National Bank of Canada ($NA)

Good morning, and welcome to National Bank of Canada's Second Quarter Results Conference Call. I would now like to turn the meeting over to Marianne Ratte. Please go ahead, Marianne.

Welcome, everyone. We will begin the call with remarks from Laurent Ferreira, President and CEO; Marie Chantal, CFO, and and Jean-Sebastien Grise, Chief Risk Officer. Our business heads are also present for the Q&A session, including Julie Levac, Personal Banking; Judith Menard, Commercial and Private Banking; Nancy Paquet, Wealth Management; Etienne Dubuc, Capital Markets and [ Bill Bane ] International. Before we begin, please refer to Slide 2 of our presentation for forward-looking statements and non-GAAP measures. Management will refer to adjusted results unless otherwise noted. I will now pass the call to Laurent.

Marianne, and thank you, everyone, for joining us. In the second quarter, we delivered EPS of $3.23, up 13% year-over-year. We generated a return on equity of 16.8% and while in -- while maintaining a strong CET1 ratio of 13.54%. Despite macroeconomic uncertainty, clients remain active throughout the quarter and market conditions were favorable. This was reflected in strong growth in both our balance sheet and our fee-based businesses. We also benefited from credit performance, the realization of cost and funding synergies and momentum in revenue synergies from as well as share buybacks. On the capital deployment front, we remain active on our NCIB. To date, we have repurchased 8.8 million shares under our program, which was upsized during Q2 to enable the purchase of up to 14.5 million shares. Our strong earnings power and capital position also support an increase in our dividend with today's announcement of an $0.08 or 6% increase -- this brings the quarterly dividend to $1.32 per share. During the quarter, we completed the syndicated loan transaction with Laurentian Bank -- and earlier this month, we received clearance from the Competition Bureau for the retail and SME portfolio transaction, which remains on track to close by year-end, subject to remaining regulatory approvals. We are committed to operating with strong capital levels and continue to target a CET1 ratio converging towards 13% by year-end of 2027. Turning now to our economic outlook. Uncertainty has increased significantly with the war in Iran, which has impacted the global and Canadian economies. We expect the complex to drive inflation and higher rates as supply chains for critical goods are disrupted and reconfigured. This uncertainty could further impact business investments, which have slowed down over the past couple of years due to tariff-related uncertainty and excessive regulation. But if we look beyond the near term, Canada is well positioned to benefit from ongoing efforts to reindustrialize our economy, undertake major projects, make Canada and energy superpower modernize our defense sector and create champions and invest in Arctic infrastructure to support defense, energy and critical mineral development. On this I want to acknowledge the leadership shown by the federal and provincial governments to rebuild Canada's economic sovereignty. Structural changes are required to adjust to the evolving economic and geopolitical landscape and National Bank will be there to support clients and our country's economic priority. Turning now to our business segments. P&C Banking generated net income growth of 18% year-over-year, driven by strong growth in lending activity and mutual funds as well as credit performance. Operating leverage was positive in the quarter. Personal Banking mortgage volumes was up 12% year-over-year, supported by a resilient housing market and share gains in Quebec. Personal deposits were slightly down sequentially as strong equity markets drove increased client flows into investment solutions and generally higher portfolio levels, contributing to an 8% increase in total personal savings year-over-year. In Commercial Banking, deposits were up 7% and commercial loans were up 5% year-over-year. Despite macro uncertainty, clients were active within the National Bank originated loan portfolio growing by 11% year-over-year. The CWB legacy book declined by $400 million sequentially, primarily driven by commercial real estate. Our outlook for the year on commercial lending remains positive, while acknowledging that the macro context has shifted with the conflict in the Middle East and with heightened uncertainty around the path of inflation and interest rates. Net income in our Wealth Management segment increased 18% year-over-year to $277 million, supported by growth across the franchise, including strong fee-based and transaction revenues. Assets under administration grew 14% over the same period to reach nearly $940 billion, benefiting from resilient equity markets and strong net sales. Capital Markets generated net income of $490 million. This notable performance reflects the strength of our business mix and strong execution. Trading conditions were favorable in the quarter. Our performance in global markets was primarily driven by strong client activity, including in equity structured products originations, commodities and rates as well as higher market-making volumes more broadly. Record results in Corporate & Investment Banking reflected sustained client activity across M&A corporate banking and ECM as well as continued investments in our franchise. Credigy generated net income of $46 million, up 15% year-over-year. Average assets were up 10% over the same period and 1% sequentially as we continue to benefit from recurring flows from established partnerships. We remain highly disciplined in pursuing new deals given the prevailing competitive market dynamics and pricing conditions. At ABA Bank, net income increased 10% year-over-year, reflecting balance sheet growth and lower PCLs, partly offset by a higher efficiency ratio. Loans were up 12% year-over-year, while deposits grew 15% and over the same period. I will now pass the call to Marie Chantal.

Thank you, Laurent, and good morning, everyone. We delivered strong results in the second quarter. revenues increased 7% year-over-year, driven by solid performance across our segments and strong balance sheet growth. [ GTPT ] grew 5%, and our businesses generated an all-bank efficiency ratio of 50.4%. Expenses increased 9.5% year-over-year. Of note, Q2 2026 included $15 million of litigation expenses and Q2 2025 reflected a $22 million reversal of a property tax provision. Excluding these 2 items, expense growth was 7.4%, in line with revenue growth. For the second half of the year, we anticipate expense growth to moderate towards the low single-digit range, positioning us to deliver positive operating leverage. Moving to Slide 8. Net interest income, excluding trading, grew 7% year-over-year. Sequentially, it was down about 5%, with fewer days in the quarter, accounting for over 2/3 of the decline. Additionally, balance sheet growth was offset by Credigy's prepayment revenue of approximately $12 million recorded in Q1 and higher treasury NII in the prior quarter. NIM in Q2 was 2.16%, down 8 basis points quarter-over-quarter. As expected, NII from treasury was lower sequentially representing 4 basis points, largely offset by noninterest income. It also reflected higher prepayment activity last quarter, as well as 1 basis point decline in P&C NIM as loan growth outpaced deposit growth. Looking at next quarter, we expect the P&C NIM to be slightly down from Q2 levels. Deposit margin expansion is expected to be offset by commercial deposit mix. As for the all bank NIM, we expect it should remain relatively stable next quarter. Turning to Slide 9. We continue to grow both sides of the balance sheet. Loans increased 9% year-over-year and 3% quarter-over-quarter, including the addition of the Laurentian Bank syndicated loans of $657 million. Deposits increased by $9 million or 3% sequentially. Personal demand deposits grew $1.6 billion or 2% and mainly driven by wealth management. Furthermore, our customers' appetite for investment solutions has been strong, given the favorable market performance that continued in Q2 and resulted in solid growth. Non-retail deposits grew $7.5 billion or 4% quarter-over-quarter, mainly driven by Commercial Banking and Corporate and Investment Banking. Now moving to capital on Slide 10. We ended the quarter with a strong CET1 ratio of 13.54% supported by capital generation of 41 basis points. RWA growth consumed 38 basis points of capital. Credit risk of 25 basis points primarily reflected balance sheet growth with 5 basis points from the acquisition of the Laurentian Bank syndicated loan portfolio. Market risk, mainly driven by business growth consumed 9 basis points of capital. Share buybacks during the quarter reduced the CET1 ratio by 32 basis points. Since the launch of our current NCIB we have repurchased 8.8 million shares representing approximately 60% of the program. Now turning to Slide 11. We are making solid progress on realizing synergies from the acquisition of CWB. So far, we have realized $215 million of cost and funding synergies, and we are on track to reach $270 million by the end of fiscal 2026. Moreover, we are increasing our cost and funding synergies target to $300 million on an annualized basis. We have also realized $33 million of revenue synergies since the beginning of fiscal 2026 and mainly driven by fee income. As previously mentioned, revenue synergies should reach approximately $50 million by the end of this fiscal year. We continue to target $200 million to $250 million in revenue synergies by the end of fiscal 2028. We delivered strong results across both quarters of the first half, supported by solid underlying performance across our businesses, ongoing cost discipline and realization of CWB synergies with credit remaining within expectations. In addition, we continue to return capital to shareholders through dividend increases and ongoing share repurchase activity. We grew our EPS by 12% year-to-date. While the macroeconomic landscape continues to be uncertain, our outlook for the remainder of the year remains positive. For the second half of 2026, we expect EPS growth to be in line with our performance year-to-date. We also anticipate expense growth trending towards the low single-digit range, contributing to a positive operating leverage for the remainder of the year, having generated an ROE of 16.7% year-to-date, alongside strong capital markets performance, we remain on track to achieve our ROE target of approximately 16% in fiscal 2026. With that, I will turn the call over to Jean-Sebastien.

Good morning, everyone. Since our last call, the Canadian economy has grown modestly, while the labor market continued to weaken. The conflict in the Middle East is adding another layer of uncertainty by putting pressure on energy prices, inflation and interest rates. That said, strategic trade diversification and accelerated nation building projects in energy, natural resources and infrastructure should help to support future economic activity. In this complex environment, our resilient portfolio mix, disciplined risk management and prudent provisioning underpinned our strong credit performance. Now turning to the second quarter results on Slide 13. The Total PCL were $233 million, including the initial provision on performing loans of $6 million or 1 basis points related to the Laurentian Bank's syndicated loan portfolio. Adjusted total PCL were $227 million or 30 basis points, down 2 basis points quarter-over-quarter. We added 4 basis points of adjusted performing provisions in Q2 and mainly reflecting portfolio growth and unfavorable macroeconomic scenarios, which included a higher unemployment rate and more pessimistic outlooks for both equity markets and housing prices. PCL on impaired loans were $192 million or 26 basis points, down 2 basis points quarter-over-quarter and within our guidance of 25 to 35 basis points for the full year. Personal banking provisions were $2 million higher sequentially, mainly driven by consumer credit. Commercial Banking provisions rose $12 million quarter-over-quarter, mainly driven by the real estate and construction sectors. Capital Markets reported a $1 million recovery related to one file. At Credigy, provisions decreased by USD 3 million resulting from the normal seasoning of residential mortgages and consumer loans. At ABA, impaired provisions were down by USD 4 million sequentially to USD 13 million reflecting lower formations. Turning to Slide 14. Our total allowances for granted losses were $2.6 billion, representing 5.1x coverage of our net charge-offs. Our performing allowances were $1.7 billion, demonstrating a strong performing ACL coverage ratio of 2.2x. We have been building allowances for the past 16 quarters, and continue to be comfortable with our prudent and defensive provisioning levels. Turning to Slide 15. Our gross impaired loan ratio was 114 basis points up 3 basis points quarter-over-quarter. Laurentian Bank syndicated loans accounted for $40 million or 1 basis point. Gils excluding USS F&I were 84 basis points, up 3 basis points sequentially. The Net formations were 13 basis points this quarter. Excluding the Laurentian Bank portfolio, net formations were 12 basis points, up 5 basis points compared to last quarter. In Commercial Banking, net formations were 28 basis points and included 1 file in CRE residential insured. On Slide 26, we provide additional information on a few sectors of focus. Of note, we have limited exposures to U.S. nonbank financial, NAV lending and software. In conclusion, we are pleased with the credit performance in the second quarter and first half of the year and continue to expect impaired provisions to be within the 25 to 35 basis point range for the 4 fiscal 2026. In the current context of heightened uncertainty and softer labor market conditions, we expect further gradual increases in PCL while our wholesale book remains subject to periodic lumpiness. However, our defensive qualities, resilient business mix and prudent allowances position us well for the remainder of the year. And with that, I will now turn the call back to the operator for the Q&A.

[Operator Instructions] Your first question comes from John Aiken with Jefferies.

Laurent, as we look towards you achieving the target of 30% CET1 ratio, can we assume that what we saw in the second quarter is going to be pretty much the blueprint moving forward, where the internally generated capital remains very strong, and -- but it's being fought off by the share repurchase, but also risk-weighted asset growth. I mean is this something that I mean, not definitively, but is this something that we should be expecting moving forward in future quarters?

Thank you for your question. At a high level, yes, you have sometimes period of volatility, which could impact market risk RWA. So that is a factor that we have to take into consideration. But I guess at a very high level, yes, you should expect us to continue executing at these levels.

Great. And then in terms of the risk-weighted asset growth, I don't know if this is for Marie or not. But in terms of the expected growth assuming that Canadian consumer remains a little bit in trouble. I guess the density on the commercial side is going to cause growth on that side. Is that a reasonable outlook?

John, can you please repeat that question?

Sorry. Yes. In terms of risk-weighted asset growth, presumably the outlook is on a bit stronger on commercial and higher density is going to lead to the potentially a risk-weighted asset acceleration.

Yes. In that context, that could be a good assumption.

Your next question comes from Matthew Lee with Canaccord Genuity.

Maybe just 1 on P&C. Loan growth continues to be pretty strong. Deposit trends a little bit more mixed this quarter. Anything about the franchise today, is the pace and mix of core deposit growth is going to economics of new lending or the path of P&C margins? And is that going to be the main source of NIM pressure as you look into Q2 and maybe Q4.

Matthew, it's Chantal. So maybe I can start with a few points on the NIM going forward and what we are seeing this quarter and then Judy can take a moment to speak about more of the the outlook in terms of loans and deposit growth for the for the P&C. So for the NIM, let's take a moment just to look at the Alba NIM and then I'll go a little bit deeper in the P&C limb. So the Q2 decline of the bank NIM, as I explained in my remarks, is something that we had anticipated for this quarter. So recall that in Q1, we benefited from a particularly strong NII driven by ALM activities. And in Q2, the treasury performance remained solid, although reported NII was lower sequentially, largely offset in noninterest income due to the accounting of some hedges, which happens from time to time. So on a total revenue basis, that treasury, as I said, had a very strong second quarter. and the overall impact from treasury on the all bank NIM represents approximately 4 basis points sequentially to the all by NIM. Additionally, we had some prepayment activity last quarter from Credigy also impacted the NIM by 1 basis points Q-over-Q, which is something that we had also mentioned. Now when you look at the P&C NIM decline this quarter, improved deposit margins was offset by volume mix as loan growth outpaced deposit growth. So that's something that we've also shared in the past, and it's something that you're seeing when you look at our loan growth volumes as well as deposit volumes. Looking ahead, we expect the bank NIM to remain relatively stable in Q3 from Q2 levels and we do expect a slight decline on the P&C NIM in Q3 driven by mix dynamics in commercial deposits, partly offset by continued repricing benefits on our core deposits. Also, we expect the treasury NII to revert towards a midpoint between Q1 and Q2 levels. That's a bit of what happened in terms of the NIM and on the P&C name.

So if I look into -- this is Julie. So if we talk about deposits, specifically for retail, our deposit outlook remains consistent with the current market trends. the continuation of low interest rates through the end of 2026 limits the relative attractiveness of deposits and continues to drive outflows from GICs. While the market returns that are expected to normalize potentially slowing the pace of migration towards funds, the underlying dynamic is not expected to reverse. As a result, deposit growth is expected to remain flat. Should it on the commercial side. I don't know if you want to end. So thanks for your question. So the deposit growth on the commercial banking side remains a strategic focus. And we're really well positioned to capitalize on a significant opportunity to grow our penetration in cash management product. And just to give you an idea on our cash management and deposit strategy, we have 3 pillars -- the first one, we've been operating our online banking platform. It's almost done. Second, we're expanding our treasury management team to deepen client engagement and support deposit growth. This is in process. And third, we're enhancing our deposit solutions through more targeted offerings by client segments and industry. So very positive on the outlook of the deposits on the commercial banking side.

Okay. So if I'm taking that together, in the next couple of quarters, we should continue to see loan growth outpacing deposits? And if so, we should still continue to see P&C banking NIM as in pressure.

That's correct, Matthew.

The next question comes from Ebrahim Poonawala with Bank of America.

I guess maybe first question, Laurent, for you, around -- I think you said that the uncertainty on the macro side has led to a slowdown in investment spend. And then you went on to outline a lot of good things that could happen in the future. Just give us a sense of -- it feels like the Quebec economy has had a delayed impact in terms of the slowdown. So when you look at just the job picture locally, what's happening just from a credit standpoint, do you think that lagged effect the Quebec maybe feeling, which show up with somewhat higher PCLs over the coming quarters? Like how would you frame the year-end now in terms of just the economic activity and how that could translate into credit trends?

Ebrahim, thank you for your question. So maybe -- so let's start with Canada in general. General delayed reaction, labor market suffering a little bit more now across the country, Quebec as well. And the uncertainty also around Cosma and commercial tensions for our country. Those are all factors, I think, that are impacting growth and investments in businesses. And so we are -- we feel -- it feels like we are a bit in a lull in our country in terms of business investment, and in my prepared remarks, I've said this publicly, we are definitely encouraged by the shift in our government towards a focus on the economy. So to us, that bodes really well going forward. Now in terms of change, you asked a question about outlook on PCL, it doesn't change your outlook. Maybe I'll ask also Jean Sebastien to comment on our outlook regarding PCLs for.

Yes. So we just -- we confirmed our guidance for total Bank. If you look at the retail book in Quebec versus rest of Canada, so the retail book in Quebec has outperformed for the past several years. So it would be normal to see a little deterioration. I agree with you. You pointed out the higher unemployment. However, I would be cautious in not pointing it as a trend as we've seen a large shift this quarter, but I would wait for a couple of quarters before we see longer lasting trends before having a conclusion. But the fundamentals of the Quebec markets remain which is a strong saving rate, more double-income families and low housing prices. And to add on top of that, I'd remind you that we have a low unsecured proportion in our total portfolio, which is where typically it would shift the first and the performing of our unsecured portfolio in Quebec is particularly good given the fact that we're overpenetrated and homeowners, which is the place where typically delinquencies and losses are lower.

Got it. And as a follow-up on the capital and the buyback discussion earlier, as you think about just -- I mean, obviously, you have a lot of excess capital, high ROE, so you're generating a lot. When we think about just, is there any level of sensitivity when you look at the stock from price to earnings, price to book your internal return on those. This -- I'm wondering or is it more about you want to do x amount of buybacks and keep capital levels at a steady state and you, as a result, not particularly sensitive to where the stock is fading at any given point in time. Just would love to hear how you think about it.

That's a great question, Ebrahim. We will adjust from time to time. So if we do see opportunities to increase the pace of our buyback because we think our stock is not performing at the same level as others. For instance, like we saw, there's a period of time in January where our stock was not performing at the same level as others, and we did take advantage of that. So we are a little bit dynamic in the way we manage the buyback. But in terms of change in our strategy because of our stock price, there's no change in strategy. The only thing that would change our strategy is a big shift in macro. If there's a big shift in macro, where inflation is picking up and interest rates are picking up, and we think that the macro environment will deteriorate, we'll revisit. So that's kind of the philosophy. But we'll take advantage of price swings if we can, but our strategy is pretty steady.

Your next question comes from Mike Rizvanovic with Scotiabank.

I had a question for Judith. I guess a 2-part question. So one, just on the CWB loans coming off, I think $400 million is what you flagged -- so it does move the needle on your year-over-year performance. So 11% gets down to 5%. I guess I'm wondering like how much of that is more recent? Like is this just the normal part of the process of getting out of areas where you maybe are not comfortable on the risk side or for whatever other reason. Are you to the point where it's almost done at this point? Or is there more potentially to go there?

Okay. Thanks, Mike, for your questions. So I'll start by saying that as expected, our sequential commercial loan growth was consistent with the previous several quarters. So there's no surprise on that. So and on the -- just I will comment on the legacy National Bank portfolio. So despite macro uncertainty, clients remain very active throughout the quarter, and we're very happy delivered another quarter of double-digit year-over-year growth. So our core -- it is really as per our strategy. And this, I want to point out our core commercial banking grew more than real estate, and that's really focused on both mid-market and large client segments across all geographical footprint. So that's the first part. So if we go on the CWB side, so I want to offer 3 things. First, the performance of the CWB portfolio has been as expected, as mentioned in the last few calls, our teams have been focused on supporting the throughout the conversion, no surprise around that. This focus has supported strong level of client retention with payout volumes remaining below pre-acquisition average. So that would be the first point. The second point is integration activities have created short-term headwinds and capacity for new volume, which has not been sufficient to offset regular payment and payout. This has been particularly pronounced in the commercial real estate portfolio, as Laurence said in his remarks and which contain amortizing commercial mortgages, interim construction financing that pays out a successful project completion. And the third point I want to offer is now the integration impact has clearly moderated and our teams are well positioned to return to generating new volume with early signs of recovery with a visible improving pipeline, while we maintain pricing discipline, obviously. So we're positive on the opportunities in front of us to drive growth on portfolio. And what I would like to say also on the -- is it finished the integration. I would say that where we are right now, conversion and integration is finished, and we're going back like to normal state in the next few quarters. That's what I would offer to you.

Okay. So really nothing on the credit side that surprised you more recently, there's nothing related to credit.

No, nothing on the credit side. I'm comfortable with what I see in front of me.

Okay. Perfect. And then just quickly on the 11% growth that's a really robust number. And I'm wondering if you could just sort of delineate between growth in Quebec, your core market and some of the -- maybe the low-hanging fruit that you're getting outside of the Quebec market as you expand I guess, in Western Canada in particular. Any color on that?

Yes. Yes. So on our kind of legacy NBC portfolio, our growth Western Canada has been really high. And Ontario as well, I want to point out Ontario, but Quebec is also growing at a faster pace. So I would say that just to map it out, Western Canada, faster, Ontario and Quebec. That's how I would share that.

Your next question comes from Sohrab Movahedi with BMO Capital Markets.

Okay. I just maybe -- can I just pick up there for a second, this growth? Is it net new clients? Or are you increasing lending with existing clients?

So it's mostly net new client. We're also increasing, but we're seeing some momentum with net new clients, and that's been our focus.

Okay. And [ Jean], you had talked to us about pretax pre-provision. Maybe if I can just get a reminder what you think your segment pretax pre-provision is likely to do this year now that you've got 2 quarters under your belt?

So yes, thanks for the question. So I'd say, overall, we continue to feel good about the outlook, and I feel confident now about our ability to hit the top of the PTPP guidance that we had given for fiscal '26. So we've had obviously, a really strong performance in both Q1 and Q2 with a lot of great deal activity and very supportive market conditions across several businesses. But also, I think -- the franchise is operating from a structurally stronger position today. And you see it in our ability to execute for clients across market cycles with the ability to support increasingly complex financing and capital raising needs and the increasing number of leads and the improving diversification of the revenue mix. So for the balance of the year, our base case is we'll see some more typical seasonal dynamics through the summer months and a market backdrop that may be a bit less active than what we experienced in the first half, while we still think it is -- it will be positive overall. So maybe a bit of more precise color. So we're seeing in structured products. You're going to see less volatility, we feel. But overall investors are surprisingly resilient and the continued calling products, and that should mean good issuance volumes -- and the intermediation businesses, it's really our scale and execution capabilities that continue to position us well, support client flow across different market regimes, and that's reinforced by our leadership in ETFs and options and domestic bond trading. And across our hedging solutions businesses, we think we'll see continued activity tied to financing and infrastructure across rates, FX, commodities, although part of the elevated results in Q2 may have been pulled a bit forward from later periods. And at DCM, I think they could get interesting. I mean, borrowing on both the corporate and the government side, there's good financing conditions. There's resilient investor demand. And that, I think, will translate into robust issuance activity. And we continue to see good pipeline in the corporate banking and the investment banking. It's well diversified across sectors. So we think M&A remains strong and strong markets and strong investor risk appetite, I think will continue to be a good backdrop for equity in new issues.

Okay. That's very helpful maybe, even is incredibly helpful comprehensive maybe you're going to even surprise yourself and exceed the upper end. Laurent, one last question, maybe just for you. Last -- I think last quarter, when we talked -- when you talked about ROE outlook, you talked about either side of 16% for 2026. And you mentioned 17% or thereabouts in 2027. So I guess, I wanted to confirm that, that 17% still remains the 2027 kind of yardstick. And does it -- can it benefit further based on the work you're doing in the ROE optimization in your P&C Bank? Or did you have some of that benefit incorporated into the 17% type of number you were talking to us about for 2027.

So thank you for your question. So you're correct. Last quarter, we did provide guidance for the -- we upgraded our guidance for the year from 15% to 16% for 2026. And maybe I should correct you, but 2027, we provided a waterfall and it was 17 plus that we guided for 2027. And I think Marie Chantal provided a really good explanation last quarter on the 17-plus and also said that all the work that we're doing right now in terms of the next strategic plan are not included in our guidance for our ROE for 2027. So does that answer your question, Sohrab?

Yes, that's perfect.

Your next question comes from Doug Young with Desjardins Bank.

Just maybe starting on the credit side, 2 things, new gross impaired loan formations, and I look at it on a gross net-net, gross loan formation did jump sequentially and I think even year-over-year. And -- and it looked like write-offs were a little bit elevated. So I'm just -- maybe you can talk a little bit about where you're seeing the pressure like from a product or from a geography perspective on, again, new gross impaired loan formations and write-offs?

Thanks for the question, Doug. It's JS. So pretty simple explanation to that, and we called it on the slide. So I'd say the majority of our formations in commercial were actually driven by 1 file in commercial real estate in Western Canada, and that file is insured. So you've seen us grow in residential insured in the past years. And I think this is one good feature of this growth is when the they go wrong, you have some PCL protection on it. So although there is a large deal associated to it, there is no PCL associated to it.

And have you sized what that was in terms of loan or in terms of formation.

So I can give you a little bit more detail on this. So it's a little bit more than half of the commercial formations were driven by that file.

Okay. And how about the write-offs?

So the write-offs are -- can be lumpy. So there's always 2 sides to write-off. The retail write-offs are more normal driven by credit cards and by end of cycles for the other portfolios. And then we did arrive to the end of workout for a couple of larger files in commercial. So when you arrive there, what you do is you derecognize the loan and you have the correspondent write-offs, so obviously, you're seeing a little bit more lumpiness on this this quarter.

Okay. So it doesn't sound like in either of these 2 that there's anything overly concerning. Is that from your perspective?

Well, I'm happy that the gross impaired loan was related to an insured file, that's for sure. But no, nothing overly concerning. Like if we had removed this file, our Gils would actually have been down quarter-over-quarter. But as I mentioned in my prepared remarks, I don't think we're in an environment where the level of uncertainty has reduced. So we could expect still ebbs and flows for the GIL ratios going forward.

Okay. That's clear. And then second, just on Credigy, we do our math and we look at the NIM or margin. And I look at the margin this quarter and I look at it relative to what an average would have been over the last 3 years. And it looks like it's down by a decent amount. And I know that you can say from last quarter, there was some prepayment that went through. But even if I look longer term, it looks like it's lower. Is there anything that's changed in the portfolio or that went through this quarter that or there would have been a material kind of impact on NII or NIM for margin for Credigy?

Doug, it's [indiscernible]. So you're right to point out a long-term slight decrease in margin. I think it's a function of -- we continue to prioritize secured assets. And in I think 2/3 of our investment volumes were in mortgage portfolios, first lien and second lien, but a lot of first lien. And so that -- on a risk-reward basis, we really like it. But that's really -- that's where we see value right now. We -- and if you look at other asset classes like MD unsecured space, we continue to see portfolio trading at prices that don't really reflect our view of the potential risks and performance. So conditions are a bit challenging there. So we'd rather stick to the mortgage space for now and then we'll adapt and as the macro changes or as the situation evolves, we'll pivot as strategy as many times over its history been able to do. But you're right that that margins have been going down a bit, although the risk reward, we're probably in a great position. And the goal is still to deliver strong asset growth, but never jeopardize the long-term to meet short-term guidance in terms of margin or as a group.

I guess what I'm reading and missing, I guess, I should have looked at this, but if I looked at a risk-adjusted margin, it actually probably wouldn't be that different because our PCLs will be coming down as this mix shifts and that speaks to the risk reward. Is that a fair comment?

Yes. I think that's how I would look at it also, Doug.

[Operator Instructions] Your next question comes from Darko Mihelic with RBC Capital Markets.

I wanted to revisit the net interest margin discussion. Your outlook is very helpful for the next quarter or so. My question is, a little bit more longer term, I suppose, in nature, and it really revolves around the high level of liquidity we're currently covering, you're currently carrying. So I understand you have a 13% common equity fund ratio sort of target end of '27. What would be a more normal LCR level? And is there any kind of a drag here on your margin, how fast would you sort of target to get to more normal liquidity levels?

Darko, maybe I can start, and I'll let [indiscernible] give some -- a bit more insights on -- from a capital markets perspective. So when looking at the LCR before going to the long term, just I think it's worthwhile just giving you a few insights on on the evolution of the ratio over the past couple of quarters. So the decrease in LCR that you saw this quarter, which is effectively a decrease from the previous quarter, but it's it really came back to the usual level that we are used to seeing. And that's what -- where we like to operate at National Bank. But Nevertheless, the decrease came mainly driven by secured funding and collateral management activity. So it really reflects the transaction mix and timing rather than a change in our strategy, as I mentioned, and how we manage the bank core liquidity positioning. So the level that you're seeing right now is probably where we are -- we like to operate. We like to be in a good position and seize market opportunities when we see good funding opportunities, and that's what we saw earlier in the year. So maybe [indiscernible], would you like to add any

Thanks, Mariana. So you said it very well. So we prefunded a lot over the last couple of quarters, the previous couple of quarters, there were some market opportunities that were interesting, and we and it made sense to fund and to deploy this funding in highly liquid securities within capital markets and treasury portfolios. Now that the conditions are normalizing you're seeing our LCR drift back towards more of its long-term average. I think over the long term, I expect us to be in the $140 million, $150 million range, but we really like having it among the highest of the big banks that will remain part of the strategy.

And so as I think about that then, it's clear that this is really a cap market, and there's none of this that's actually sort of being pushed out through FTP into P&C Canada. Would that be a correct assumption?

It is mostly in capital markets and treasury portfolios. But you're right, it's really opportunistic positioning in capital markets that are the bulk of this ratio.

Okay. That's very helpful. Another question on ABA. Just wanted to sort of revisit your outlook for ABA. It looks like there's a weaker economy the country itself has sort of lowered its economic outlook. It doesn't seem like you did any on the performing side from PCLs. So what is your outlook for ABA and should we just simply consider that the high level of growth, double-digit loans and so on should continue and we really shouldn't expect any difference in PCL levels either.

Darko, it's Bill. I'll take that, and maybe JS can comment a little later on the PCLs. But yes, for the economic outlook, I described Cambodia has faced a series of challenges over the past years. From the pandemic to the U.S. tariffs, the conflict with Thailand and now the conflict in Iran. It's -- whether those headwinds are relatively well but expected GDP growth has certainly declined. I think 6% in 2024, 5% 2025 and expect it to be around 4% next year, which remains significantly below its potential growth. And we've talked previously about recovery and tourism being slow. That's certainly the case now. However, the growth in exports is higher than we had expected, particularly to the U.S. Year-to-date, it's up about 39% from last year, and FDI remains strong. So in the challenging context of headwinds in the economy, we're very happy with ABA's performance. It's continued to evolve its market-leading digital banking services, which has led to great growth in the number of clients and in low-cost deposits, which is helpful. And I'd point out, Darko, that the long-term structural tailwinds in Cambodia remain in place. It's still under banked, young population, FDI remains strong. It's competitive labor cost supports manufacturing sector and exports. And so we remain pretty positive about the long-term growth potential. Does that answer your question? Maybe I'll pass it to JS for.

Yes. So on a credit perspective, recall we had 2 data points on ABA first as we had guided a while back, and that still holds through that 2024 would be at the higher end of what we expected going forward in terms of formations and it's true. And we also repeated that we expected the impaired PCL to remain elevated for this year, which is still what we expect. And finally, to your last comment on the build, I think it's important to remember that the starting point is important. And although we built 3 bps this quarter, we built 47 bps last quarter, 42, the beeps the quarter prior. So we have been building performing provisions at ABA to make sure we have good downside protection.

Okay. Maybe just 1 last question to wrap up on ABA. If this current pace of growth continues, -- it is completely self-funding. Is that correct?

Yes. It -- as you've seen, deposit growth has been much higher than loan growth. I will caution when I think about what the impacts will be from the Iran crisis, whether you're an conflict, it's mainly impacted the price, not the availability of fuel. -- and it is consuming a greater portion of household budgets than in the past. So we would expect deposits, saving rates and deposit growth to be lower than in the past, and that will impact it. But in terms of self-funding, yes, it definitely remains to be to have a strong excess liquidity on the balance sheet and continues to grow deposits very, very strongly.

Your next question comes from Paul Holden with CIBC.

Okay. I want to go back to and you've given some helpful commentary on the outlook for the business for second half of the year. I guess I wanted to ask you sort of longer term because this business has become harder to, I think, harder to forecast never easy. But harder to forecast just because you have this underlying growth from your from client initiatives and growing product offerings, et cetera, and then also very favorable market conditions, right, which have obviously benefited benefited all banks. So trying to figure out a couple of things. One is like, should we actually be assuming continued growth into next year? -- for this business? Or is that just asking too much at this point? And two, if we think this business at some point has to normalize, which it probably does, what specific market conditions do you think we should be tracking to sort of get a sense of what could result in more normal run rate earnings?

Thanks, Paul. It's Etienne. Definitely, we want to keep growing the business, and we want to keep it growing at the same pace as the rest of the bank. That's definitely part of the strategy. and we're putting in place a lot of initiatives both on the global markets. And the corporate and IB divisions to continue our growth. And really to, as we've scaled domestic champions in Canada to slowly part those capabilities in new markets. We've done it successfully both on the C&I and the global market side. I'm thinking of how we operate in the Delta One space in the structured product space. now in the project finance and renewable energy space, we'll definitely continue to do that as to what to track expect slowdowns. And we've seen that, right? It's when clients get a lot more quiet. I mean, we still are a franchise that depends on client flow client deals, giving clients advice. And so when the economic cycle reaches a point where there's a lot less activity look for a slowdown. I mean, some of it may be when there are impacts on the markets that are negative, that creates volatility, sometimes so because we have a lot of countercyclical businesses on the trading side, that can be cushioned. But over the long term, we need clients to make money. We need clients to succeed. And so this is a franchise that will always track client activity and client success.

Okay. So to be clear on that, even though your business is outgrowing the rest of the -- growing the rest of the bank in the last couple of years, you still think going forward, even at the current levels, you can grow in line with with the rest of the bank, that's the messaging here.

That's certainly the goal, yes.

This concludes the question-and-answer session. I'll turn the call to Laurent Ferreira for closing remarks.

Thank you, operator. Our second quarter was on that, I'd like to thank our teams across the country for all their efforts and excellent execution. And while the macroeconomic context remains uncertain, we are really well positioned to support our clients and continue delivering strong earnings growth and ROE on that. Thank you, and I wish everyone a great day.

This concludes today's conference call. Thank you for joining. You may now disconnect.