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

[Foreign Language] For those who don't know me, my name is Jean-Philippe Cousineau, I'm Head of Sales at National Bank Financial. I'd like to welcome you all to the 21st Financial Conference of Montréal. It is a great timing to have this conference this year. It's interesting times for financial institutions, for the banks, for insurance companies as we're seeing governments around the world do a major tightening cycle, which brings a lot of challenges to financial institutions. In fact, when we did this conference last year, it was the first time the Canadian government raised rates, and they went from 25 basis points to 50 basis points. And this year, 1 year later, it's the first time that the Canadian government took a pause at 4.5 for their overnight rate. So big changes in the last year, which puts a lot of stress on financial institutions on their funding costs, on their margins. And we saw what happened in the U.S. We saw what happened also in Europe. Some of the topics that could be addressed in the next few days, that and obviously, the budget that we saw last night from our Canadian government. [Foreign Language] I would also like to highlight our two luncheon speakers that we're going to get. Today, Toni Gravelle, the Deputy Governor of the Bank of Canada that oversees the bank's financial system activities, ensures responsibility for setting monetary policy, will make a short presentation. It will be followed by Q&A that would be narrative by Warren Lovely from National Bank. And tomorrow, [ Stephane Manuel ], that I'm sure everybody knows, one of the best economists in Canada, and I would say North America, will be our speaker for the luncheon speaker. [Foreign Language]. So on that, I'd like to welcome you all. Thank you all for coming. [Foreign Language].

Thanks, JP. And welcome, Laurent, and thanks, everybody, for filling out the room here. I'd like to kick things off with a big-picture question. A lot of interesting things have happened over the past few weeks, bank failures, forced mergers, just to name a few. I'd like to get your perspective on how these events impact the Canadian banking sector, in particular the National Bank.

Absolutely. So first of all, thank you very much for being here. This is an exciting day for us. This is a great conference. And so very happy to see that we have a big room here with lots of people and all the people online as well, welcome. So yes, the past couple of weeks have been quite interesting to say the least. It has definitely brought some concerns overall about the banking sector. Now the Fed, FDIC, I think the government's response was swift, robust, and it was the right thing to do. I think the resolution of SVB, the fact that we have now a buyer with First Citizens. Definitely, a good thing for First Citizens' shareholders. I think that's a very positive outcome as well. In Canada, I can assure you that the banks, the regulator, the federal government, the Central Bank, we are communicating constantly and we are very tight group. I think if there's one thing we have to be proud of in Canada, it's our banking sector. We have with our concentrated 6 D-SIB. We have prudent risk-taking in Canada, and we have, I think, overall, better oversight with OSFI. Now some takeaways. I think that what has happened and the key factors. When you go back, and JP was just talking about it, early 2022, we have rising inflation. You have a monetary policy that the signals were there, interest rates were going to go up. When that happens, you have uncertainty, you have macroeconomic uncertainty. Well, you do put on a defensive posture in your liquidity, your risk and the way you deploy capital. And that's what we communicated throughout 2022. I think it's the same, it's -- today, it's still very relevant in terms of defensive posture. So I think that's one takeaway that when you see uncertainty, you put on the brakes and you put on a defensive position. The second thing is your business model. I think having a diversified business model with funding sources from different industries, from various businesses is key. We're a big fan of the universal banking model. I think we've struck a really good balance in terms of the revenue streams that we get from retail, wealth, wholesale. And that matters when you go through cycles and when you go through crises. And the last thing is, well, people and culture matter. A risk management culture is key in banking. And having expertise and experience at the table is very important when you go through a stressful period. And the best example we have with the bank and Louis, my predecessor and myself were advocating about this, having strong people in financial markets, treasury and risk to manage liquidity, volatile markets during a stressful period is very important. So those are the takeaways. Our message to our employees is very simple, stay disciplined, stick the strategy, and let's talk to our clients. And we're going to get through this. So we're in a good spot.

We have a couple of minutes left here before we switch over to Marie Chantal. On the Q1 call, you sounded pretty cautious in your outlook. I imagine recent events have not -- maybe you feel suddenly more bullish. I just want to get your perspective on the recession and your view on soft landing scenarios. And then relatedly, how the resilience of the Quebec economy helps National in that -- against that backdrop?

So the -- we turned a little bit more cautious. I think we are definitely starting to see a slowdown. Consumer behavior, business investment, we're seeing that. I mean, you raise interest rate by 400 basis points; at some point, it will have an impact. I think the pause that the Bank of Canada put in place was the right thing to do. I think the -- I was advocating for a pause way before that. I think the Fed should put the breaks on as well last week. I think -- I don't think they should have raised the rates. So yes, we are a little bit more cautious because the slowdown is there. So we are definitely seeing -- we are seeing it in our volumes, essentially. Inflation rates, there's still uncertainty around where all of this is going to land. So you have to be prudent, right? And that's -- those were essentially our messages. Now in terms of resiliency in the downturn. Overall, Canada, strong labor market. So that's a very good thing. I think longer term, immigration will support growth. As for Quebec versus the rest, like we do have, I think, a better position in the start of the downturn versus other provinces because lower leverage, lower housing costs, higher saving rates. So those are factors, I think, that will help Quebec. The economy is a little bit more diversified. But long term, the fundamentals are strong, right, for Canada because I think labor market, I just mentioned it. Energy transition could be something that -- for us, and we started with the budget. I think at least it's a start. I think our government focused on providing incentives for investment in Canada. So longer term, I think we'll be fine. But for sure, there is still, I think, a lot of uncertainty on how severe the slowdown will be. And do we have a recession? Again, labor markets are there to, I think, soften that blow.

Okay. Well, Laurent, I'll -- maybe we switch it up now and...

We can switch it up. Thank you very much, everyone. Have a good day.

Maria Chantal. So Maria Chantal is the CFO of National Bank for roughly a year now. There's a lot of juicy topics to get into, which I have on my question list. But first, I'd like to start with your first year perspective in the job, what have your observations been across the bank, and what some of your key priorities are in the next few years anyway.

Perfect. Thank you, Gabriel, and good morning, everyone. Happy to be here. Happy to meet a lot of you this morning for the first time. So already 1 year in the role, 25 years at National Bank. And I have to say that the past 12 months have been definitely fascinating times. I certainly did not expect the last February to have so much turbulence and volatility in the market. But you know what, this is when 25 years of experience and a few cycles along the way come in handy. And as Laurent said, a very experienced management team and a resilient model, which brings me back to your question. So in terms of observation. I think the one thing that I'd like to share with you today is National Bank has had a consistent strategy over the years, which has proved and given us a very solid performance. We've generated a high -- in the high single-digit PTPP growth CAGR for the last 10 years, positive operating leverage every year but one. So that's the secret of that strategy. It boils down to three important factors. And if there's one thing that's important to remember today, I think that's it. So Laurent mentioned it, a diversified business model, first. Second, a prudent approach. And third, a balanced prudent and risk profile. So combining all these three factors is really what makes National Bank's performance solid. So priority probably seeing me coming with this. Continuity of the strategy is a top priority for us as well as performance and governance in order to drive value, continue to manage risk and continue to deliver superior ROE. So basically, that would be my some observation and priority for -- after the first year.

Well, that's good. I do want to talk about the -- you mentioned the PTPP growth that the bank has delivered, high single digits and positive operating leverage for -- except for 1 year. On the Q1 call, and I guess Q4 guidance was for this year to be in the mid- to high single digits. The world has changed a lot in the last few weeks, the last couple of months. I'm wondering, given some of the headwinds that may be intensifying and other factors that may be on the horizon, how are you thinking about that guidance at this point?

And Laurent mentioned that we're definitely seeing a slowdown in volumes, for example. So there's still a lot of uncertainty. But that said, we are still planning on achieving our mid- to high single digit for 2023. So how are we going to be doing this? It comes down to two of the factors that I just shared before with you. So our business mix and our prudent approach. So let me just elaborate for a few seconds on both. So on the business mix, we have a very good balance between our retail and wholesale commercial businesses. We have a resilient financial market franchise. We have a specific strategy on the international side. And when it comes down to our Wealth business and Financial Markets business, they both represent 25% of our revenues with each a very differentiated strategy. So all of these factors in our business mix allows us to continue to see our outlook for PTPP. Now on our disciplined approach, we are constantly managing business growth while investing in the business. And cost management discipline is key in each of every sector. And they generate some of them a best-in-class efficiency ratio. So when you combine all of this, it makes us very comfortable in achieving our target. And to conclude, we have a solid capital position that allows us to continue to generate opportunity and grow the business across Canada, and we see opportunities in all of our sectors.

Great. On the -- let's break down the outlook a little bit into the components of the revenue and then the expense side of the equation. You did cite lower loan growth and fading margin tailwinds in the year ahead is making you a bit more cautious on the revenue growth outlook. Is that -- do you maybe gotten a bit even more cautious since like Feb?

Maybe I can talk a little bit about our NIM outlook. So we're very pleased, obviously, with our net interest margin, excluding trading in Q1, and if you remember, excluding those nonrecurring items that we had in there, what we really have to look at is 2.15. So if we give a little bit of the drivers driving that increase, and then I'll go to the outlook, our strong deposit base for sure is something that was really a big factor in our Q1 results on the P&C front and on the wealth management front as well as good performance from treasury in terms of funding with the year-end -- calendar year-end. So when you look at those drivers, and we look forward, well, of course, there's a lot of uncertainty in terms of interest rate trajectory, migration of deposits from demand to term deposits. So that makes it a little bit difficult to predict at this time. But as of now, we do see NIM subsiding in the next few quarters for the remaining of the year.

You mean still positive, but maybe the pace of expansion.

The pace. Yes.

Yes. Got it. And then on expenses, I mean, I don't want to single out National, every bank had a big spike in expenses and every bank, the biggest -- if I look at fixed costs, the biggest driver of fixed cost inflation was fixed compensation, get the messaging from pretty much every bank, including yours, is that expense growth will moderate. How does that -- how is that achievable if that one particular bucket is the bigger driver of cost expansion?

And you're right, our expenses in Q1 when we exclude our nonrecurring item last year, what you really have to look at is 8%. And you're right, the biggest driver of that was talent acquisition in 2022 and inflation. So probably a big 50% of the growth. Then there's the IT investments that we invest. We continue to invest in our businesses. And to a lesser extent, discretionary fees, mainly business and travel considering client activities have stabilized or normalized, I should say, compared to last year. So now how are we going to be managing those expenses going forward? Well, first of all, the 8% growth that we've driven in Q1, we don't expect that growth to be at that level for the remaining of the year. And why is that? Well, first of all, we have a, like I said before, very disciplined approach in all of our businesses. So what we're doing right now is being very selective and strategic on our expense management. For example, new hirings, discretionary fees. All of our business lines are really prudent. Laurent mentioned it before. And if revenues weren't to not materialize at the level that we are expecting, well, there are some levers that we can activate, usual suspects for sure, in terms of variable compensation, new hirings, as I said, discretionary fees, reprioritizing our investments. So that's how we're going to be managing this. And our sectors are really balancing revenue growth and expense management dynamically all the time.

For what it's worth, I'm doing my part on Monday night on Montréal, I had a shawarma for dinner. So I kept it. Now I'm going to transition into the more recent events, I guess, and very recent, last night or yesterday afternoon, rather, the federal budget came out and there are 2 standout items that impact the banks. One, the reductions to interchange fees, [ turret ] to small businesses. And then the -- now dividends, financial services companies are being singled out. The dividends they receive will be taxed as business income. Can you talk about the -- it's early in your assessment, I'm sure, can you talk about the impact that these 2 items may have?

Next question. Seriously, it's still very recent. Of course, we all saw that last night and actually it was a bit of a surprise on the dividend front. So that said, our very first initial estimate is really nonmaterial. So maybe approximately 1% of our revenue on the dividend front. And on the interchange, considering our market share in Canada, it's really, really nonmaterial for us. So I think at this point, that would be very...

So credit cards, 1% of the bank's revenue is an interchange and even smaller.

Very irrelevant.

Okay. Then on the dividend taxation issue?

Well, on that front, as everyone knows, it's -- a lot of banks have filed notice of a bill for that, and we are looking at this very diligently, and we won't be commenting on that event.

Got it. So you -- in your -- one of your answers to a previous question, you talked about the shift from zero cost deposits into fixed term deposits, big issue in general, even ahead of last few weeks events. Firstly, do you have any quantification of uninsured deposits on the bank's balance sheet? And then as far as flows go, I'll throw a few questions there, have you seen any acceleration of outflows perhaps or any indications rather, I mean, not that acceleration is bad word, but any indications of that? And thirdly, the trends that we've seen over the past few months, higher pricing for deposits and then that shift out of zero cost into fixed term, have those trends accelerated at all? I can repeat those if you...

Okay. A couple of items in there. So let me start with, first of all, so exposure. So as I said before, our model is diversified, but mostly activities are in Canada. So exposure for us is really not a material. U.S. regional bank exposure, not material. And European bank as well, not an issue for us in terms of exposure. Now second part of your question on deposits. So in that front, so maybe I could start by saying that we do have a centralized governance in managing our balance sheet, and we monitor our deposits daily. And for sure, in the past couple of weeks, we've done it with a little bit more scrutiniity. And as of now, what we're seeing is not a change in customer deposit behavior quarter-to-date, our deposits are still up sequentially. So that's very reassuring. As I said -- and as I said, our business is really broad Canadian. So Brazilian banking system.

So quarter-to-date, deposits are actually still growing.

Yes.

Okay. So the opposite of what's going on elsewhere.

Exactly.

And as far as the trends we've been seeing, whether it's the substitution effect out of zero cost into fixed term and just pricing in general, is that still -- it hasn't accelerated or anything like that?

Hasn't accelerated. We -- still the same trends that we're seeing in the past couple of weeks or months in shifting from demand deposits to term deposits. So -- and I think that's not different for any other banks. It's an industry behavior that we're seeing, very normal with the interest rates, right?.

While we're on this deposit topic, and you did mention the NIM performance in Q1. And that's create a lot of questions for analysts and investors and how is that possible that National could deliver that strong performance. Is there any simple way to break down or illustrate how it exceeded expectations, I guess, is how I'd frame that.

Well, I touched base a little bit earlier, but our strong deposit base in P&C and Wealth is definitely a factor of that performance. So deposit spreads were mainly the most important factor in our good performance. We had very little impact from our mix of loan growth versus deposit growth. So that was pretty much negligible. And the deposit spread positive impact was partly offset by loan spreads, considering competitive dynamics in the markets. And maybe last item that I mentioned as well is good performance of treasury in Q1 in terms of funding, considering the year-end seasonality.

I guess that's -- the bank's funding strategy is a little bit unique relative to some of the other banks. And then can you comment on the -- just maybe the funding strategy overall?

Yes. So maybe I can talk about the funding strategy. So -- and I'll bring it up a level a little bit. So our funding strategy really relies on three important pillars. So a diversified deposit strategy as we've mentioned before. That's the first thing. We maintain a good resilient risk management in terms of liquidity. And we also are very active in accessing different sources of funding in terms of institutional. I think Laurent mentioned it also as well. So that's how we go on managing our funding at the bank. It's an integrated view. And -- so when we look at it, we look at it from a bank perspective, and we don't look at it from a P&C funding gap perspective because that -- sometimes that's what we're hearing from National Bank. So it's really to look at it from a broader view.

Okay. Another issue that has come out of the U.S. is the unrealized losses that banks have in their held-to-maturity portfolios. The numbers aren't that -- they're not even comparable. I mean, that could be the answer in and of itself, but can you maybe just tell us why investors shouldn't be concerned that you might have to realize some losses here and your outlook there?

And you're right, investors should not be concerned. Clients should not be concerned. System is very different in Canada, as you've mentioned, and we're seeing it with a minimal impact of those losses. So first of all, realizing those losses would probably be a very unlikely scenario as we have lots of liquidity that we can use before going there. But if we were to go there and realize those losses, it's really nonmaterial for us, as you've mentioned. So it's about $300 million net of taxes. And on our capital, it's not even 25 basis points. Considering our solid capital position at this moment, obviously, it's not an issue for us. So absolutely no worries on that front.

If I may just peter off towards the Credigy and ABA. First, on Credigy, this could be a positive development for Credigy, what's going on in the U.S. now. Is it too early to say they're seeing opportunities from distressed asset sales or anything of that nature? Or is that starting to come on the radar?

You're right. It's always -- those events in the markets could definitely be opportunity for Credigy. And Credigy is also applying the same principles that we do in terms of prudence. So they will definitely be very prudent and not make any sudden move to take -- to grab some opportunity. But I'm pretty sure it should be quite interesting for them in the next couple of weeks and months.

And as I understand it, their strategy now is primarily on prime originations or secured rather.

Yes. Secured.

But it can pivot pretty quickly if other opportunities present themselves.

It could. But in the past recent, they are more on the secured business.

Okay. And then I guess, the ABA question would be, is there any -- I mean it's obviously far away from here, but you're still confident in the growth outlook you laid out for ABA.

For ABA, yes, great asset with always a great outlook in terms of growth, considering the demography, the banking system there, China reopening. So yes, we're very confident in the business for ABA.

We've got a few minutes left here. I'd like to wrap up on capital. One more of a growth-oriented one. I know that maybe that seems odd to go back to growth right now. But given the bank's capital position versus its domestic peers, you're not as constrained in terms of which avenues of growth you can pursue and how many you can pursue. Are you actually seeing that capital advantage play out in your originations or your volumes?

Definitely, we're very pleased with the capital position that we have. And we like where we are right now. So maintaining strong capital ratio is definitely a focus. And we've been saying it for a few quarters now, growing organically is our number one focus in terms of capital, and we are seeing opportunities throughout Canada with all our businesses. So you -- so this will allow us to continue to generate performance as we have that flexibility. However, we're still being prudent as mentioned a couple of times, in order to make sure that we are making the right choices to continue to drive performance for the bank.

So back in December, as everybody knows, OSFI not only increased the domestic stability buffer, they increased the range from -- to the upper end of 4%. We're not there yet, but could be. Does the bank operate under the assumption that in theory, that 12% minimum requirement, is it in place at some point? Because it theoretically could be in June, maybe not, but...

Yes. Well, we've been operating at that level even before OSFI augmented the domestic stability buffer. So it just makes us really happy to be in that position in the event that they would raise it again. We'll know next June is the next window where they could decide to raise it. But it just happens that we're at that level, and we're very happy with that.

And you're happy at the current level, not planning to build above that.

We're happy at the current level. This is where we like to be.

Okay. And is there any, I don't recall, but the Basel IV impact?

The Basel reform.

Yes. Do you have any quantification there?

Yes. So a lot of pieces are moving pieces still. This will be effective next quarter. So right now, what we're seeing is a positive impact from Basel coming in the next quarter, but we'll see in May next play.

Okay. And dividend policy is still -- I mean, is there...

Sustainable dividend...

Low end of the range, that's where you operate.

Yes. Yes.

Are there any questions from the room? Yes, we have one here.

I had a question regarding commercial real estate. You are building a building now. And obviously, there's COVID, inflow, outflow of staff. And what percentage is being by your staff? And within the real estate it can be a drain because they're spending so much on leasing. I think a lot of companies might have this issue. And is that an issue?

Well, as you know, National Bank, we've -- I think we've shared it a couple of times. We -- flexible environment is what we look at for our employees and 40% of our employees in the office is what we operate with at the moment. In the new building, even before pandemic, we had already started with this flexible time with our employees. So we have not planned to have 100% of space for all of our employees. So that said, I think we're in a good place for this change of head office coming up next spring that will be very interesting, not only for our employees but also for our clients who will have a great environment to have meetings with us.

Well, that's a wrap. Thank you, Maria Chantal for your time.

Thank you, Gabriel.

Enjoy the rest of the day.

Thank you.