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

So perhaps we can start the next session here. I have Laurent Ferreira of National Bank. And before we begin, I just want to remind everybody that his 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. So...

That's really well said.

Thank you. I had a lot of years of practice with this conference, in saying that. I can almost recite it from memory. So thank you for joining me today on what...

Thank you. Thank you for having me.

Which seems to be not a bad weather day, so that's great. I do want to spend some time with everybody talking about capital, given the recent announcements with the domestic stability buffer and the changes therein. I think in your case, your capital ratio is on a relatively high area. But all the same, I just want to explore what it might mean for National Bank. Buffer is wider now potentially all the way up to 4. So maybe you can give us a little bit of a thought process around how you view the changes that have come? And what, if anything, will change for you and the way you manage your capital base?

Absolutely. And -- be a pleasure. So a short answer to your question is OSFI's announcement doesn't really change our capital plans or the approach we have. We really like our business mix right now, the capital we have allocated to our various businesses. We obviously like the performance we've had over the years, and also in 2022. So our goals don't change. The priorities don't change. Maintain strong capital levels. We're going to continue to invest in our business. Focus on organic growth is definitely a formula that has worked for us. And return capital to shareholders, right, through sustainable dividend growth and share buyback. So that doesn't really change our plans at this point in time.

So does it mean that you're -- I mean, as we stand here today, you do sit at a higher level of common equity Tier 1 versus your peers. Is that what you're essentially telling me that you're going to keep running at a higher ratio than peers? Does it mean that you'll have the same hurdle rate for future acquisitions? So is it really that nothing changes? Or is it just that you have an opportunity here to maybe let the other sort of catch up to your high capital ratio and not necessarily that you'll keep running at such a wide buffer?

So -- good question, a couple of parts here. So DSP at 3, and the possibility, let's call it that, of it going to 4, we're very comfortable operating above 12. So that's where we stand at this point in time. As well with the economic uncertainty -- I think you heard us last year, we said we did put a pause on buybacks. I think it's just, I would say, a prudent thing to do at this point in time to operate above 12. Now having said that, call it whatever you want, prudence, a bit of luck, we are, we think, at a really good place to keep growing our business, to keep growing the platform and keep investing in the businesses that are performing at National Bank. So we're going to focus on making sure that our diversified business mix, which has been really performing continues, we continue to allocate to these various businesses. And I think you're right. Look, we do have a position right now that we're not looking to save capital. We're not looking to rebuild capital. We're actually looking to deploy capital. So I think you're touching on a good point there. I think we're in a good spot.

Okay. So then moving on to the other topic of the day. I was going to try and say that in French, but my French is not that good, so apologies.

[Foreign Language].

Here we go. Maybe talk a little bit about the mortgage situation. A lot of concern out there that we've got very big mortgage payments in the horizon. Your book is a little different, a lot more in Quebec. Maybe just give us a bit of an overview of your situation where you sit. And can you give us some details around the size of where you think potential issues. We've got a little bit of talk of that this morning with the other -- with the other CEOs. Can you give us maybe a sizing of the part of the portfolio that may pose some risks with higher interest rates?

So just at a very high level, though, right now, not overly concerned with defaults, very comfortable with our position. Obviously, clients are experiencing increases in payment. So we're watching that closely. But we are very -- and we're very active in engaging with them and making sure that they're going to be able to absorb the increases in interest rate. Our book, roughly $60 billion, 1/3 of it is variable rate mortgages. Now -- so that's kind of a good indicator because we have seen increases in payments in that product. Our variable rate mortgages is a fully variable rate mortgage product, it doesn't have any trigger rates. So that has been, I would say, a good data point for us to observe what can client absorb and we've seen increases in terms of payments above 30% in that portion. So that's 1/3 of our book. When we look at the fixed rate mortgages, so 2/3 of our book, right now about slightly over 10% of our fixed rate mortgages are due for renewal in the next 12 months. And if you look at that cohort, we have the uninsured portion, the average LTV is below 40%, and 3/4 of these clients have an amortization period that's below 25 years. So when we look at what's going to happen in the next couple of -- in the next year, we're quite comfortable because we have our clients of variable rate mortgage clients that have seen the increases already. And we're seeing a bit of an increase in delinquencies in the past quarter but it's still below fixed-rate mortgages delinquencies and below pre-pandemic and the -- we are observing that our -- the evolution of our fixed rate mortgage payment, and we're going to see that in the next while. So overall, when we look at the performance of our portfolio, as well as the ability of our clients to sustain higher rates, it's quite good.

And maybe just to dig into that a little bit more because you do have a cohort of mortgages or customers that are facing higher payments. Can you give us a little bit of insight into -- okay, they've had a fairly large increase in their monthly payment. Can you give us some insights into how fast that's depleted maybe the excess deposits that have been built up during the pandemic? And is that the road map that you can use for the fixed rate mortgages that are coming due this year and next?

So liquidity has come down a bit, still above pre-pandemic. So that cushion is still there. Again, I'll go back to what we've observed, and I think that's a really good indication. 1/3 of our book payments gone up. The -- and 80% of that comes from variable rate mortgages. If we look at that cohort, their liquidity is still higher versus pre-pandemic. So they're -- now they're into their first payments. So this is that erode quick, faster, obviously, but they're going to be able to sustain that. So I think at this point in time, overall, the health is still -- it's pretty robust.

And what would a stress test tell us? I mean, what if rates keep going higher? I mean how much can rates go higher? And at what point do you think this could pose a problem for the mortgage book?

I wouldn't want them to go much higher than they are today. I mean, we are anticipating, I think, more increases in interest rates over the next couple of months. But we all -- I think we're all hoping that we're going to see peak rates midyear. I think what's important, the labor market is, I think, a very important component in the risk analysis here. As long as we have a very tight and healthy labor market -- this is not just the interest rate or house prices, it's really a question of managing cash flow through a period of time through a stress. So I think, again, I'll go back, we're comfortable with our position, comfortable with what we're seeing. Do I want to see interest rates? Do I want to see an extra 400 basis point of increases? Absolutely not. And we all hope that rates are going to peak by midyear.

And maybe just the last couple of questions on this topic. Maybe we can just dive into a little bit about -- some of the other things that we see around the edges with respect to the mortgage industry in Canada, I mean, a few things that have been thrown at me is there's too many investors now in residential real estate. And the subprime component of mortgages has grown in proportion to what it was just 10 years ago. Are these things that you see? And how -- first of all, do you see that? Clearly, I don't think you have any subprime in your mortgage but...

But investors, yes.

And so what can you tell us about those 2 issues? And did they concern you?

So the investors, I mean, they're part of the Canadian landscape. If you look at our book, again, $60 billion, I think it's roughly slightly above 10%, the amount of investors that we have. Typically, the investors are -- have a higher credit score at origination, higher saving and the delinquency that we have observed in the past has always been lower with investors than non-investors. So I mean, it's part of our -- of the Canadian landscape. Is it a problem? I don't think so. So we're very comfortable in terms of the risk profile of these clients and our position in our book. Overall, is it a problem for the Canadian real estate market? I think it does put some pressure on housing affordability and rents. But I think governments are definitely aware of that and addressing it in some way. In terms of subprime, but it's 15% of the Canadian market. Alternative lenders, I think we are keeping an eye on them just because they are on the riskier spectrum. I don't see any -- I don't have any strong views or -- I don't see any issues at this point in time. Again, I think what's more important right now is to make sure that our labor market -- and that's the one thing that we're going to keep an eye on is that we have a strong labor market to go through this uncertainty.

Maybe we can use that as a segue into the next questions -- set of questions, which is credit and credit quality and provisions for credit losses. So I do want to touch on provisions for credit losses as well as existing reserves. And I'm going to maybe separate the 2 into 2 sort of different buckets. And I realize you're not the Chief Risk Officer. So I won't go into too much detail.

I'll do my best.

But no, you are the CEO and you could set a tone from the top. And so one of the things that we noticed when we look at how each bank sets reserves -- I'll contrast national with having a base case scenario that doesn't look that stretched, you talked about unemployment. I think the unemployment number that you use is very modestly higher in 2023. So is this to say that really don't see a concern in the marketplace. I don't even think you have a very big drop in house prices. And so I thought that the reserve build you had last quarter was relatively modest. So can you talk about how you see it through your lens as a CEO, how well reserved you are, what statistics you look at and tell Darko why you were well reserved?

Good third party use. So maybe just very high level in terms of the approach, the philosophy, and you know us, very proactive and prudent in general. You go back in time, 2016, we saw in the oil and gas sector, a deterioration. We build up allowances very quickly. We did the same thing in 2020 at the beginning of the pandemic. So very proactive. We also have management overlays. We have a stagflation scenario that we put in last year. So I think in terms of the approach, very proactive when we see a negative situation and general, I think, prudent in terms of building up, but also releasing. In terms of credit quality, I think the most important thing is cycles, right? I think cycles are very important. When you look at our growth, our loan growth pre-pandemic, right? We were below peers by 200 basis points approximately across the commercial spectrum. Why? We saw the end of the cycle. We felt a little bit concerned in certain areas. We hit pandemic, then we saw opportunities and we build up there. You saw also us put the brakes on Credigy last year, right? So while we're seeing interest rate increases, there's uncertainty on how everything is going to unfold. So that's a great asset, by the way, to have the ability to turn the switch on and off in terms of deploying capital, when you know there's uncertainty, you know that what you buy today is not going to perform as well as what you would buy in 6 months from now. I think it's a great asset to have in the tool. So you have to look at cycles and you have to adjust quickly. So on your business, you put caps -- so now in terms of our provisions overall at this point, our total allowances are approximately 50% above pre-pandemic level at this point in time. And our performing allowances are 6.4x our last month -- last 12-month impaired PCLs. So I think we're really well provisioned. We still have a very proactive, prudent approach and a culture of risk management. So I do think we're in a really good spot. You heard my comments overall on our position in terms of our mortgage book. We feel very comfortable overall with the risk profile. And we also feel very comfortable with our -- the ability of our clients to keep paying, right, and to sustain higher payments.

So a couple of follow-ons there on that. So when you say it's 6.4x the last 12 months of losses, the last 12 months losses are like...

Very little.

The lowest we've ever seen. So...

But -- okay. So we're approximately 3x prepandemic -- last 12 months prepandemic. So just as a -- you're absolutely right. So...

So 3x. And what would have -- I mean, I have to go back now -- we're not going to be up here splitting hairs on numbers. But look, I think the next sort of logical walk-through on that would be -- well, you're expecting PCLs to rise. And you've given us a range, a fairly wide range as you normally do, and I think 15 to 25 basis points. And I think based on that, looking at consensus numbers, it looks like your earnings per share growth really can't happen this year if we use sort of the midpoint of the range. So -- is there anything you can help us with? It's a wide range? Is it more likely that it comes in this year at the lower end of the range? Or is there any thoughts on how you could maybe overcome this normalization of credit and actually produce EPS growth this year?

So we did give the range of 15 to 25 last quarter for impaired. We expect them to be at the lower end of that range. So that's what we expect. Now in terms of factors for EPS, I think the most important one is going to be a pretax, pre-provision growth for 2023. And I think the one big factor that we have at this point in time is our capital position. I think that's going to give us the opportunity to keep growing our franchise and deploy capital organically. So as we stand right now, as I said, impaired, low end of the range, and we see growth opportunities in all of our businesses for 2023.