult to predict and work on. So these are the things that you have to have in mind right now. Having a solid balance sheet, a good risk management culture, I think, is key, obviously here. And our strategy doesn't change with the current situation.

But in terms of the risk management part of that, and I know that's a big philosophy at National Bank, core competency as well. Is there any particular things you're doing a bit more of today or less than normal today, like holding on to extra liquidity or dialing back on any lending or anything of that nature?

Nothing major. I mean you are -- we are obviously -- maybe you become a little bit more selective when you know that there's more uncertainty in the market, but nothing major.

You also mentioned volatility, and I don't want to be crude or anything, but there's potentially a silver lining to some of these situations or maybe not. Is there such a thing? I asked a similar question on the conference call a couple of weeks ago. Is there such a thing as too much volatility? Or are we in a position now where it's actually kind of a bit of a tailwind?

Well, it's -- silver lining. It's difficult to think of a silver lining when people are suffering. There is such a thing as too much volatility for sure. Now we don't build our business around what volatility will be or what volumes will be, those we can't predict. So when it comes to financial markets and our trading businesses, it's providing liquidity to our clients is what we do, smart risk, and ROE accretive decisions, right? That's the mindset in our trading businesses, right? We want to go through cycles. So we do position ourselves with a defensive bias. So when there is more volatility and more trading, we do tend to perform well. And it does provide a bit of a buffer. And then when volatility comes down and trading comes down, well, you adjust towards that as well. So the idea is you want to perform regardless of the market cycles, right? So it's not just -- we believe involved, so we're going to be positioning ourselves accordingly. But overall, the bank were in Canada, I think the -- go back to the economic outlook and macro outlook. Commodity prices are up, which we should do well in Canada. Unemployment is still very low. And the fundamentals of North America, in general, are still pretty strong. So I think we're in a good spot.

Okay. Just to switch gears a bit. I think it was at a conference earlier in the year, you were asked about some of the key priorities for the bank and your -- as you see them and you did bring up the wealth business a few times. And I think it's one of the parts of National. It's a little bit underappreciated. It's actually a bigger proportion of the overall bank than some people realize. What -- A, what do you see as some of the main drivers for growth in the wealth business; and underlying that, some of the key advantages that your wealth business has that might not be as well understood by The Street?

I'm glad you're bringing it up. There's been a lot of in the past couple of years, emphasis on financial markets and how there's a large proportion of our revenues that come from financial markets. But our wealth business, 25% of our revenues at the bank come from our wealth business. So we really like our positioning there. We like the space. We like the balance it brings out in our business model. I'm a really big fan of the universal banking model. that balance between retail and wholesale, the balance between commercial and wealth, I think, is a really resilient model. We've seen it throughout the COVID crisis when you look at our results. So a couple of things on our wealth business that make us different. So the first thing is we focus on distribution, some manufacturing. So we don't go into asset management. We actually got out of it. So it's really client-facing, our focus. We also support independent brokers. So we have National Bank independent network. We do believe that there is fragmentation in financial services like personal banking, but there is also fragmentation in wealth. So I do believe that there's a market for independent brokers, and we're there, we want to support them. There is also a strong collaboration between our financial market team and wealth. On product manufacturing, so ETF structured products and technology. So when you look at the trade, for instance, the trading technology that we use in financial markets, we try to leverage that in our wealth business for our clients. So these are the aspects that we work on. And I think that makes us a little different from our competitors.

You mentioned collaboration. And one of the announcements that came up recently was the -- well, for a lack of a better description, some of the combination of sales efforts between the commercial bank and the wealth business. Can you just explain to us what's the opportunity you see? And -- well, I'll follow up that with a -- I'll let you answer that one first.

So what we announced is we brought together private banking, which is under wealth and commercial. And the analysis is, obviously, there's an overlap, there's clearly opportunity to really leverage those relationships. So that's the initial analysis. So obviously, cross-selling between your business owner, your commercial accounts and private banking wealth there's a lot there. And we think that, that by bringing that, obviously, we're going to have an impact on client acquisition, cross-selling. We believe that we can increase over a period of 5-year by about 25% our franchise over the normalized growth rate that we've had over the past 5, 10 years. So that's sort of what we see at this point. Wealth, commercial, private bank, when we look at those 3 platforms, these are definitely growth engines for us across Canada. We like our strategic positioning in each of them. So these are definitely elements for us to increase growth.

Well, my follow-up on that, is there any side of that business that you see there's -- while there's more of an opportunity for wealth because we have all these commercial businesses that are selling out and they didn't particularly manage money or commercial banking because your wealth distribution private banking, I think has a much broader national presence than most of your other businesses. So there's more commercial banking opportunities at West. Or is it balanced?

Well, there's a mix, okay, I think it's balanced. But the key here is our culture, right? And what you're bringing here is the key element that we keep talking about here is our collaboration between everyone. And when we talk about that, it's not just posters, it's not just words. You have to work on your model. You have to work with the teams. You have to send certain signals right on how serious you are about this. You have to work on your compensation model as well, right? So you want really the salespeople to be incentivized, right, to do the proper thing and you want everyone to look at it, even your risk people to say like to have a view on our performance. So yes, there's -- there's a lot of potential for us in Quebec, but also outside of Quebec when we look at those three businesses.

And sticking with the collaboration, I think that's one of your priorities where you -- obviously, this is one example. Do you see others that or across the bank? And if you can describe it because I have an idea.

So why don't you answer the question.

Equity research and Cambodia, especially in winter time. I'll collaborate, okay.

I'm going to think about that one.

Okay.

We did announce also in January. The -- we -- I brought together the operations and IT as well as our investment portfolio in financial technology -- in fintech, so our end venture arm. For as long as I know, operations at the bank and technology was separate. So I think we're sending a very positive signal to everyone about the next steps of our evolution on digital transformation. I'm a very firm believer that technology is no longer a cost center. It is definitely an enabler and an area where you want to see more than just running the bank. You want to also see innovation. So for me, it was important to bring under one leadership operating the bank but really having a view of optimizing our operations, so operational performance, but also bringing in innovation because you can't do everything, so financial fintechs, I think, are important in this. So that's another change where, again, I do believe that you collaboration with the culture, right, really is going to have an impact on our transformation and innovation at the bank.

Okay. Before I switch on to another topic, I'll field the -- is there a question from the audience?

Yes. You talked about fintech, your predecessor has [indiscernible] on midpoint. Can you give us...

Absolutely. So -- and we heard Joe Biden, I think last week talked about putting the framework together for regulation. So I think crypto in general does not exist in an unregulated separate world. So I think we have to -- so that's one thing that needs to happen. I think the regulators have been sleeping a little bit at the switch here, and I think it's time for them to get involved. So how does it evolve? And there's a lot of scams out there. There's a lot of, I think, hyped up greed, for a lack of a better word, that follows these products. So there is -- at some point in the space. So I think gaming is an area where you definitely see potential. So I mean, at this point in time, our strategy is to really wait, look at what's happening, and we trade ETFs that are linked to bitcoin. We provide markets. We don't custody crypto at this point in time. So we're -- I think it is really evolving. It's moving very fast as well. So I think for us, it's a wait-and-see kind of approach at this point in time.

Anyone else? Okay. We've done big picture wealth. That's Canadian banking. And the one thing that jumps out to everyone is the growth in the mortgage business National certainly participated, but I have not seen growth rates like this in my lifetime, I don't think. What's the outlook there? How long can we have double-digit growth in mortgages. It seems like with rising rates, you got regulatory kind of tightening looming, a few different factors that might cause that to drop off pretty fast. Lack of supply, I guess, too, as an issue, how do you see the mortgage market growing over the next little while or maybe a year or 2, let's say?

I think we're going to see some normalization towards the end of the year and into 2023. I still think that the outlook for the year is still strong. So we've guided and we think we're going to see high single-digit growth again for 2022. So you mentioned it, I mean, the problem is supply. It's still an issue, so that imbalance immigration is coming back. Demographics are good in Canada, you have strong economic growth, low unemployment. So I think the -- I think it's still strong. Now rising rates, obviously, is something that -- but we do have qualifying rates for mortgages that, I think that does protect a little bit the market. The inflation, now food and energy, so rates, food, energy, that buffer of liquidity that households have built up during the COVID period might reduce faster. So we're looking at our mortgage business and household finance. You think that they have liquidity until 2024, 2025. So those are two things that we have to keep an eye on, right? Rising rate, inflation. And we manage our business. It's not about volumes at all costs, right? We're not there to buy market share. It's -- you want to manage its volumes, margins and credit quality. So we go back to those three things. So when we see a race to the bottom in terms of margin and we pull out a little bit. So I think that's sort of the approach we've had in terms of managing the growth. But I think we're good for 2022.

Capital markets then. I'm sure I've asked this before, but I'll do it again. Geographic expansion, the whole Canada strategy has been very successful, but some will say, "Oh, it limits your growth opportunities". Are there any avenues of expansion you're looking at outside of Canada. I know Europe was a little nichey opportunity that became decent size a few years ago, anything you're looking at now that...

And the right word is niche. So that's the approach that we have in financial markets. So we don't think really in terms of geographical expansion. The approach we have in financial market, disciplined, selective ROE-accretive decision. These are the mindset that we have. So a couple of things that we're looking at right now. One of them -- and we're already present in the space, but we think we could do more is infrastructure project and mainly in renewable energy. Half of our business is already in the U.S. So we took a decision a couple of years ago. Here is a space that we want to grow. We want to be -- we want to build expertise around that. And so we did that, but Canada was too small.

Right.

So our footprint, North America. So that's an area that we know we can do more. Our -- the other area that we're -- we've done really well over the past couple of years, and we could do more is structured products. So we -- when I started in structured products 20 years ago on the desk, we were selling somewhere between $200 million and $500 million of notes, that's over $10 billion a year today. But we've expanded distribution across North America. And so we could do even more there. So building on our expertise, where we know we have the talent, we know we can compete we're going to go there, right? So not building our platforms, not going on into U.S. and building larger investment banking platforms. It's what are we good at? Where is there an opportunity for us? And with our size, where can we compete?

And not -- and I think also the capital markets business has a really nice mix ratio that you don't want to go.

We don't want to expand that.

Yes. Right. Credigy, this is a business that it fluctuates what it's originating based on what's attractive at that time. Can you give us a bit of insight on what type of business they're doing today because the...

Sure. we bought Credigy -- so our first investment in Credigy was in 2006. We own 100% of Credigy today. When we bought them, they were in, I think, 3 or 4 countries. Now they're just in the U.S. They have a few trades in Canada. In 2006, it was primarily a distressed asset. It was purchases, right? And then winding off of portfolios. So the Credigy has adapted to their models from distress to performing loans, I think most of our portfolios is now performing loans, moving from unsecured to secured assets as well. So structuring deals with a lot of protection. We also finance portfolio. So where sometimes we have opportunities to buy portfolios and there are too many -- it's a little crowded. There's a market with a lot of liquidity, yield longer players. So sometimes we pull out and we can finance the acquisition for a player who is a little bit more aggressive for us on pricing. So we have a few to the model has evolved. And the one thing that we've been doing really well over the past couple of years is partnering up with distribution. So fintechs that are there that have distribution model, a specific niche, we can buy those assets. So for me, I really see Credigy as a phenomenal tool deep expertise in personal and commercial credit that can allow us to partner up with fintechs that have an origination model that own, call it, the client. But in the end, we can give them the credit box and say, here's what we're prepared to buy from you. So again, going back to fragmentation of financial services. Credigy is a phenomenal tool for us. So we plan on really working more closely with them and actually bringing them even closer to the bank ecosystem to really help us as we keep seeing more fragmentation in the market.

Okay. And last question, Cambodia. ABA, so Ghislain...

You're not going to Cambodia.

Ghislain is now overseeing ABA. Is this more -- you want them to focus on maximizing growth or on managing risk?

No. It's both. Yes. It's both. So we've talked about Cambodia, phenomenal economy. The growth prospects are great. An underbanked market, 50% of the population is still on a bank account. So we're in a really good spot there. So I think we're lucky to have someone like Ghislain who's been with the bank for 10 years. He's been close to the ABA file to keep going and managed that for us. And I think the fact that it's taken a good proportion of our revenue. I think it's important to have someone responsible for that. So it's really -- we want to keep that growth going, but we want to do it at the National Bank way, which is risk management top of mind and good growth for our shareholders.

Well, I think that it's a good way...

It's good timing.

Good timing, yes.

Maybe a question there.

Question, quick.

Discussed the situation...

So they did -- they went through COVID, and it was -- they did really well. We were actually surprised because the economy, the whole tourism went down to 0. But they've really adjusted well. So when you look at their economy, they're mainly exporters. Light manufacturing has been booming, so bicycle parts and auto parts. So they've adjusted quite well. I haven't heard anything in terms of affecting the growth of the country or the outlook when it comes to inflation. So I think we have like GDP growth above 5% this year and next year. So we're -- yes, we think it's pretty solid.

I wanted to ask you about Credigy , and I [indiscernible] with your order growth is on about 28%. And I know that senior management [indiscernible] and diversity. Is there anything impacting when you're doing now evolve is the cultural [indiscernible]?

Yes, absolutely. So the -- one of the things that I have been discussing with the management team is how do we really support diversity, bring it to the next level. And so I want to move away from, let's follow statistics and what the percentage are. And so we have actually a committee that's responsible specifically for initiatives. So identifying mentoring and really supporting people who we want to bring up and that are -- that would help us on diversity. So we started this in the past year, specifically.

Well, we're good.

We're good. Thank you very much.