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

Okay. We might as well get started with our next session. Very happy to have Laurent Ferreira here, the CEO of National Bank. And before we begin, I will remind you that certain Laurent's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections or conclusions in these statements. Listeners can find additional details in the public filings of the National Bank of Canada.

Laurent, thank you once again for coming to our conference.

Thank you very much. It's a pleasure to be here. So I think in your case, there's some very obvious questions that come up. And the most obvious place to start is, I'd love to explore a little bit more of the Canadian Western Bank deal, now we know, in terms of approval. Maybe just to start this off -- maybe why don't I just open the floor and have you give us some updated thoughts and views on CWB and then I want to dive into some specifics on CWB.

Absolutely. Well, we're obviously very excited. You just mentioned it. We got approval. We announced also our close date, which is February 3. And our focus is going to be day 1, really employees. So onboarding employees onto the National Bank HR platform. And then throughout the year, portfolio by portfolio, we're going to be welcoming all the CWB clients on the platform. So that's the plan for the year. It's a big year for National Bank, a significant acquisition for us, our largest in our history and a significant step towards growing our P&C platform outside of Quebec. If you look at -- if you take the total revenues for P&C at National Bank, 80% Quebec, 20% outside of Quebec, this changes and it brings it to 60%-40%. So a significant step towards growing our platform. And then we know that this is going to have a significant impact on our capabilities to grow organically faster outside of Quebec.

And so maybe just picking up on that point right there. CWB had always kind of had aggressive growth targets as a bank. So maybe you can talk about the growth targets that you think are appropriate for CWB now that it's under your -- and the first thing that comes to mind for me just is lending limits, right? You're a bigger bank. You're on AIRB, which we could probably talk about, too. But should we think of CWB as potentially having a significantly higher growth profile under your watch?

So, a very good question. At a very high level, I think the way to look at it and we'll get into specifics about metrics in our results in Q1. We'll be able to disclose more of that. But a way to look at it at a very high level, take CWB's operation, put them on National Bank's commercial banking operation and take a 2- to 3-year -- 2- to 4-year time frame and we see the ROE of CWB get to the level of the National Bank's commercial banking ROE, right? So that's a good way. And look, there's cost synergies, funding synergies. There's -- you mentioned capital. We have, obviously, plans on revenue synergies as well. All of that is upside for us. And CWB becomes much more competitive, liquidity, capital. So all of that, we'll be able to talk about throughout the year and provide more visibility on this.

Maybe just to be very explicit because I don't have my model in front of me, what is the commercial ROE that we're talking about at National Bank? Like what is the -- I don't have it in front of me. And I don't even know if you guys actually split it out but I got to ask.

We don't disclose it but the total ROE of CWB is around 10%. We think there's -- over this 2- to 4-year period, we think there's about 500 basis point of upside in terms of ROE.

Okay. Great. Fantastic. And so sticking with CWB just for a moment. One of the things that we've seen in the last couple of quarters are elevated losses. Does this mean your credit mark has to change? Obviously, I guess that gets determined on February 3 or -- but maybe you can speak to what we've seen from credit quality perspective.

Absolutely. So we'll update those numbers at our Q1 call. So yes, PCL is elevated but it's normal. We're smack in the middle of a credit cycle. So this is -- and commercial losses are going to be lumpy. And so what you saw in Q3, 2 specific files, which explained half of their impaireds. And what you saw in Q4 was related to manufacturing and trucking or transport, which we know that the -- there are certain industry issues right now in the trucking industry. So no surprises in terms of having elevated PCLs at this time in the credit cycle. We look at our numbers for Q1, we think we're going to be at the top of our -- of the range that we've disclosed, which is normal, right? We've got -- we've had 2 years of restrictive monetary policy. So we're right in there. We're at the peak of the mountain and I think we're going to be there for a couple of quarters.

Okay. Fair enough. And just maybe discuss -- I think you've not really discussed revenue synergies with CWB. Is there an intention to discuss that at some point? Or -- and am I barking up the wrong tree? Is this not a material...

Is it nonmaterial?

Yes, is it nonmaterial?

I think it is going to be material. So the #1 focus will be Commercial Banking. If we look at National Bank's profile, we've got upside with the integration of CWB on fee-based revenue. So noninterest income at National Bank is 20% of our revenue, CWB 10%. So that's one. There's a lot of NII optimization as well. When you think of just purely deposits, CWB funds a lot through broker channels. We're not going to do that. And we have a cash management platform that we'll be able to offer to our clients. So a lot of the focus initially will be on commercial clients and getting them to the model of National Bank, right? And so you're absolutely right. We haven't disclosed this. We're going to start talking about it this year. when and how and which metrics that we want to follow and that we'll disclose, we haven't determined that yet. But it is -- at some point this year, we'll be able to talk about it. But it is material in our mind longer term for sure.

And it's a big acquisition and I'm really curious to see how the branding comes along. But the question that I get a lot from investors is the cultural differences. Can you speak to that a little bit? And do you see that as an impediment or as something that can help you?

That's a great question. I don't -- I definitely don't see it as an impediment. I see it as a cultural booster for us. The similarities are -- they are very close, values, the way we approach clients, the way we manage talent. We spent a good 2 years discussing this possibility. And the discussions were around the fit. And we spent now 6 months since the announcement, working together on the integration. On a weekly basis, there's employees of CWB in Montreal and employees of National Bank in Edmonton. And I have yet to hear something negative about the culture fit. It's on the contrary, very encouraging, very positive.

Okay. I'm going to maybe save some questions from the audience on CWB. I'm sure they're going to come through. So maybe we can skip over to the other second most question, I suppose, or highest level of concern that I get from investors is a discussion on ABA and the recent increase in impairments, some PCLs there as well. And so when I -- and to fill this out, I mean, we've seen an increase in the impairment ratio. It's 25 basis points higher than prepandemic. And the elevated formations are a result of a longer resolution process that you guys have discussed. So maybe we can talk about that first. And what gives you confidence that if we have this elevated or long sort of workout process that we're not going to get more and higher gross impaired loans and an overall higher level. So maybe you can just touch on that for us, please and sort of flesh that out that longer resolution process and why we shouldn't be concerned that the gross impaired loans will be piling up.

Certainly. Maybe I could talk a little bit about the economy first and what we're seeing. So the economy is definitely trending below potential and that's part of the reasons that we are seeing some difficulties in the market. Having said that, we are starting to see certain positive signs. There's a new manufacturing coming into the market. Infrastructure build is apparent in Cambodia. We also have a new government, which is really pro-business, focused on attracting foreign direct investments, focusing on growing manufacturing capabilities in Cambodia. So there are certain signs. Export is starting to pick up again. Tourism is not where it was but trending in the right direction. So I would say, difficult 1.5 years in terms of the economy, still growing at around 4.5%, 5%, below its potential of 7% approximately. But you look at the performance of ABA through this cycle, it has been really good. So we're able to stay out of the trouble areas, grow the franchise, keep growing on the client acquisition side. And yes, so impaired loans are -- certain formations are up. And what we said in Q4 is, we believe that gross impaired loans are going to continue to go up. Although formations, we believe, have peaked at this level or we were some -- at the higher level at this point in time. In terms of the workout process, so that's the one frustrating part that we have is that it is taking much longer. But I have 0 concerns at this point in time with the process. So when we look at files that have been resolved, the net charge-offs are very low. I have spoken to the Deputy Minister in -- this fall about what's going on. And there is a backlog in the system. They have a problem with capacity right now.

That's just being the judicial system to me?

Yes, absolutely. And so -- and when we look at files that have been resolved, right, it has been in the favor of ABA. It's -- and so in terms of abiding law, it's as clean as it could be. So -- but I guess the frustrating part is, why is it taking so long? And I keep asking the question. I get the same answer, spoke to government. They gave me really good confidence in addressing the situation. And hopefully, it's speeding up again.

And I guess the concern has always been, from my perspective, from the outside looking in, I'm definitely not an expert on Cambodia but if we have a long process, then there's the potential for the asset that's backing the loan to degrade in value. And I don't know much about real estate there. So I'm always concerned that if we have this long process, that real estate values and the collateral backing your loan could drop significantly. So what do you -- what gives you confidence that...

Well, I think it's -- I think the economy is what we need to follow here and is -- are we trending back towards potential? And we are starting to see signs that we are trending towards potential. But in terms of our collateral, we watch carefully loan-to-value at -- once we -- at assessment during the life and when they're impaired as well. So impaired loan-to-value, approximately 50%, on average, 50%. And that's why the net charge-offs are so low. And the overall book, the loan-to-value is approximately at 40%. So good collateral, right? So it's houses, shophouses. It's not condos, it's not office, not warehouse and low loan-to-value and a process so far that we feel confident in.

So if we're seeing some improvement in the economy, should we start thinking about once again an acceleration of growth for ABA?

Well, we're well positioned. And what gives me really good confidence is, throughout this more difficult economy, we've seen an acceleration in client acquisition. And that comes from an ability to price that dynamically deposits. Our digital app is -- in Cambodia is phenomenal. They're market-leading. And when you think about digital payments, mobile banking, POS, 50% market share. And so -- and what that has done, it -- when you have a leading tech stack, you are able to attract sticky low-cost deposits. And we estimate that the technology is responsible for approximately 70% of our deposits in Cambodia. And so they migrate to the platform because it's such a fantastic payment platform.

So in the past, I think we had seen pretty strong branch growth. Are you suggesting now that branch growth really isn't necessary?

So that's a good point. So we did -- we kept growing the -- so you need both. You need visibility, you need a good tech stack. And so we've been increasing the network. So I think we've added in the past 2 years, more than 10 branches across the country and probably the only bank that has been doing that. It's both, right, getting more visibility and a very strong digital capabilities. The brand is really strong as well. ABA is a household name in Cambodia. So it attracts a lot.

So I don't want to kill the rest of our time talking about ABA because there's a lot of things to talk about. But just one last thing that might be helpful for investors to think about here is, can you talk a little bit about the risk controls that you have in place and governance procedures and things like that, that might make everyone feel a bit better about the position. And by the way, I might weave this into the question on AML because I don't know how AML is done in Cambodia. But over to you, maybe you can talk a little bit about governance and control.

So we own 100% of the bank. We control the Board, strategy, culture. I have a monthly call with management and go over results. Our CRO is -- provides oversight. Our Chief Compliant Officer (sic) [ Chief Compliance Officer ] is -- assists to a -- the compliance committee of the Board. And the Board is ex-National Bank employees. So Chief Credit Officer, ex-Treasurer, the person who ran our branch network is on the Board. They're retired. They keep helping us there. So I feel very comfortable in terms of the overall governance that we have. And Cambodia, has elevated itself in terms of a country. Financial Action Task Force reviewed the country last year and said that Cambodia has reached now international standards in terms of AML. So it's -- we're comfortable with the type of governance that we're doing in the country. And the country itself is very serious about standards as well.