National Bank of Canada NA
Q2 2013 Earnings Call Transcript
Transcript Call Date 05/24/2013

Operator: Good morning, ladies and gentlemen. Welcome to the National Bank of Canada Second 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 second 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 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, Ellen. Good morning and thank you for joining us this morning. In the second quarter of 2013, National Bank posted record adjusted net income of C$369 million, or C$2.08 per share, up 6% and 7% respectively from the same period last year. Along with this performance, the quality of the loan portfolio remains solid with provision for credit losses at C$53 million, or 24 basis points. Return on equity was at 20.5% and the Common Equity Tier 1 ratio under Basel III stood at 8.3%.

National Bank again delivered excellent results with all three business units contributing to earnings growth, In Personal and Commercial Banking, loan volume is still showing solid growth and net interest margins appear to be stabilizing. Furthermore, the deployment of our new mortgage platform is in line with expectations with implementation in more than 200 branches so far. In the second quarter of 2013, Wealth Management did very well with earnings increasing by 23% on a year-on-year basis, thanks to successful integration of our latest acquisitions, good cost control and slightly more favorable market conditions.

Financial Markets earnings were up 23% compared to last year due mainly to strong contribution from client-driven activities and excellent expense control as indicated by its very strong operating leverage. This overall strong performance, particularly in Wealth Management and Financial Markets demonstrates the momentum of our pan-Canadian expansion and a broad diversification of our revenue sources.

Our very strong earnings, high ROE and gains on the ABCP portfolio impacted positively our capital position. Even taking into account the negative impact of the CVA adjustment, we are essentially meeting a minimum Basel III common equity Tier 1 ratio of 8%. This means that we could be in a position to reactivate our common share buyback program as early as this current quarter.

In addition, we will raise our quarterly dividend by C$0.04 to C$0.87 per share for the third quarter of 2013.

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

Ghislain Parent - CFO and EVP, Finance and Treasury: Good morning, everyone. I invite you to turn to Slide 5 to review the second quarter results. First, on an adjusted basis, National Bank posted total revenues of C$1.3 billion, up 3% from the same period last year, due mainly to higher trading revenue in Financial Markets, increased revenues in Wealth Management and loan growth in Retail and Commercial and Corporate banking.

Net income amounted to C$369 million or C$2.08 per share, representing a 7% increase from the same period last year and a 3% increase on a sequential basis. ROE was solid at 20.5%.

Now on a reported basis, net income amounted to C$434 million or C$2.49 per share in Q2 2013, compared to C$553 million or C$3.22 per share in the same period last year. The decrease is mainly due to the net gain of C$198 million realized on the sale of Natcan Investment Management in Q2 2012.

Second quarter net income included specific items of C$65 million, net of taxes, which comprise the positive fair value adjustment of C$100 million of ABCP restructured notes and the write-off of C$29 million in intangible assets related to IT development.

Turning to Slide 6. For the first six months of 2013 adjusted net income reached C$730 million up 4% compared to the first half of 2012. On a fully diluted basis EPS also increased by 4% to reach C$4.10 adjusted ROE was solid at (20.2%).

Please turn to Slide 7. The revenue mix shows P&C and Wealth Management representing 72% of total revenues. Net income of Financial Markets and wealth management rose by 23% on a year-over-year basis thanks to good revenue growth and tight control over expenses. The other segment was down C$19 million from Q2 2012, due mainly to a lower contribution from treasury.

Now on Slide 8, operating expenses amounted to C$769 million up 2% from Q2 2012 and 3% on a sequential basis. Salaries and technology expenses were stable. The increase is due to higher professional fees related to revenue generating activities and higher performance management fees for Wealth Management.

On an adjusted basis National Bank posted a slightly positive operating leverage of 28 basis points in the second quarter of 2013, we continue to be strongly committed to maintain a tight control over expenses in 2013 and a positive operating leverage.

Now on Slide 9, year-over-year the Bank continues to deliver strong loan growth P&C and Wealth Management alone grew by 9% while commercial and corporate also performed well with loans increasing by 11%. On the funding side, deposits and BA sold reach C$96.1 billion, up 11% from the same period last year. Retail deposits from P&C and Wealth Management were up 5% while commercial and corporate deposits grew by 25% and securitization rose by 7%.

Now, turning to Slide 10 for a capital management review; core equity Tier 1 ratio under Basel III reached 8.3%, up 40 basis points on a sequential basis mainly due to reported net income including a CVA charge of 27 basis points, the ratio of 8%. Risk weighted assets increased by C$700 million sequentially to reach C$50 billion at the end of April.

To conclude, the Bank is well-capitalized and will continue to manage its capital by keeping a sound and prudent balance between organic growth, acquisition and returning capital to shareholders.

On this, I'll turn the call over to Bill for the risk review.

William Bonnell - EVP, Risk Management: Merci Ghislain, and good morning everyone. Need to turn to Slide 12 to review our credit portfolio composition at the end of the second quarter. Personal Banking and Wealth Management loans accounted for 67% of the portfolio. The commercial and corporate books represented 25% and 8% respectively. Geographical mix also remained stable with 68% of the loan book based in Quebec, 20% in Ontario and 12% in the other 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 14%. The retail portfolio mix shows that insured mortgages remained the largest asset in the book, accounting for 37% of the portfolio. HELOCs and non-insured mortgages represent 24% and 18% respectively.

I would also note that the loan to value for HELOCs and uninsured mortgages was approximately 59% and 55%, respectively. The geographical breakdown of the residential mortgage portfolio is provided on Page 18 of the supplementary pack, where we can see that the largest share in the portfolio remains in Quebec. Mortgages in Toronto and Vancouver represented only 11% and 2%, respectively.

Now please turn to Slide 13. Credit performance remained strong with PCLs of C$53 million, or 24 basis points compared to C$49 million, or 24 basis points in the same period last year. Retail banking PCLs were C$39 million or 32 basis points, slightly higher than the last four quarters. PCLs in the commercial portfolio accounted for C$13 million or 21 bps down 3 bps from last year.

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

On Slide 14, we see that that gross impairments amounted to C$346 million, which is down C$8 million from the last quarter. Impaired loan formations for the retail book were at C$20 million in line with previous quarters. Commercial repayments reduced the level of impaired loans by C$13 million and formations for the corporate book amounted to C$7 million.

In the appendices, you will find highlights of our market risk exposure. We registered two days with net trading losses during the quarter with no trading VAR breaches. In summary, we are pleased with performance of the portfolio 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 morning. I invite you to turn to Slide 16 for the review of the Personal and Commercial business segment. Q2, 2013 revenues amounted to C$632 million, up 2% compared to the second quarter of 2012.

Personal Banking revenues reached C$295 million, up 2% year-over-year mainly due to volume growth offsetting lower margin. Commercial Banking revenues were up 2% due to volume growth mainly from the credit card revenues increased 3% from the same quarter last year to C$80 million. While insurance revenue were down C$4 million year-over-year due to the recording of a securities gains in Q2 of 2012.

Operating expenses increased by only 1% compared to the same period last year due to initiative to contain costs. Provision for credit losses amounted to C$52 million up C$4 million for the corresponding quarter of 2012 mainly in retail.

P&C's net income reached C$166 million up 2% from Q2 2012 due to the combination higher revenues and good expense controls. On a sequential basis the decrease in net income stems from pure number of days and higher credit losses.

Looking at the P&C's key metrics for Q2 2013 loan and BA rose by 10% year-over-year, while deposit increased by 5%. Net interest margin are now presented based on earning asset to align with industries practice. This does not impact changes between periods.

So net interest margin stood at 2.30% for Q2 2013 down 1 basis point on a sequential basis. Loan margin was slightly down by 1 basis point while deposit margin was down 3 basis points.

Finally the efficiency ratio was at 56% an improvement of 60 basis points from Q2 2012. Overall the P&C segment experienced good volume growth and a moderate sequential decline in margin while controlling efficiency is expensive.

Please turn now to Slide 17 for the Wealth Management review. Q2 2013 revenues totaled C$289 million up 4% compared to the second quarter of 2012. Fee based revenues amounted to C$137 million up 4% year-over-year while transaction and others were at C$86 million representing a 2% year-over-year increase.

Net interest income at C$66 million increased by 8% from Q2 2012. On a year-over-year basis operating expense improved by 460 basis points. The sector Q2 2013 net income reached C$58 million, up 23% from the corresponding quarter in 2012. Looking at the Wealth Management key metrics in Q2 2013, loan and BAs from independent networks remain at C$7.8 billion or deposits increased by 10% to reach C$21.7 billion. Assets under administration stood at C$207 billion, up 8% from last year, driven by good momentum into corresponded network division. Asset under management increased 15% to C$39 billion due to strong mutual fund sales and momentum in private wealth.

Now I invite you to turn to Slide 18 for the Financial Market's review. In Q2 2013, Financial Markets posted revenues of C$363 million, up 13% from the corresponding period of 2012, due mainly to higher trading revenues in Banking service. Trading activities were up 40% year-over-year, thanks to client-driven activities and strong performance in fixed income and derivatives. Financial Market fees were down C$6 million due to stronger M&A activity for the corresponding quarter of 2012. The Other segment was down C$10 million mainly due to lower revenue contribution from April.

In Q3 2013, CVA/DVA was negative C$3 million while prop trading amounted to C$4 million. The efficiency ratio was at 46% compared to 51.2% on a year-over-year basis, overall a strong performance client-driven activity.

That concludes my remarks. I will now turn the call over to the operator for the question period.

Transcript Call Date 05/24/2013

Operator: Gabriel Dechaine, Credit Suisse.

Gabriel Dechaine - Credit Suisse: First time in a while we have, you know you reporting not a day after four banks. Anyway, just on the Canadian NIM, can you tell me if there is any pick-up in pre-payment income that may have influenced the NII this quarter?

Jean Dagenais - SVP, Finance, Taxation and IR: No, not to – this is Jean. Gabriel, not to my knowledge, this is really due to a stabilizing margin in our mortgage business and the business mix was favorable for us.

Gabriel Dechaine - Credit Suisse: Second is on the commercial book, I mean, given the weakness in commodity prices, I think a lot of people are focusing on credit quality in mining and energy-related loans. It's but a C$ 4 billion loan book for you. Can you give me a sense of how much of that is big name companies that we know that can also tap public debt markets at low rates and/or SMEs I guess as it would. And then also, what you are seeing as far as the financial help of the big companies that you are lending to?

William Bonnell - EVP, Risk Management: Hi, it's Bill. You are right. As you know the main part of our portfolio in that sector is in the oil and gas. It’s the smaller producers that has been our core historic portfolio in the mining sector and other commodities it's very small, our portfolio. We've been looking in stress testing the portfolio quite actively, we have this quarter had a couple of files which we've taken some provisions and impacted their commercial loan losses, but we see those as isolated in nature. The reasons for the difficulties were not similar and we are quite comfortable with lending model that we have and the portfolio of clients that we have in that sector.

Gabriel Dechaine - Credit Suisse: Have you been trimming, lines of credit at all just to kind of protect yourselves or taking any other actions like that?

Louis Vachon - President and CEO: Main action is following it extremely closely we haven’t changed our underwriting criteria and we've been quite pleased with the track record in that sector with the underwriting criteria that we have.

Gabriel Dechaine - Credit Suisse: My last question also on the commercial book, this is from Page 17 on the supplement you've got C$5.4 billion of loans in construction and real estate, C$4.3 billion and that includes commercial mortgages, I'm just trying to get a sense of how many commercial mortgages are in that C$4.3 billion and then the construction and real estate book. How does that, you've given very an indicator that the condo exposure is very small less than 1% of your total commercial book but in that C$5.4 billion what else would be in there, partner buildings or…

Louis Vachon - President and CEO: The biggest increase in that sector is the non-residential mortgage units, 5 units or more and it’s the sector that classically has maximum 75% loan-to-value and a portion of it is actually insured as well.

Gabriel Dechaine - Credit Suisse: That’s certainly the other what about the construction and real estate?

Ghislain Parent - CFO and EVP, Finance and Treasury: Yeah. So in the construction, as you know, the portfolio is weighted to Quebec. So we have about C$140 million in the condo construction sector, which is little over 60% Quebec based and Ontario be the next largest, percentage weight.

Gabriel Dechaine - Credit Suisse: So, C$140 million out of C$5.4 billion. What's the rest of it? I think you got me. I don't know, I'm just trying to get a better sense of what's in that number?

Ghislain Parent - CFO and EVP, Finance and Treasury: Yeah. So let me – why don't I come back to you offline and go through with more details.

Operator: Sumit Malhotra, Macquarie Markets.

Sumit Malhotra - Macquarie Capital Markets Canada: First question to Louis, regarding the potential for share repurchases. You've differentiated in the past between, what I'll call, your intention to put all of the ABCP related gains towards share repurchases and then your comfort level on buybacks in relation to where you are on B3 capital. So with C$100 million write-up on the restructuring this quarter, is it correct to assume that that can immediately be applied to buybacks or are you linking that in with where you are in capital?

Louis Vachon - President and CEO: I move more to where we are in terms of capital. So, as I said last quarter, the objectives – the first objective was to get above 8% the minimum threshold under the conservative assumption that there would still be a negative CVA impact as of the end of and early 2014. So we essentially are there now. Now going forward, the issue is how quickly do we want to build a buffer and given that where we are, and I think we demonstrated that even excluding the ABCP gain this quarter would generate to at least 20 bps to 25 bps of excess capital during the quarter. So, assuming the economic environment holds up and the performance holds up, the question is, how quickly do we want a delta buffer above the 8%? Let say a minimum is 75 bps and can we do the buyback at the same time we're building up the buffer? We think for now that the answer is yes. So, I think the question, the speed of the buyback will be basically our calibration of how quickly we want to build a provision of at least 75 bps above the 8% minimum, and at the same time continuing to buyback. So, that's why I think, you know if we give it one or two months, this quarter, I think buy the end of this quarter, we could be in a position to start buying back stock. And then the speed at which we buyback the stock, we'll be calibrating based on how quickly we want to build the buffer of 75 bps. So, in a stable environment, probably 18 months would be a good time, and that's why 2% buyback per year looks as we are looking to get approval on, looks to be a realistic number to us at this stage.

Sumit Malhotra - Macquarie Capital Markets Canada: And somewhat related, so on the ABCP, when you first sort of talking to us about this, I think it was roughly year ago. You mentioned the potential for C$300 million to C$500 million in gains. This quarter's gain is the largest we've seen, and I can obviously go back and check this as well. Where are you on that C$300 million to C$500 million, and maybe even from a carrying value perspective, where is the holdings being carried by National right now?

Ghislain Parent - CFO and EVP, Finance and Treasury: You can look at the, I think we –

Louis Vachon - President and CEO: It's C$1.8 billion notional. C$1.3 billion net of reserve.

Sumit Malhotra - Macquarie Capital Markets Canada: Okay.

Louis Vachon - President and CEO: I think we've taken roughly close to C$250 million of gains between…

Sumit Malhotra - Macquarie Capital Markets Canada: Sorry, C$150 million or C$250 million?

Louis Vachon - President and CEO: C$250 million so far I think since we started the major recoveries. So 130 this month and this quarter…

Ghislain Parent - CFO and EVP, Finance and Treasury: In Q4 2012.

Louis Vachon - President and CEO: I think conservatively, I think it's still at least C$200 million more that we could take the timing of that of course is any time between now and next two years. So the timing is uncertain, but 200 looks like a pretty good minimum right now.

Sumit Malhotra - Macquarie Capital Markets Canada: My last question is for Ricardo, looking at Page 7 of the supplement. When we look at the six quarters that you've provided for us here, we certainly see revenue this quarter being at by far the strongest level for the segment, but the expense number isn’t really too different from what we've seen consistently over that time. When we think about expenses within Financial Markets compensation is usually at the top of the list, and it did look like the compensation ratio was lower in an all bank level. So was there something special in the compensation accrual this quarter that really helped the expenses in the operating leverage or would you see the level that we had in Q2 as more of a run rate type of number?

Ricardo Pascoe - Co-President and Co-CEO, National Bank Financial EVP, Financial Markets: I think as you know we've had three restructurings in as many years. So you are starting to see the impact of how we are trying to drive the efficiency and we are managing down the comp to revenue ratio with international markets definitely we are, I think year-to-date we are already below 25% and last year we were above 26%. The business mix, revenue mix helped us a little bit this quarter or has helped us this year because investment banking and equities our revenues are down, but that’s only a bit of help it really is a very conscious move to reduce comp to revenue ratio.

Sumit Malhotra - Macquarie Capital Markets Canada: Sorry. I guess that was the last one, but since you are here, I mean, on the revenue side, it did seem like it was a better quarter for capital markets activity, but this is one of the better performances we've seen from the Bank in quite some time. Maybe just take your temperature here as we head into what is usually a seasonally slower period and what you are seeing in terms of specifically underwriting advisory, but also in terms of trading conditions as well?

Ghislain Parent - CFO and EVP, Finance and Treasury: It's very hard to predict. I mean, the point I would make, if you look at the chart over the last few quarters, our trading revenues for each of the categories are not outsized for what they have been in the past, but it just happens that they all were towards the high end. So it's really a broad-based pickup in client activity. And I think it shows how much we've developed the client franchise. I mean, you can see that we have very significant trading revenues with very low prop trading revenues, it's really all now driven by clients, so hard to predict going forward. It really depends on client activity, but I think the base is much broader. As far as the new issue pipeline, we see it improving, but still very slow on the resources side. It's still early I think for recovery there.

Operator: John Reucassel, BMO.

John Reucassel - BMO Capital Markets: Louis, just to understand better the 75 basis points buffers, what's the magic on that? I mean, when you sit down talk to the Board does that give you a flexibility to do smaller deals or it's just a buffer for operations? Or how – can you just elaborate on that a bit for us?

Louis Vachon - President and CEO: There is no magic to it and probably even less science, frankly. But I think clearly, we don't want to operate at 8.01% limit for obvious reasons, so just to build a bit of a buffer above that, you know and we're trying the number of 75 bps for now and at some point, we'll get feedback from all the appropriate parties on this. But for now, that's what we are I think looking to build over – and as I said 18, maybe 24 month period, and we think we can build that and at the same time return capital to the shareholders if performance allows it.

John Reucassel - BMO Capital Markets: Does it speak to the size of transactions you are looking at, or is that reading too much?'

Louis Vachon - President and CEO: You are reading too much. I think if it's a small, if we do medium size acquisition, what we would do then is probably stop the buyback and let the excess capital pay for it. If we do large transactions which as you know indicative market quite unlikely given the absence of potential targets, but just for theoretical sake, then we would issue shares to maintain above.

John Reucassel - BMO Capital Markets: Then just for Bill, I apologize if I missed it, but, I see the LTVs on your originated mortgages are higher in Ontario than Quebec. Would that be the same for your existing loan book as well of mortgages?

William Bonnell - EVP, Risk Management: For the existing loan book, as you know because of the higher rate in Quebec, it would have a greater impact on them all. But, on the – on Page 16, 18 in the supplementary pack, I think you can see the breakdown by province.

Louis Vachon - President and CEO: It gives you the in-force kind of by province.

John Reucassel - BMO Capital Markets: Okay. Sorry, I missed that. And then just on the deposit funding I guess it's like 19. There is a big jump up in corporate over the course of the year. Do you feel comfortable with that, the funding mix you have now or how should we look at your ideal funding mix going forward?

Louis Vachon - President and CEO: We're quite comfortable with as long as we see growth in all business segments and all client segments. We are quite comfortable as you know, we have a very strong commercial and corporate banking franchise. So we've deliberately over the last 18 to 24 months called them a little bit more to contribute to funding and that has been a pretty deliberate decision. Generally I think we do want to see growth in all business segments in terms of deposits and that’s where we are seeing and that’s why are quite comfortable with it.

John Reucassel - BMO Capital Markets: Just following on that, the deposit competition in personal and term or demand and term deposit what is it like in Quebec and Montreal. Is it still not that bad and the pressure is still on the asset, margin, pressure is still on the asset side or as you are seeing more in the deposit side?

Jean Dagenais - SVP, Finance, Taxation and IR: I think you can see competition everywhere and that is true on both sides of the balance sheet. I think what you are seeing now, not as much appetite on term for deposits it's actually the activity has been more on the high interest savings account and this is where you've seen a whole lot of competition in that particular market. So not as much on term but much more on variable high interest savings account.

Operator: Brad Smith, Stonecap Securities.

Brad Smith - Stonecap Securities: Just a quick question, the tax equivalent adjustment in the quarter I believe was C$61 million. It's up about 50% from the previous quarter. I guess the implication being that there's been a significant increase in tax-advantaged investments, but just wondering, if you could put that in context for us to help us understand why that number is getting so big and perhaps give us some sense for whether that's going to continue? I guess, the other side of that is, just to link that into the whole trading revenue picture where most of the trading revenues are coming from your equity book, the increase anyway I should say, where with TEB adjustment I guess – I might have thought it might have been spread out more in the fixed income and credit side as well.

Louis Vachon - President and CEO: Actually it's Louis. When we look at the numbers we've seen growth in trading in all segments. In fact, we had a record and close to a record in fixed income and also an FX and commodities. So, your first statement that most of the growth came from equities is not correct. If you look at the numbers, it came from all segments in fact in trading.

Brad Smith - Stonecap Securities: Well, I'm looking at is on Page 11. It say, trading revenues by product went from C$50 million third quarter to C$73 million in the equity book. So, I was just saying, that's a very large increase on a relative basis, and I just wanted to get that tied together with the TEB adjustment. Thank you.

Jean Dagenais - SVP, Finance, Taxation and IR: Just for the TEB adjustments, are you saying most of the TEB – all the TEB adjustment goes into the Financial Market sector and it would go obviously into the equity portion, because it's related to dividend that are not taxable in Canada and there were more trade, more transactions into that respect.

Brad Smith - Stonecap Securities: Right. And I'm just talking in terms of the general magnitude of it. I mean, your effective tax rate is basically doubled by adding back that TEB adjustment. I haven't seen a TEB adjustment of that scale for a long time at another bank. So, what is that that you are doing differently, or doing more of?

Jean Dagenais - SVP, Finance, Taxation and IR: Because of the trading we do with our clients and the support we do for ETF and like that, we have a large portfolio of securities that pays Canadian dividend.

Louis Vachon - President and CEO: So, it is, I think where we are larger than the others is in the ETF trading on a proportional basis. And that's why it is such a big business and would it continue? It really depends on the activities in the ETF and that's why we are so hesitant to give a forward looking number on that. It really depends what happens to the market. So, a positive overall market involvement and where we've seen no good positive market in the U.S has been a good factor, and if that slows down, then I think you should probably expect that number to go down.

Operator: Stephen Theriault, Bank of America Merrill Lynch.

Stephen Theriault - Bank of America Merrill Lynch: Couple of follow-ups for Louis and a question for Bill. So, Louis, I apologize if I missed this, but I lost you a little bit. Did you suggest it was about 18 months to get and 8.75 Tier 1 common on an organic basis?

Louis Vachon - President and CEO: Ideally, we like to do over that period of time and but that may change depending on number of things. But ideally that's where we like to build it up over a period of time.

Stephen Theriault - Bank of America Merrill Lynch: Any new thoughts on the possibility of keeping the 30 basis points of CVA benefit. Is that, any more positive or negative on that likelihood?

Louis Vachon - President and CEO: We have no special insight on that front.

Stephen Theriault - Bank of America Merrill Lynch: And, so you've got C$200 million of the MAV gains over the last three quarter, I think. I'd like to understand a bit more, so what would it take for you to realize some more gains over the course of the next couple of quarters I know it's certainly hard on the visibility, but is there much of a likelihood we see any more this year or is it dependent on what happens with spreads or market trades or if you could help us a bit on that.

Louis Vachon - President and CEO: I think there is ongoing proposal for MAV II to essentially unwind part of the MAV II and that’s been driving a reduction of the trading values versus implicit values within the MAV I and MAV II. So should that restructuring effort succeed and I think it’s they are trying to execute this sometime this summer, that could be a positive catalyst for better evaluations on the MAVs otherwise it’s the, as we get closer to maturity I think that would be possibly the major driver for recuperation as we get closer to expiry on the underlying CDS contracts and then we get to closer to getting the money back in late 2015 and 2016, then obviously then the notes would gravitate to at par.

Stephen Theriault - Bank of America Merrill Lynch: It's hard to believe those structures are already getting close to maturity?

Louis Vachon - President and CEO: They are meant for that.

Stephen Theriault - Bank of America Merrill Lynch: Then just quickly for Bill. I think this is the first time in while we are seeing more human type credit losses from the bank material leads versus guidance. So does it feel like the recoveries have come to an end a little bit here and we'll see some more normal credit, not to say they were abnormal before, but to see something more in the range of what you are guiding towards.

William Bonnell - EVP, Risk Management: I'll tackle that in two sides in the retail side you've seen that there was an increase in the retail sales from last quarter and it was mainly driven by two factors. One, the PCLs in credit cards was a little bit higher, and that's that pattern that we've seen in the past couple of years where the second quarter has seen a little bit of a jump in the loss rate. The other credit metrics though for the card portfolio are great, lower delinquencies and they don't indicate a change in the positive trend we've seen. The second factor relates to the integration of an acquired mortgage portfolio that's generated some noise in our mortgage PCLs and delinquencies for the quarter. The acquired portfolio is performing according to expectations, but during the transition to our system there were some operational issues that impacted both the PCLs and delinquencies. Excluding that little portfolio, the mortgage PCLs actually declined quarter-over-quarter as did the delinquencies.

Stephen Theriault - Bank of America Merrill Lynch: So you do you feel like you cleared those issues then from that small book?

William Bonnell - EVP, Risk Management: They should regulate over the coming say two quarters, but they were still at the beginning of this quarter, there were still some operational issues that needed to be resolved. On the other side, on the Wholesale, clearly there were fewer recoveries this quarter than last quarter, and I talked about a couple of files in the oil and gas portfolio less that impacted the quarter. But overall, we've had 24 basis points revisions, which is well within our expected range and on a year-to-date basis it's 19 basis points, which remains low. And finally I point out that our gross impaired loan ratios continued to decline. So excluding the noise that we've discussed, we are not seeing a change in the – in our – anything that would change our view of the supportive environment for credit.

Stephen Theriault - Bank of America Merrill Lynch: While I have you, maybe this is in the numbers, so I apologize, but could you tell me the average LTV of your uninsured, the uninsured portion of your mortgage book? Not for the new originations, but for the entirety?

Louis Vachon - President and CEO: Uninsured 55 and for the deluxe it was 59, that's based on authorized. If you look at actually utilization of the HELOCs, it much lower than that.

Operator: Peter Routledge, National Bank Financial.

Peter Routledge - National Bank Financial: Question for Luc, Wealth Management, your earnings grew well 4% quarter-over-quarter, so it's mid-teen on an annualized basis. The growth trajectory looks pretty consistent over the last six quarter. So, assuming the operating environment, the capital markets environment doesn't change much from where we've been in the last several quarters. Can you maintain 15% earnings growth year-over-year and for how long?

Luc Paiement - Co-President and Co-CEO, National Bank Financial EVP, Wealth Management: The upcoming, there shouldn't be any surprise for the upcoming. Beyond that we'll see, but we're doing more fee base than ever. So, the earning will be stable and there is lots of good thing happening. So, the – I'm positive for the upcoming quarter, the few upcoming quarter.

Peter Routledge - National Bank Financial: And that's on the revenue side reflective of the shift to fee based business?

Luc Paiement - Co-President and Co-CEO, National Bank Financial EVP, Wealth Management: That's, yes. That's one of the elements of our business lines. What I like about the current numbers, all of the business lines, there is nothing flashy, nothing, but the good core business and all of our business line where it's organic, whatever it's because of the acquisitions that not now we are driving, we finalized the integration of our two acquisitions and it's going well. So it's just going well, just about everywhere I mentioned to you (core net) last time that we added new clients and now they are paying off. So and we get approached by all sorts of bodies to provide more services and either core net or partnership or others. So it is broad based and but yes fee base is going up and so I don’t expect any strip prices or negative strip price at least for the next quarter or quarters.

Peter Routledge - National Bank Financial: On efficiency is 72% sort of a natural lower bound for efficiency in this business, or in two years could you be at 70 or…

Louis Vachon - President and CEO: Well as you the top line is you'd be – I think we have done a good job on the expense side. There is some more room but, some more room but not that much, because we have been pretty good, let's say last year. Top line as I said there is nothing exciting if we start to do more new issue business and stuff like that. I think the ratio will improve. Yes it could be a target of mind to get to 70 or something like that.

Peter Routledge - National Bank Financial: Then quick one for Louis I just noticed that excluding the ABCP gains. Your capital markets related businesses generated a fair bit more in earnings then commercial banking and that’s sort of the first time I have seen that in a while. Assume that I mean, assuming the trends hold, I mean international markets may not be as strong this quarter as they were this quarter, but assume generally the trends holding, National Bank has over 50% of its earnings on a recurring basis from capital markets related businesses? Is that acceptable are you okay with that, is there any reason to change your business mix to weight more towards P&C?

Louis Vachon - President and CEO: I think long term, I think we wanted to keep capital markets around 30% and 33%, but as I said I am not going to clip Ricardo's wings and his team's wings when they have a good quarter. So there will be market conditions and environments and we've seen that before '08, '09 was one. 2001 and 2002 was another where we've had for periods of time we had capital markets and treasury representing close to 50%. But once situation stabilized, we gravitate more toward the 30%, 35% we are targeting. The second one too, that we – as you know we have discuss that in the past as part of the growth within Financial Markets is coming from Credigy. It's growing quite well. I think you could easily make the case that Credigy is technically not Financial Markets. So at some point if it gets big enough we would probably change the reporting structure of Credigy either as a fourth reporting segment or roll it into P&C to give a more accurate picture of what it is. When it was pretty small we didn't really care, but at the speed that which its growing right now, it is giving probably overweighting a little bit, the impact of Financial Markets versus the overall activity of the Bank.

Operator: Michael Goldberg, Desjardins Securities.

Michael Goldberg - Desjardins Securities: First question I'd like to follow-up with Bill. You mentioned the integration of an acquired mortgage portfolio adding to a mortgage PCL, just remind me what was that mortgage portfolio, how big was it and was it insured or uninsured?

William Bonnell - EVP, Risk Management: The portfolio was about C$330 million in size, closed in December I believe of last year and it was primarily uninsured. It's one of three or four small portfolios that we purchased typically from banks that were exiting the Canadian market. And as I said, the expectation for performance, we haven't changed our expectation for how it will perform for the year, but there were some issues in integrating it.

Michael Goldberg - Desjardins Securities: I'd like to turn also to (indiscernible). You mentioned lower contribution from Treasury in the other segment. I always have a hard time wrapping my head around the segment numbers. What does that means on consolidated basis?

Louis Vachon - President and CEO: Well. So, the Treasury results are reported in other segment and it's been the case for two years now. Treasury had a very, very good year in 2012, and well in 2013 the year is a little bit more difficult. It's related essentially to two things. Well, the low interest rate environment for sure is one, and the other item will be – as you can see in our numbers and the liquidity numbers, we have more and more term financing. So, of course there is a cost associated with term financing and so those are the two reasons why we have lesser performance in Treasury.

Michael Goldberg - Desjardins Securities: On a consolidated basis, does this get neutralized or I mean is it offset in another segment?

Jean Dagenais - SVP, Finance, Taxation and IR: Michael this is Jean. No it stays into the other segment, it's not neutralized. It is the trading position and position on the curve that treasury will take. That stays there. It's not related to the financing of other sector which is based independently on that.

Michael Goldberg - Desjardins Securities: Lastly for Louis, recent acquisitions surrounded your wealth business. Does that remain a key area of interest and whether the businesses interest you?

William Bonnell - EVP, Risk Management: Wealth Management does remain a priority for us. And in terms of acquisitions, I think we said quite consistently, Michael, that in terms of acquisition that Personal and Commercial Banking activities and Wealth Management activities in Canada would be of interest to us. So that remains a focus on the P&C aside from the few portfolios that we've acquired, that we just discussed, we don't see a lot of activity. On Wealth Management, I think we've been more active on that front, as you know to our latest acquisitions. So, we are almost done integrating the last ones we've made namely Wellington West and HSBC. And so I think we would be interested. Should the right fit comes from the cultural and strategic standpoint come, we would be interested.

Michael Goldberg - Desjardins Securities: The comment was also made that competition in HISA accounts has, they've intensified, and I guess that's what ING and Ally moving to Scotia and I guess World Bank nuking Ally, but once this has happened, do you see more consolidation taking place in HISA? Do you think that some of the players in there are likely to get out or do you think – like smaller players or do you think that more may get into that business?

Louis Vachon - President and CEO: I'll take the first crack at it and Jean correct me. I think Michael when we look at what's going on with Basel III in terms of liquidity requirements and the favorable treatment on the Basel III of HISA-type accounts. My suspicion will be that it is a product that's here to stay and it will become more and less competitive over cycles, but the product, it will remain very much a mainstay of most financial intuitions savings product.

Operator: Gabriel Dechaine, Credit Suisse.

Gabriel Dechaine - Credit Suisse: Just a follow-up on the MAV-notes. Can you tell me of the – I guess the carrying values C$1.3 billion or so. What's the risk weighting on those assets?

Jean Dagenais - SVP, Finance, Taxation and IR: I don't have the detail in risk weighting. It depends on – some notes are rated, so they have less impact. Some of them are not rated, so they are deducted. So they have 1250% risk weighted, but I don’t have the specific detail.

Gabriel Dechaine - Credit Suisse: I guess there ballpark for the whole portfolio you can give, the 50% or 75%?

Jean Dagenais - SVP, Finance, Taxation and IR: Just a second. Maybe there's something in the Basel III disclosure. There was a lot of disclosure on securitizing the portfolio in there.

Louis Vachon - President and CEO: I think while Jean is searching the information Gabriel, you are on to something, because in fact when we appreciate the portfolio, and as the portfolio matures, there are two gains from the regulatory standpoint in terms of capital. The first one is, obviously when we markup the book, the gain allows us to increase our regulatory capital. But also when the product will mature, it would also free-up regulatory capital, because it is using some regulatory capital right now. So we have two sources of increase coming from that, not just one.

Jean Dagenais - SVP, Finance, Taxation and IR: On Page 32 of the supplementary package, you see the re-securitization risk weighted assets which is a total of C$1.8 billion. It's mostly those.

Gabriel Dechaine - Credit Suisse: Sorry, can you – what page is that?

Jean Dagenais - SVP, Finance, Taxation and IR: Page 32, capital requirements for securitization exposure under securitization framework, and you see that on balance sheet, your risk weighted asset in the banking, there is three amount here totaling C$1.8 billion, mostly than that.

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

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

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