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

Good morning, and welcome to National Bank of Canada's Third Quarter 2026 Earnings Call. I would now like to turn the meeting over to Marianne Ratte, Senior Vice President and Head of Investor Relations. Please go ahead.

Merci, and welcome, everyone. We will begin the call with remarks from Laurent Ferreira, President and CEO; Marie Chantal Gingras, CFO; and Jean-Sebastien Grise, Chief Risk Officer. Our business heads are also present for the Q&A session, including Julie Levesque, Personal Banking; Judith Menard, Commercial and Private Banking; Nancy Paquet, Wealth Management; Etienne Dubuc, Capital Markets; and Bill Bonnell, 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.

Merci, Marianne, and thank you, everyone, for joining us. Before turning to our results, let me say a few words about the latest developments affecting Canada. The Canadian economy has demonstrated resilience over the past 18 months, but the unresolved and escalating trade conflict with the U.S. continues to create economic uncertainty and challenges for businesses across the countries. At this point, it is difficult to forecast outcome, but new tariffs on both sides of the border will impact additional industries, business investments and affordability for consumers. Yesterday's announcement on business and worker support is welcome and should provide relief for those impacted. Alongside government support, National Bank will be there for affected clients. Ongoing discussions with clients and partners point to one conclusion: Canada is taking the right steps to strengthen the foundations of its economy, and it has fiscal room to continue doing so. While business confidence and investment are difficult in the current context, I am encouraged by the way governments and business leaders are mobilizing around Canada's economic priorities, and significant investments are being made in strategic infrastructure across the country. At National Bank, we are committed to supporting our clients and working with governments and businesses to deploy capital towards reindustrialization, infrastructure, defense and energy. Investments in these sectors are critical to strengthening Canada's productive capacity and supporting durable economic growth across the country. The retooling of the Canadian economy is creating attractive opportunities to deploy our balance sheet. Energy, power infrastructure and the recent icebreaker contract announcement are great examples of our country moving in the right direction. And OSFI's decision to lower the range for the domestic stability buffer provides additional flexibility to support Canadian businesses as they are dealing with a challenging environment. Turning now to our financial results. EPS for the third quarter of 2026 was $3.39, up 26% year-over-year. Revenues increased 18%, supported by favorable market conditions across our fee-based businesses and strong balance sheet growth. We generated positive operating leverage of nearly 6%, and our credit performance remained resilient. Return on equity was 16.8%, continuing on the solid performance we have delivered since the beginning of the year. Our CET1 ratio stood at 13.51%. We maintained a strong capital position while generating strong organic growth and buying back shares. We intend to complete our current NCIB in September and launched a new one at that time, subject to regulatory approvals. Our dividend payout currently stands at 38.8%. As per usual practice, we will review the dividend next quarter. Finally, on the Laurentian Bank transaction, last quarter, we completed the acquisition of the syndicated loan portfolio, and the Ministry of Finance has since approved the acquisition of Laurentian Bank by Fairstone. We expect our acquisition of the retail and SME banking portfolios to be completed by late 2026 as previously announced. Turning now to our business segments. P&C Banking generated net income growth of 13% year-over-year. Results reflect strong growth in personal mortgages and fee-based income as well as solid balance sheet growth in Commercial Banking. This was further supported by positive operating leverage of [indiscernible] and strong credit performance. In Personal Banking, mortgages grew 14% year-over-year, continuing the momentum of recent quarters. This was driven by renewal activity, a resilient housing market in Quebec and market share gains. Deposits were stable sequentially, while rising equity markets continue to drive client demand for investment solutions. This contributed to a 7% increase in total personnel savings year-over-year. In Commercial Banking, deposits were up 12% year-over-year. This reflects the usual seasonal inflows from government clients as well as higher balances in our Commercial business. Commercial loans were up 4% year-over-year. Activity remained solid within the National Bank originated loan portfolio, which grew 10% year-over-year. The CWB legacy book was relatively stable sequentially. Our integration is going well, and our pipeline is strengthening. In Wealth Management, net income was $299 million, up 22% year-over-year. Results reflect strength across the franchise, including higher fee-based income and transaction volumes. Segment performance was further supported by positive operating leverage above 2%. Capital Markets generated net income of $442 million, up 32% year-over-year. Global markets revenue were $578 million, consistent with the strong performance of recent quarter and supported by healthy client activity. Rising equity markets continue to support structured products origination, while attractive funding opportunities benefited our securities finance business. Corporate and Investment Banking revenues increased 13% year-over-year. Corporate Banking loans grew 13% over the same period, reflecting continued opportunities across sectors. Investment Banking maintained its strong performance, supported by M&A activity and continuous investment in our franchise. Favorable market conditions drove solid debt capital market activity across both corporate and government issuers. Credigy generated net income of $39 million. Revenue growth of 13% year-over-year was primarily driven by a gain on the sale of our portfolio, while credit performance reflected a build in performing loan provisions, and average assets grew 8% year-over-year. Against the competitive market and pricing backdrop, we remain selective in pursuing deals as we continue to benefit from recurring flows from established partnerships. At ABA Bank, net income was up 1% year-over-year, reflecting slower economic growth in the country. Revenue growth of 6% was partly offset by higher efficiency ratio and PCLs. Loans were up 11% year-over-year and deposits grew 7% 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 third quarter. PTPP increased 24% year-over-year, with positive operating leverage of 5.8%. Revenues grew 18% over the same period with strong performance in Capital Markets, Wealth Management and Personal Banking, along with solid balance sheet growth and higher treasury revenue. Operating leverage was positive across all businesses, supported by solid execution and realized synergies. Expenses increased 11.7% year-over-year. This was mainly driven by higher variable compensation, consistent with our strong performance. We also continue to invest in talent and technology with IT investments focused on supporting business growth and on strengthening our operational resilience. Q3 also included litigation expenses of $11 million. Excluding variable compensation and litigation costs, expenses rose 7.7%. Moving to Slide 8. Net interest income, excluding trading, increased 7% sequentially, benefiting from strong volume growth across P&C Banking, Wealth Management and Corporate Banking, while the higher number of days in Q3 accounted for approximately half of the increase. All-bank NIM increased 2 basis points quarter-over-quarter to 2.18%. This reflected a strong contribution from treasury, which added 3 basis points, as well as the realignment of noninterest income to net interest income between Q2 and Q3, which contributed an additional 4 basis points. These benefits were partly offset by a decline in the P&C Banking margin, down 7 basis points sequentially, largely driven by strong growth in personal mortgages and the commercial deposit mix impact reflecting seasonal inflows from government deposits. As we look forward to Q4 and recognizing an evolving interest rate environment, we expect the P&C margin to remain relatively stable at Q3 levels. Although deposit margins have generally been improving, the benefit is expected to continue to be offset by deposit mix dynamics within Commercial Banking. As always, balance sheet mix remains an important factor to consider. Our focus remains on growing the franchise with the right balance between volume growth, margins and credit quality. The all-bank NIM is also expected to remain relatively stable in Q4. Turning to Slide 9. We continue to grow both sides of the balance sheet. Loans increased 11% year-over-year and 4% quarter-over-quarter amid record mortgage originations. Deposits increased 11% year-over-year or 1% sequentially. Personal demand deposits were slightly lower quarter-over-quarter as customer appetite for investment solutions remained strong, supported by favorable market performance that continued through Q3. Personal term deposits increased by $1.3 billion, primarily driven by structured note issuances. Non-retail deposits increased by $2.9 billion or 1% quarter-over-quarter, mainly within Commercial Banking. Now moving to capital on Slide 10. We ended the quarter with a strong CET1 ratio of 13.51%, supported by capital generation of 41 basis points. RWA expansion resulted in a 19 basis point impact on our CET1 ratio this quarter. Strong organic growth in credit risk RWA consumed 35 basis points of capital, led by Corporate Banking. This was partly offset by 15 basis points of benefits from continuous refinements. We repurchased 2.3 million shares in Q3, reducing CET1 by 26 basis points. We remain on track to complete our current NCIB by its September 2026 expiry. Now let me turn to the capital optimization initiatives currently underway, beginning with AIRB. We continue to make good progress on the transition of the acquired CWB portfolios to the AIRB framework. We have now completed the required 2-quarter regulatory parallel run, which has provided valuable insights into the performance of these portfolios. More importantly, we have demonstrated regulatory readiness across 3 of the 4 pillars of the CMAP framework, namely, integration, operations and controls. The work completed to date has also validated our ability to effectively integrate and leverage CWB data within our AIRB framework, strengthening risk insights and supporting the successful integration of the acquired portfolio. The remaining work is primarily concentrated on the methodology pillar, where we concluded that additional model refinements are needed before seeking regulatory approval given the current stage of the credit cycle, including higher observed default rates. Accordingly, we have decided to defer this submission into fiscal 2027, reflecting our disciplined model optimization approach. Based on our updated assessment, we continue to expect a CET1 benefit from the AIRB transition, although the benefit is likely to be more moderate than our previous estimate. Benefits are expected to begin materializing in late 2027 and are now expected to track toward the lower end of our previously communicated range of 35 to 55 basis points. Looking ahead, additional ongoing refinements are expected to generate approximately 20 basis points of additional CET1 capital in Q4 2026. Additionally, we intend to launch a new NCIB upon the current program expiry in September 2026, subject to regulatory approval. Overall, our capital position remains strong, supported by a robust CET1 ratio. It continues to provide ample flexibility to advance our strategic priorities with disciplined RWA management, ongoing optimization initiatives and sustainable dividend growth. Importantly, it reflects our ongoing focus on disciplined capital deployment as we remain on track to achieve a 17% plus ROE by 2027 and assuming a CET1 ratio converging towards 13% by the end of next year. Now turning to Slide 11. We are making solid progress on realizing synergies from the acquisition of CWB, having captured $238 million of cost and funding synergies to date. We remain on track to realize $270 million by the end of fiscal 2026, representing about $300 million on an annualized basis. We have also achieved our fiscal 2026 revenue synergy target of $50 million ahead of schedule. Specifically, $52 million, mostly from fee income, has been realized to date. Further progress on the integration will support incremental synergy capture over time as we continue to target $200 million to $250 million in revenue synergies by the end of fiscal 2028. Following another strong quarter, our year-to-date EPS grew by 16.8%. This was supported by broad-based revenue growth, strong capital markets and wealth management performance, positive operating leverage and ongoing cost discipline. As well, CWB synergies are being realized, and credit remained within expectations. Accordingly, with our year-to-date ROE of 16.7%, we are well on our way to exceed our 16% ROE target for fiscal 2026. We also continue to expect positive operating leverage for the full year, with expense growth moderating in Q4. And before I turn it over to Jean-Sebastien, I would like to provide an update on how we plan to enhance our segment disclosure as we continue to execute on our strategy. As we have previously discussed, we are advancing a multiyear plan to strengthen our retail franchise. We intend to provide greater visibility into the strategic plan by year-end 2026. In that context and to better reflect the CWB revenue synergies, we are introducing select enhancements to our segment reporting beginning in the fourth quarter of 2026, including separate disclosure for Personal Banking and Commercial Banking. We believe this enhanced segmentation will provide investors and analysts with a clearer view of the performance drivers and strategic progress within each business. We look forward to providing an update by year-end. With that, I will now turn the call over to Jean-Sebastien.

Merci, Marie Chantal, and good morning, everyone. Since our last call, the Canadian economy has demonstrated resilience with GDP growth and signs of improvement in the labor market. However, the current trade conflict negatively impacts business sentiment and investment outlook. Meanwhile, government measures should provide support on impacted sectors and their employees. More broadly, geopolitical risks remain elevated and have impacts on energy prices, inflation and interest rate. At the same time, trade diversification, growth in key resource sectors and strategic investments in technology and infrastructure should support long-term economic growth. In this complex environment, our resilient portfolio mix, disciplined risk management and prudent provisioning underpinned our strong credit performance. Now turning to the third quarter results on Slide 13. Total PCL were $246 million or 31 basis points, stable quarter-over-quarter. We added 3 basis points of performing provision in Q3, mainly reflecting portfolio growth and a macroeconomic scenario update at Credigy, including higher long-term interest rates that impacted our longer duration portfolios. These factors were partially offset by model calibration. PCL on impaired loans were $224 million or 28 basis points, up 2 basis points quarter-over-quarter and within our guidance of 25 to 35 basis points for the full year. Personal Banking provisions were stable sequentially as higher retail losses were offset by lower credit card losses. Commercial Banking provisions were $25 million lower quarter-over-quarter, with Q3 provisions mainly reflecting 2 files. Capital market provisions were $49 million higher than Q2 and related to 1 file in the oil and gas sector. At Credigy, provisions increased by USD 2 million, resulting from the normal seasoning of residential mortgages and consumer loans. At ABA, impaired provisions were up by USD 4 million sequentially to USD 17 million, reflecting new formations. Turning to Slide 14. Our total allowances for credit losses were $2.7 billion, representing 5.3x coverage of our net charge-offs. Our performing allowances were $1.7 billion, demonstrating a strong performing ACL coverage ratio of 2x. We have been building allowances for the past 17 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, stable quarter-over-quarter. GILs, excluding USSF&I, were 82 basis points, down 2 basis points sequentially. Net formations were 10 basis points, down 3 basis points from Q2. In Commercial Banking, net formations were down 24 basis points to 4 basis points, mainly reflecting 2 files, partially offset by repayments. In Capital Markets, net formations were driven by 1 file in the oil and gas sector. In conclusion, we remain pleased with the credit performance in the third quarter and year-to-date. We continue to expect impaired provisions for fiscal 2026 to be within the 25 to 35 basis points range. In the current context of ongoing uncertainty, we expect unemployment levels to continue to drive retail provisions, while wholesale books remain subject to periodic lumpiness. Overall, our defensive qualities, diversified business mix and prudent allowances position us well as we look ahead. And with that, I will now turn the call back to the operator for the Q&A.

[Operator Instructions] Your first question comes from Matthew Lee with Canaccord Genuity.

Mortgage growth was strong this quarter, and it looks like that contributed to some of the pressure on Personal Banking NIM. Can you maybe just help us understand how much of that compression reflected competition for loan growth versus maybe some of the deposit dynamics we've seen over the past couple of quarters? And then bigger picture, how willing are you to continue trading margin for growth if the competitive environment stays elevated?

Matthew, thank you for the question. You're right. The P&C NIM declined 7 basis points, and it's driven by our continued mortgage growth in our business mix. And it's supporting our revenue growth as well. That is 10% year-over-year. Mortgages are really one of our most effective client acquisition vehicle, so our strategy has always been to view the mortgage as an entry point to a broader banking relationship. And this opportunity is to deepen those relationships over time through deposit, as you mentioned, investment, credit cards and advisory services. So as we see the large cohort of newly acquired mortgage clients mature, we expect stronger primary banking relationship. And this is really a key component of our long-term growth strategy and an important driver of future deposit growth.

Okay. That's helpful. I mean, you've [ seen ] the outperformance in mortgages is primarily just driven by execution and channel strength? Or is there a pricing aspect there as well?

So thank you again for the question. Our mortgage growth continued to be driven primarily by market share gains rather than aggressive pricing. We've maintained a consistent pricing strategy across all of our channels, and we remain focused on profitable sustainable growth. Our growth is being supported really by a strong execution across both of our channels, so distribution network and the broker channel, which really has a strong momentum in Quebec, where we -- where the market has been really resilient. We're also encouraging growth in Ontario and other markets outside of Quebec. Our recent CWB acquisition provides us a good window and a good opportunity to grow that business out with as well.

Your next question comes from the line of John Aiken with Jefferies.

Marie Chantal, I want to talk about the AIRB conversion to the CWB portfolio a little bit further. So now we're expecting -- I think you said the benefit is going to materialize late in 2027. Does this mean that we expect the conversion to happen in late 2027? Or is the conversion going to happen early in 2027 is going to take some time for the benefits to fall through? I'm a little confused because I thought previously it was going to be in the fourth quarter, the conversion and the benefits were going to impact Q4.

Thanks, John, for the question. And yes, I think it requires a little bit of more details in order to clarify what we shared earlier in our remarks. So as you heard, we have completed our 2-quarter regulatory parallel run, and we're happy with the demonstration of the regulatory readiness that we've demonstrated across 3 of our 4 pillars. Now the next pillar that we'll be focusing again on is the methodology one. And really, what we are trying to achieve there is we want to recalibrate the models to improve their predictive accuracy. And once that work is done, we will proceed with the required 2-quarter regulatory parallel run. So to answer your question specifically, the conversion will happen late in 2027 once that work is done. So for us, the strategic rationale for transitioning to the acquired CWB portfolio to the AIRB, it remains fully intact. We're very confident that the initiative will support long-term capital efficiency and shareholder returns.

Your next question comes from the line of Stephen Boland with Raymond James.

Yes Sorry, I'm going to follow up with John. And again, maybe this change -- maybe I missed this or just because of my tenure doing this with the banks. But I thought the AIRB benefits were in the 50 to 75 basis points. Is that -- are you just talking about that 35 to 55 just for this 1 portfolio, or that's the total benefit that we should expect now?

It's just for the 1 portfolio because you're right. Yes, the overall target was larger, but our first conversion was 35 to 55.

Okay. I appreciate that. And just -- you kept your guidance or your goal for a 17% ROE by the end of fiscal 2027. When I look at your CET1 waterfall, how are you going to drive a higher ROE when -- unless you just continue to buy back more stock? Because you're obviously very profitable. But is it a combination of higher profit and then accelerated the NCIB that's going to drive that 50 basis points lower over the next year?

So to your question on our -- the main drivers on our ROE target of 17% plus for 2027, it's a combination of many factors as we've disclosed earlier this year. So yes, continued broad-based growth across all of our segments. Revenue synergies, as I disclosed earlier in my remarks, are also expected to contribute to that upside into the ROE. There is obviously some buybacks that we had referred to. And this is something that we continue to converge to with a new NCIB program that we'll be announcing upon expiry of the current one. So we continue to be very confident in achieving that 17% plus ROE. And we are also maintaining that target while trending the CET1 ratio towards approximately 13% for year-end of 2027. So those are the main drivers behind our target. As per our usual practice, we will be revising the guidance in Q4 for the following year. So stay tuned for that.

Your next question comes from the line of Doug Young with Desjardins Capital Markets.

I apologize. I'm going to follow up on the AIRB. But just -- I get the whole process and how you described, it all makes a ton of sense. What I'm wondering is why the lower end of the target now? Like what changed versus your initial kind of view that's driving that to the lower end of your initial target range? And I know this is for the first conversion. But for the second conversion or for the remainder, should we be thinking something similar?

Thanks, Doug. It's Marie Chantal. I'll answer the first portion of your question, and maybe I'll pass it over to Jean-Sebastien for the follow-up. So we concluded that additional model requirements were needed given the current stage of the credit cycle, including higher observed default rate. So this is an important portion of our update today. So Jean-Sebastien, do you want to give a little bit more of insights?

Sure, Doug. Yes. So great question. When you look at our CWB performance last year and this year, you would have seen that the CWB impaired loan ratio was higher than what we had in our National Bank ratios. So higher observed defaults. What that will mean is when we will redevelop that part of the model, there will be more conservatism. And given the more conservatism, you should expect then, a little bit more capital consumption than what we had originally expected, which explains why the benefit would be lower.

Okay. I kind of get it. But maybe sticking with yourself as well, just thinking on credit. And I get the interplay of NIMs in Canadian banking being down, but your impaired PCL is down, and I think -- thinking about NIMs and credit kind of go hand-in-hand. So -- and then you did release some performing loan allowances in Canada as well. So I'm just trying to understand, like the credit in [indiscernible] P&C Banking was better than expected. Is this also a function of the mix shift that [ top time ]? Or can you provide a little bit more detail on what drove that?