National Bank of Canada NA
Q1 2013 Earnings Call Transcript
Transcript Call Date 03/01/2013

Operator: Good morning, ladies and gentlemen. Welcome to the National Bank of Canada First Quarter 2013 Results Conference Call. I would now like to turn the meeting over to Ms. Helene Baril, Director of Investor Relations. Please go ahead Ms. Baril.

Helene Baril - Senior Director, IR: Thank you. Good morning and thank you for joining National Bank's first quarter 2013 results conference call. In a few moments Louis Vachon, President and CEO will start the call with his opening remarks. Then Ghislain Parent, CFO and Executive Vice President, Finance and Treasury, will present the overall Bank performance as well as the capital management review. His comments will be followed by the presentation of Bill Bonnell, Executive Vice President, Risk Management who will cover the Bank's Risk Management section. Following his comments Jean Dagenais, Senior Vice President, Finance, Taxation and Investor Relations will cover the business units' results. Then we will take your questions.

Please note that Diane Giard, Executive Vice President, P&C Banking; Ricardo Pascoe, Executive Vice President, Financial Markets; and Luc Paiement, Executive Vice President, Wealth Management will also be on hand to answer your questions.

Please also note that all documents referred to in today's conference call can be found on our website at nbc.ca in the Investor Relations section. I would also like to remind you that a caution regarding forward-looking statements applies to our presentation and comments.

Over to you, Mr. Vachon.

Louis Vachon - President and CEO: Thank you, Helene. Good morning and thank you for joining us today. In the first quarter of 2013 National Bank posted record adjusted net income of C$361 billion or C$2.02 per share, up 2% and 1% respectively from the same period last year. Return on equity was 19.8% and their common equity Tier 1 ratio on their Basel III stood at 7.85%. We continue to deliver excellent financial results in a competitive and slower growth environment, thanks to our (enormous) initiatives to expand our position in the P&C and Wealth Management business units.

In Personal and Commercial Banking loan volume still reaches double-digit growth. The full deployment of our new mortgage platform is expected to start this month as planned. This will enhance client experience, increased cross-selling opportunities and reduced operational costs. In their first quarter of 2013 Wealth Management perfumed very well with earnings increasing by 22% on a year-over-year basis due to a successful integration of our latest acquisitions and more favorable market conditions.

Financial markets also did well with the strong performance in corporate banking and debt underwriting. Lower loan losses helped offset significantly lower investment gains compared to the same period last year.

On the credit side, the bank still enjoys stable condition and their supportive environment to maintain the lowest level provisions for credit losses in the Canadian industry. In the first quarter 2013 PCLs amounted to C$32 million or 14 basis points.

With an economic environment showing moderate GDP growth in 2013, we intend to maintain tight control over our expenses. We anticipate the Bank's operating leverage to be slightly positive for 2013. While we await the regulators update on the (DCIB) status, we are targeting a minimum Basel III ratio of 8% including the negative impact a CVA charge before reactivating the share buyback program. We expect to get to that target by Q4 2013 at the latest. I would like to underline that potential ABCP gains are still very much relevant, as they would positively impact earnings and capital and therefore could allow us to reach the 8% target prior to Q4 2013.

As usual, we intend to review our dividend policy next quarter.

On that, I'll turn things over to Ghislain for the financial and capital review.

Ghislain Parent - CFO and EVP, Finance and Treasury: Thank you Louis and good morning everyone. I invite you to turn to Slide 5to review the first quarter 2013 results. On an adjustment basis, National Bank posted total revenues of C$1.2 billion, down 1% from last year, due mainly to higher investment gains realized in the first quarter of 2012.

Adjusted net income amounted to C$361 million or C$2.02 per share, representing a 2% increase from the same period last year and 5% increase on a sequential basis. Adjusted ROE was solid at 19.8%. Now on a reported basis, net income totaled C$364 million in Q1 2013, compared to C$351 million in Q1 of last year, an increase of 4%.

EPS reached C$2.03 in Q1 2013, up C$0.04 compared to the same period last year. Specific item had a positive impact of C$0.01 on EPS in Q1 of 2013. Before providing additional comments, I would like to mention two changes effective in Q1 2013, with regard to the results presentation of our business segments.

First, the distribution activities of banking products through independent networks have been reclassified from P&C to Wealth Management. Second, the banking activities with energy sector, commercial clients, were transferred from financial markets to P&C. These transfers have a non-material impact on the business lines revenues growth during the first quarter.

Now turning to Slide 6. On a year-over-year basis, the contribution to the revenue mix from P&C and Wealth Management increased to 75%, up 3% compared to the same period last year. Net income of P&C and Wealth Management were up 5% and 22%, respectively. Thanks to good revenue growth and tight control of our expenses. Financial markets net income was down C$6 million, mainly due to lower investment gains.

Now non-interest expenses on Slide 7. Operating expenses amounted to C$747 million, down 1% from Q1 2012 and down 3% on a sequential basis. On a year-over-year basis, salaries and tax benefits were down 1% due to lower variable compensation. Technology and professional fees rose by C$5 million due to IT development projects while other expenses decreased by C$5 million. On an adjusted basis, National Bank posted a negative operating leverage of 50 basis points in Q1. We continue to be strongly committed to maintain a tight control of our expenses in 2013.

Now on Slide 8. Year-over-year, the Bank continues to deliver double-digit loan growth. P&C and Wealth Management loans grew by 10% while commercial and corporate banking also performed well with loans increasing by 11%. Under funding side, deposits and BA growth reached 12% from the same period last year. Retail deposits from P&C and Wealth Managements were up 7%, while Corporate and Commercial Banking deposits grew by 20% and securitization rose by 13%.

Now, on Slide 9 for the capital management’s review. In Q1, 2013 risk-weighted assets under Basel III decrease by C$2.8 billion to reach C$59.4 billion, mainly because of the CVA charge delay. Core equity Tier 1 ratio under Basel III reached 7.85%, up 51 basis points since year end 2012.

Beside a positive impact of delaying the CVA charge, the increase is mainly due to net income for 29 basis points and common share and OCI elements for 13 basis points. These elements more than offset the impact of IFRS transition of 27 basis points. Please take note that the five-quarter transition period for IFRS is now completed.

Also, I’d like to remind you that in Q4, 2012, we made an accounting policy choice to recur pension plan actual gains and losses in the OCI. We then reduced CET1 ratio by 39 basis points. We expect the CET1 ratio to move to 8% by the end of 2013 at the latest excluding any positive impact of the CVA charge delay.

To conclude, the Bank is well-capitalized and we'll continue to manage its capital by keeping a sound, improved and balance between organic growth, acquisitions and returning capital to shareholders.

William Bonnell - EVP, Risk Management: (Merci Ghislain). Good morning everyone. I invite you to turn to slide 11 to review our credit portfolio composition at the end of the first quarter.

Personal Banking and Wealth Management accounted for 67% of the portfolio. The Commercial and corporate books represented 25% and 8%, respectively.

The geographical mix remained stable, with about two-thirds of the loan book based in Quebec, 18% in Ontario, and 15% in the Western and Atlantic Provinces.

Looking now at industry concentrations; you can see that the wholesale book remained well diversified across industrial sectors with no sector accounting for more than 15%.

The retail portfolio mix shows that insured mortgages remained the largest asset accounting for 37% of the book. HELOCs and noninsured mortgages represented 24% and 18% respectively.

The geographical breakdown of the residential mortgage portfolio is provided on Page 18 of the supplementary pack where we can see that 69% of the portfolio is in Quebec, mortgages in Toronto and Vancouver represented only 11% and 1% respectively.

Now, please turn to Slide 12. Credit performance remained strong with PCLs at C$32 million or 14 basis points compared to C$45 million or 22 basis points in the same period last year. Retail banking PCLs were C$35 million or 28 basis points, down three basis points from the first quarter of last year.

PCLs in the commercial portfolio amounted to C$9 million or 14 basis points, down five basis points from last year. Wealth PCLs were stable and the corporate book benefited from recoveries of C$13 million.

Looking ahead, financial conditions remained supportive of the stable credit environment and we target 20 to 30 basis points for provisions over the next two quarters.

On Slide 13, we see that gross impairments amounted to C$354 million, which is down C$33 million from the last quarter. Impaired loan formations for the retail book were at C$22 million or C$1 million higher than last quarter. In Commercial Banking, impaired loan formations reached C$34 million. The corporate books benefited from a couple of repayments during the quarter.

In the appendices, you’ll find highlights of our market risk exposure. We registered three days with net trading losses during the quarter with no global trading VAR breaches.

In summary, we are pleased with the performance of the portfolio of this quarter. On that, I’ll turn things over to Jean Dagenais for the business review.

Jean Dagenais - SVP, Finance, Taxation and IR: Thank you, Bill and good afternoon. I invite you to turn to Slide 15 for the review of the Personal and Commercial business segment. Q1, 2013 revenues amounted to C$642 million, up 3% compared to the first quarter of 2012.

Personal Banking revenues reached C$300 million, up 2% year-over-year mainly due to volume growth offsetting lower margin. Commercial Banking revenues were up 4% due to higher commissions on loans and BA.

Credit card and insurance revenues were essentially flat compared Q1, 2012. Operating expenses increased by 1% compared to the same period of last year due to initiative to contain costs. Provision for credit losses amounted to C$44 million, unchanged from the same period of last year.

Overall, P&C’s net income reached C$178 million, up 5% from Q1, 2012 due to the combination of higher revenues, good expense control and stable credit losses.

Looking at the P&C’s key metrics for Q1, 2013. Loan and BAs' rose by 10% year-over-year while deposits increased by 5%. Net interest margins stood at 2.14%, down 3 basis points on a sequential basis due to business mix and competition. Loan margin decreased by 2 basis points and deposit margin remained stable.

Finally, the efficiency ratio was at 55.3%, an improvement of 60 basis points from Q1, 2012. In summary, the P&C segment experienced good volume growth and efficiency control of its expenses.

Please turn now to Slide 16 for the Wealth Management review. Q1 2013 revenues totaled C$276 million, up C$14 million or 5% compared to the first quarter of 2012. All types of revenues contributed to the growth. Fee-based revenues amounted to C$132 million, up 4% year-over-year as a result of continued growth in client assets. Also clients being more active in the market favorably impacted transaction revenues which increased by 3% over Q1 2012 to reach C$76 million.

Net interest income C$68 million increased by 11% from Q1 2012 due to strong deposit growth. On a year-over-year basis, operating expenses were essentially flat as a result of measures taken to control expenses. Therefore the sector's Q1 2013 net income was up C$10 million or 22% from the corresponding quarter in 2012.

Looking at the Wealth Management key metrics in Q1 2013, loan and VAs from independent network rose by 2% year-over-year to C$7.8 billion while deposits increased by 12% to reach C$20.5 billion. Asset under administration stood C$205 billion, up 9% from last year, over C$3.5 billion in assets under administration came from 10 new clients doing business with our corresponding network platform.

Asset under management stood at C$37 billion, up 5% on a sequential basis. Finally, the efficiency ratio improved by 350 basis points, thanks to tight control of expenses and revenue growth. Overall, the Wealth Management business lines had a strong performance for the first quarter of 2013.

Now, I invite you to turn to Slide 17 for the Financial Markets review. Net income reached C$115 million, a 2% increase from the previous quarter and C$6 million less than Q1 2012 due to lower investment gains, partly offset by a loan loss recovery.

In Q1 2013 Financial Markets posted revenues of C$303 million, down C$34 million or 10% of the corresponding period of 2012, due mainly to lower gains on securities of C$29 million owing to the recording in Q1 of 2012 of C$28 million gain on a private investment.

Banking Services delivered a strong performance, up 26% from the same period last year, stemming from strong volume growth. The Other segment was down C$7 million, mainly due to lower revenue contribution from Maple, partially offset by Credigy’s revenue growth. In Q1 2013 CVA/DVA was C$2 million while Prop Trading amounted to C$8 million. The efficiency ratio was at 52.5% compared to 50.7% on a year-over-year basis. Overall, a strong performance in core client businesses, particularly Corporate Banking.

That concludes my remark. I'll turn the call over to the operator for the question period.

Transcript Call Date 03/01/2013

Operator: Steve Theriault, Bank of America Merrill Lynch.

Stephen Theriault - Bank of America Merrill Lynch: I have a couple of questions, first I think for Bill, Bill, can you tell us a little bit more about the nature of the recovery in Financial Markets this quarter is quite a large number and as I look back, there hasn't been a provision north of, I think, C$5 million since 2009. So, where did the recovery come from?

William Bonnell - EVP, Risk Management: There were a couple of repayments during the quarter in Financial Markets and one of those repayments was from an old file dated at least prior to 2009 time.

Stephen Theriault - Bank of America Merrill Lynch: So it is just really long dated timing on this stuff?

William Bonnell - EVP, Risk Management: Yes.

Stephen Theriault - Bank of America Merrill Lynch: (Indiscernible), please, this is a first time we've seen expenses improve in pretty dramatic fashion since the acquisitions. So can you talk a bit about the sustainability there? How sustainable is the improvement we saw this quarter? Are we turning the corner here really on expenses?

Ghislain Parent - CFO and EVP, Finance and Treasury: The answer to that is yes. We've worked hard. We have a good momentum both on the revenue and on the expense side and I don't see major changes. That's not a one-time normally.

Stephen Theriault - Bank of America Merrill Lynch: So we’ve moved from sort of the mid-70s op the low 70s, you would say?

Ghislain Parent - CFO and EVP, Finance and Treasury: I think so.

Operator: Peter Routledge, NBF.

Peter Routledge - National Bank Financial: A question for Louie. Bank had pretty strong operating performance for some time now. You stayed on strategy in terms of your acquisition activity. In particular in terms of your superregional objective, in terms of regional banking Canada. The region Canada is slowing and you see that in the revenue line. I guess sort of stepping back, do you need to broaden out or think differently about how you'll do acquisitions and how you might deploy your excess capital over the next few years, given that you've got headwinds in Canada that operating, good operating performance might not be able to overcome?

Louis Vachon - President and CEO: It's a pretty deep question here, but fundamentally the answer is we are sticking to our superregional banking model and with the exception of Credigy where I think you see improved performance and we are looking and discussing allocating more capital and resources to Credigy and clearly as you know it's a platform that operates exclusively outside of Canada, but aside from Credigy, I think our focus remains very much Quebec and the an areas in Canada, where we add value and we think we can continue to expand. So I think the way to see this, I think we've historically been focus on the regions where we add value and it's also perhaps why I think in some sense we don't feel we need to be, assuming that there are no surprises on the (DCV) level that the consensus of additional 100 basis points proves to be correct. So let's say the minimum capital is 8%. We need a buffer above that 50, 75 bps. We don't feel, we need to be much above that and if there are no opportunities to grow through acquisition we'll simply return to capital to the shareholders. We feel that having the right balance between moderate grow and very discipline capital management, will serve our shareholders very well, and that's how we're positioned and right now I think the other thing too I think we have to take into consideration is our sense is that growth in Quebec and Ontario right now is probably below what we feel is sustainable over the long-term basis. So I think we still anticipate moderate growth in Quebec and Ontario of 1.5%, 2% (REO) for the next two to five years. Right now, I think over the last quarter or two, I think we have been running probably closer to 1%, maybe a bit even below that. So I think we are growing below long-term trend right now in Central Canada. So if we would go back to trend, that’s going to help us a little bit. Then we still feel that there is plenty of places for us to grow in both Quebec and the rest of Canada and we stick to what we know. I think shareholders will be well rewarded for that.

Operator: Gabriel Dechaine, Credit Suisse.

Gabriel Dechaine - Credit Suisse: Louis, just first question is on your (indiscernible) guidance for tying that into the buyback. You are saying 8% is something you expect to achieve by Q4 or maybe above that, I don’t know. But from 7.6% now which includes the CVA that implies a lower amount of capital generation that you’ve been delivering over the past few quarters. Are you sandbagging or is this is a statement on where you think earnings are headed?

Louis Vachon - President and CEO: No, I don’t think you should read anything in terms of earnings. Frankly, I think we – this story is the same. I think we do want to return potential ABCB gains to shareholders, but the only thing we are adding is that we want to have a minimum level of 8% in terms of capital. In fact, if you listened carefully to what I said, I think Q4 is at the latest. So, frankly, between the fact that the IFRS adjustment has expired and that we are looking at potential ABCP gains over the next few quarters, I think we could get there sooner than Q4. So I'm just pointing them to that perspective.

Gabriel Dechaine - Credit Suisse: On the P&C Banking, I just want to kind of get the – is this kind of a big number thing, a conceptual thing for me, but I look at the loan growth and I'm looking in the average balances here, so bear with me, but total loans in dollar terms went up by C$1.3 billion and then deposits between Personal and Commercial and Wealth Management went up just under C$600 million. So what's the – I guess sort of funding out there C$700 million, what's the composition of how that was filled? How should I think about that?

Ghislain Parent - CFO and EVP, Finance and Treasury: We also have the securitization, so we usually fund our Retail business with Wealth Management deposit and securitization and obviously the retail deposit.

Gabriel Dechaine - Credit Suisse: I'm talking sequential here, but looks like personal loans there wasn’t that much growth and a lot of it was from the commercial, did you just kind of reallocate funding internally or something like that or – and just conceptually how do I break down that C$700 million gap into other than core deposit growth?

Ghislain Parent - CFO and EVP, Finance and Treasury: Look on the slide here you have it. In the presentation that we provided, you can see that obviously the loans grew on Page 8. You have about C$600 million loan growth in Personal and then you have another one EBIT less C$600 in Commercial and you see it on the deposit side. So overall, all the deposits for P&C and Wealth grew by C$1.3 billion. We have another (C$1 billion) something in Commercial and we have the securitization. Overall, it’s worked out with those three elements.

Operator: John Reucassel, BMO Capital.

John Reucassel - BMO Capital: I’ll maybe start with Ghislain here just. I’m trying to understand the reallocation. So you reallocated your energy loan book to the P&C business, is that right from – is that Alberta energy loan book?

Ghislain Parent - CFO and EVP, Finance and Treasury: Yes. It was in Financial Market, now it’s in P&C.

John Reucassel - BMO Capital: Is that a – I thought there were some larger loans in there too or is that mainly a small and midsized?

Ghislain Parent - CFO and EVP, Finance and Treasury: Well, it’s only the commercial loans that we have transferred. So, there’s also loans – Corporate loans there and they are still in Financial Markets. So we have transferred the commercial loans.

John Reucassel - BMO Capital: So you’ve split that loan book upwards, you’ve kept it together.

Ghislain Parent - CFO and EVP, Finance and Treasury: Exactly.

John Reucassel - BMO Capital: Then just on the spread pressure in the Personal and Commercial, and particularly on the loans, could you give us – and I’m sorry if I missed it, could you give us a sense? Or do you expect the pricing pressure on the loans to start to abate over the next few quarters or is this going to continue? Where is most of the pressure you’re feeling in your markets?

Diane Giard - EVP, P&C Banking: It’s Diane here. So what you are seeing is a continued pressure on the new issuance that we do on our mortgages relative to what we have in our books. So every time a mortgage comes up for renewal, what we see is an impact, a negative impact on our margins. So the business mix is something that we are looking at to actually offset some of those negative impact on the margins, such as having more business loans as an example and having more of a card portfolio, increasing the card portfolio are examples of initiatives that we can do to offset the negative impact.

John Reucassel - BMO Capital: Louis, in the past, you've talked about a great growth opportunity is the Quebec commercial mid-market, entrepreneurial market in Quebec. Is there competition in that kind of mid to large commercial case market in Quebec?

Louis Vachon - President and CEO: There is, but there always has been. So, as you know, what wins in the Quebec commercial market is long-term commitment and proximity and not short-term love affairs. I'm getting poetic here. So that's where we are doing and I think we're still comfortable with – we're very comfortable with our positioning. What we are also looking to do is to look at the areas where we have already had good expansion outside of Quebec. Energy is one, but we are looking to replicate that in other sectors, I've discussed that I think in the past, and so that's an area, and as Ghislain mentioned, cards as you know, cards have not been a big priority for us over last two, three years, and now after having allocated resources at times somewhere else, I think we can do a little bit better in credit cards and put a little more focus than – the more focus than we had in the last two, three years on that particular space.

John Reucassel - BMO Capital: Just on the mortgages, presumably you’re starting the mortgages to get the greater cross-sell opportunities. Are you getting those cross-sell opportunities on these mortgages, or is that still a work in progress?

Helene Baril - Senior Director, IR: Yes, what we’ve seen is improved cross-sell, especially, with insurance with our own sales force. The challenge remains with the broker channel and we are actually looking at a different strategy with leveraging our call center to promote and enhance our cross-sell abilities and results.

John Reucassel - BMO Capital: So right, just on the cross-sell on the creditor, insurance and mortgages in your own channel versus the broker channel, what would that be the difference be?

Helene Baril - Senior Director, IR: I don’t have that figure and we can get back to you on that one.

Operator: Thank you. There are no further questions registered at this time. I would like to turn back the meeting over to Mr. Louis Vachon.

Louis Vachon - President and CEO: Thank you everyone and we’ll talk to you next quarter. Thank you very much.

Operator: Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.