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National Bank of Canada
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Good afternoon, ladies and gentlemen. Welcome to the National Bank of Canada First Quarter 2018 Results Conference Call. I would now like to turn the meeting over to Ms. Linda Boulanger, Vice President of Investors Relations. Please go ahead, Ms. Boulanger.
Thank you, and good afternoon, everyone. Welcome to National Bank's investor presentation for the first quarter of 2018. My name is Linda Boulanger, and I'm Vice President of Investor Relations. Presenting to you this afternoon are Louis Vachon, President and CEO; Ghislain Parent, CFO and Executive Vice President, Finance and Treasury; and Bill Bonnell, Executive Vice President, Risk Management. Following their presentations, we will open the call for questions from analysts. Joining us for your questions are Diane Giard, Executive Vice President, P&C Banking and Marketing; Martin Gagnon, Executive Vice President, Wealth Management; Denis Girouard, Executive Vice President, Financial Markets; and Jean Dagenais, Senior Vice President, Finance. Please note that all documents referred to in today's conference call can be found on our website. I would also like to remind you that a caution regarding forward-looking statements applies to our presentation and comments. With that, let me now turn the call over to Louis Vachon.
Thank you, Linda, and thank you, everyone, for joining us today. In the first quarter, National Bank achieved excellent results with net income of $556 million, up 11% from last year. Our performance was driven by double-digit growth in all business segments, effective cost management and a prudent approach to risk. Our continued focus on the execution of the bank's transformation translated to strong operating leverage across all our businesses. For Q1, the bank delivered robust return of -- on equity of 18.9%. We are carefully managing our capital to maintain strong capital levels. We ended the quarter with a CET1 ratio of 11.2%, providing us the flexibility to invest in our business and return capital to shareholders. During Q1, the bank repurchased 1.5 million common shares. Credit quality remains strong in our overall portfolio. We continue to benefit from good economic conditions in Central Canada, particularly in Quebec. The unemployment rate is at a historical low in Quebec and the second lowest in Canada. Housing affordability is very reasonable. Household leverage remains well below the national average, and some public finances help sustain strong consumer and business confidence. Now let me share some highlights of our businesses. Our P&C segment had strong results again this quarter with a net income of 11%. Our performance was driven by revenue growth in both retail and commercial, higher net interest margin and in continued efficiency improvement. Our vision is clear: we want our bank to be simple, fast and efficient. We are investing heavily in digital transformation to enhance our customer experience. The results are very positive. Our digital -- our clients' digital adoption rate is increasing rapidly. It now stands at 43%. Self-serve transactions represent 87 of total activity, and mobile usage is accelerating. Our focus remains on a digital-first strategy for retail and SME clients and on relationship and advice for large commercial clients. As always, we are balancing sustainable growth and prudent risk management to be well positioned throughout the cycles. Looking forward, we will maintain our overweight position in the province of Quebec as well as overweight in secured loans, which we view as favorable in the current economic environment. Turning to Wealth Management. We had another excellent quarter with a 21% increase in net income, driven by organic growth, good cost management and favorable market conditions. For the past 2 years, we've highlighted -- we've been highlighting the momentum of this business, and we see it continuing in 2018. Our wealth unit is reaping the benefits of our unique business model, namely unbiased advice through open architecture as Canada's largest manager of managers. We've also cemented our leading position as the partner of choice for independent asset managers. Our wealth business is in great shape and continues to expand its footprint in the rest of Canada, where it derives half of its revenues. Financial Markets also had a very strong quarter, up 14% from last year, driven by our strength in equity derivatives and growth in investment banking activities. The key take away from our results is the consistency we have demonstrated through the -- throughout the years in this business. We have built a diversified revenue mix that is focused on client-driven activities. It is anchored by a relationship in the province of Quebec, combined with a strong team and relationships across Canada. Our U.S. Specialty Finance and International segment also had a strong quarter and generated net income of $50 million, up 32% from last year. Credigy and ABA Bank continue to perform ahead of plan and remain well positioned to generate solid returns for the rest of the year. As stated before, I reiterate our current moratorium on significant investments in emerging markets for 2018. Now let me reconfirm our capital deployment strategy. Our priority number one is to maintain strong capital ratios. Number two is to invest to stimulate business growth in our core markets. Number three, to invest to capture significant efficiency gains and generate operating leverage close to 2%. And number four, return capital to our shareholders through sustainable dividend increases and share buybacks, while maintaining a CET1 ratio above 10.5. We are well positioned to actively pursue our NCIB program. It is our intention to file for renewal when it ends in June. As usual, we will provide an update on our dividend policy next quarter. Our one client, one bank vision is in full force. In a rapidly changing environment, we want to remain the financial partner of choice to power our customers' ideas. We firmly believe this will be achieved through our digital transformation and our cultural evolution. In that context, we recently announced the construction of a new head office building, which will provide further strides in our current transformation with modern, collaborative spaces supported by advanced technology. With the employee well-being at the heart of this project, this will also become a key differentiating factor to attract and retain the best talent. We look forward to a move-in date in 2022. On that, I will turn things over to Ghislain, and I will come back for closing remarks. Ghislain?
Thank you, Louis, and good afternoon, everyone. My comments today will focus on 2 areas, efficiency and capital, beginning with Page 7 on the slide deck. As Louis mentioned earlier, we reported excellent first quarter results underpinned by strong performance across all businesses. During the first quarter, we generated strong top line growth of 9%, while exercising strict discipline in managing our costs. This resulted in an all-bank operating leverage of 3.7% with positive leverage across all business segments. P&C, Wealth Management and Financial Market delivered strong operating leverage of 4%, 5% and 7%, respectively. We continue to invest massively in our digital capabilities. Investments in our transformation continued to produce tangible results. We are now focused on the reduction of structural costs through digital solutions, automation and process simplification. This is translating into further improvements in our efficiency ratio, which improved by 190 basis points year-over-year. In P&C, we are on track to meet our target of 52% by the end of the current fiscal year. In the last 2 years, we showed consistency in our ability to generate positive operating leverage and better efficiency. Looking ahead, we will continue to invest for growth, while capturing additional efficiency gains. Our objective is to generate an operating leverage of close to 2% for fiscal 2018. There is a strong commitment from all employees of the bank to contribute to efficiency actively in all their activities and on a daily basis. Turning to Slide 8 for the capital overview. We ended the first quarter with a strong CET1 ratio of 11.24%, a slight improvement over the last quarter. This was largely triggered by strong internal capital generation, which added 42 basis points. It was partly offset by 3 items: first, the impact of IFRS 9 adoption; second, the common share buybacks during the quarter; third, a slight increase in the risk-weighted assets, mainly as a result of loan growth. At the end of Q1, the bank's pro forma total capital ratio stood at 16.6%, including the issuance of subordinated debt earlier this month. We are pleased with our current capital position, which provides optionality and flexibility to invest in business growth and return capital to shareholders. On that, I am turning the call to Bill for the risk review.
[Foreign Language] Good afternoon, everyone. During the first quarter, credit performance across our portfolios remain strong and economic conditions remain supportive. Details of our provision for credit losses are provided on Slide 10. Under new IFRS 9 accounting, total PCLs were $87 million or 25 basis points and are comprised of provisions on impaired loans, referred to as Stage 3, and provisions on performing loans, referred to as Stage 1 and 2. PCLs on impaired loans, which are the most comparable to specific PCLs under the previous accounting methodology, were $73 million or 21 basis points, stable from last quarter. This good performance was driven by stable provisions in Personal Banking, Wealth Management and Financial Markets, lower provisions in Commercial Banking, offset by higher provisions in Credigy. As we discussed last quarter, the seasoning of the Credigy unsecured portfolio is expected to generate a higher level of provisions in the first half of 2018. This portfolio continues to meet our expectations for both credit quality and profitability. Excluding Credigy, our PCLs on impaired loans would have been just 14 basis points, which is a clear demonstration of the favorable economic environment we're experiencing and the quality of our loan portfolios. Provisions on performing loans were approximately $19 million, offset partially by a $5 million change in POCI. This component of total PCLs can expect it to add volatility under IFRS 9 and is influenced primarily by volume growth, changes in credit quality and changes in economic assumptions used in our forecasts. In a stable credit environment, we would expect new loan originations to be the main influence as was the case this quarter. We did not change our forward-looking view of the economy used in IFRS 9 models this quarter. While economic performance has been strong, we are cognizant of the fact that we are late in the economic cycle and want to remain prudent in our forward-looking assumptions. Looking ahead, we expect the economic environment to remain supportive of a good credit performance, and therefore, we maintain our 20 to 30 basis points total PCL target for 2018. As I mentioned, last quarter, we expect to be around the middle of that range for the full year with higher provisions in the first half and lower in the second half due to the seasoning and amortization in the Credigy unsecured portfolio. Turning to Slide 11. We finished Q1 with gross impaired loans of $546 million or 40 basis points, following the implementation of IFRS 9, which changed the definition of impaired for some loan types and increased reported GILs. During the quarter, gross impaired loans declined by $37 million or 3 basis points. The new accounting treatment also impacted our reported formations this quarter for credit cards and Credigy loans. Under the new definition, formations totaled $69 million. I draw your attention to Page 24 in the supp pack, where the impact of these changes is clear. These changes to definitions do not change our view on the strong underlying performance of the loan portfolio. Absent the change, impaired formations remained low as we would expect in this benign credit environment. On Slide 12, a review of our residential mortgage and HELOC portfolio is presented. In terms of product mix, insured mortgages account for the largest share of 44%, followed by HELOCs at 32% and uninsured mortgages at 24%. The geographic mix remains heavily weighted to Quebec, which accounts for 55% of the total portfolio. As Louis mentioned, strong employment growth and affordable home prices continue to support a healthy Quebec housing market. The average LTV of uninsured mortgages and HELOCs was stable at 58% and exposure to the GTA and GVA markets remained modest at 8% and 2%, respectively, of the portfolio. In conclusion, we were pleased with our performance in the first quarter and believe our loan portfolio is well positioned to maintain solid performance. And with that, I'll turn it back to Louis for closing remarks.
Thank you, Bill. Before turning over to the Q&A period, I would like to say a few words on senior management changes announced this morning. Following a career spanning over 35 years -- sorry, Diane, if I mentioned that particular one, it's in the text. Diane Giard, Executive VP, P&C Banking and Marketing, has announced her intention to retire. Since joining the bank in 2011, Diane has been an outstanding leader, mobilizing the bank's largest sector toward their common goal of powering our clients' ideas and creating significant value for our shareholders. As part of a rigorous succession planning process and to ensure the success of the sector ongoing transformation, we announced the appointment of 2 highly experienced leaders of the bank, who will be joining the office of the President. Stéphane Achard, currently serving as Senior Vice President, Commercial Banking, Canada and International will become Executive Vice President, Commercial Banking and Insurance. Having joined the bank in 2017, Stéphane has over 30 years of experience in the financial services industry and is very well known in the business community. His understanding of client needs will be a key asset in growing the business line. Lucie Blanchet, currently serving as Senior Vice President, Distribution, Solutions and Processes will become Executive Vice President, Personal Banking and Marketing. Mrs. Blanchet has over 22 years of banking experience. She joined the bank in 2002 as part of the risk management team and has held various positions in the Personal and Commercial Banking, including a number of high-impact transformation initiatives. In addition, following a career spanning also 35 years in banking, Lynn Jeanniot, Executive Vice President, Human Resources and Corporate Affairs, has also announced her intention to retire. Responsibility for the sector will go to Brigitte Hébert, Executive Vice President, Operations, member of the Office of the President since 2015. She will also -- she will become Executive VP, Human Resources, Corporate Affairs and Operations. So she's keeping her operations responsibility and taking over HR. I would like to congratulate my colleagues who are taking on new leadership roles. Over the coming months, Diane and Lynn will ensure a smooth transition of their responsibility, which will come into effect as of June 4, 2018. I am very optimistic about the next phases of our transformation and the support -- with the support of a highly talented and engaged executive team. We will have the opportunity to thank Diane and Lynn for their exceptional contribution to the bank's success over the years on our next quarterly conference call scheduled for May 31. So on that, let me turn the call over to the operator for the question period.
[Operator Instructions] The first question is from Steve Theriault from Eight Capital.
I jumped on the call late, but wanted to cover with a couple of things with Diane, if I could. And Diane, congratulations on your upcoming retirement. In terms of the margin, we've had banks moving in different directions this quarter, so maybe just to start, the margin for P&C Banking is unchanged. What are some of the moving parts there? And will we start to see -- I think it's -- you can see deposit spreads accelerating somewhat in that slide. But should we see the margin moving higher here with -- after the late rate hike? Anything on outlook and moving parts would be a good start.
Okay. Thanks for your kind words, Steve. On the margin, year-over-year, we were up 60s, although it was flat sequentially in terms of the previous quarter. And the increase of 6 bps over -- the year-over-year was explained by first, the yield curve and second, the business mix. And going forward, into 2018, condition to having an increase in rates in May, our margins should go up about 6 points for the year.
6 points from year-end, 6 points on average or 6 points from Q1?
Until the end, until the end. So you can actually -- depending on when the rate increases happen, but it should happen in the second and the third quarter.
Okay. And then on the deposit side, if I flip to one of the appendices on Slide 21, I know we've talked a bit about this in the past. But in Personal and Wealth Management, the -- by my count, the last few quarters, the year-on-year growth in deposits has gone sort of 10, 3, 2, 0. Maybe a little bit of -- some insight on what the trajectory is there going forward and if you're stepping back in -- from certain components, that would be useful as well.
So on the -- Steve, it's Diane again. On P&C, our growth in deposit was actually 4% for retail and about 14% for commercial. And where that comes from is, on the retail side, it probably is as planned. And we're also seeing with the market being the way it is, if people are -- have a preference for mutual funds. So we have a much higher increase year-over-year in mutual fund business. On the commercial side, our 14% growth comes in from the strategy I spoke about in the previous quarters. It's really the business and public sectors, the government sectors as well as the other public sectors, where we had a very targeted strategy and also in terms of large commercial. And that strategy is still paying off, and that's why we're seeing a decent quarter year-over-year for this quarter. Now going into the rest of 2018, it will be probably more tame and much more towards the mid-single-digit range.
Okay, it's probably just the way the mix is presented. Maybe I'll follow up. And if I could, just one more, probably for Louis. The budget out last night, it seems -- the one item that seems highly bank-related is it looks like the government is looking at synthetic buybacks. It's not a strategy we talk about specifically. But maybe, Louis, you could give us just a little color on, is this a meaningful part -- is this -- if this does go away, will we see that in the equity trading line? How modest a component is that for the Financial Markets division?
Well, as you know -- I've been discussing these policies over quite a few years. And as you noticed, we've managed to continue to grow our capital markets business very nicely as revenue Canada has updated its rules, and this should be no exception. We don't impact -- we don't expect any impact on future growth trajectory for our capital markets following this announcement yesterday.
The next question is from Gabriel Dechaine from National Bank Financial.
Actually, a follow-up on that budget question. I also have something on the commercial -- or sorry, the IFRS 9 impact. But the -- some of the more, I guess, conceptual elements of the budget running off of through -- a few of these topics, it looks like FinTech's going to get a bit more of a level playing field, changes to the payment system might be negative for the sector. Consumer protection, cybersecurity, like what -- is there anything in this budget that, I guess, excites you?
No. You know me, I get easily excited about a lot of things. But the -- I would say on the -- let's start with cybersecurity. Actually, we view the updated strategy on cybersecurity very positive -- as very positive. I think the, particularly the increased -- the greater role for the communication security establishment in terms of their budget but also their capability in coordinating responses to incidents. So I think on that side, I think that was very positive. I think on payments and FinTech, as you know, payments, I think, it's still quite a few years away in terms of the real changes there. And I think they're still under discussion, so it's too early to really have a big view on that. On FinTech, as you know, the view on FinTech from both the FinTech side and from the banking side has evolved from a -- more from a narrative of competition to one of collaboration over the last few years. And if you look at some of the things we've done with Nest Wealth and other participants, I think we're more looking to working collaboration with FinTech as opposed to seeing each other as competitors. So I would say a big plus on cybersecurity from our perspective and the other elements are all pretty neutral.
So that big plus, the cybersecurity stuff out of the way. I'm reading your comments -- or hearing, I guess is that it's more of a concerted effort to protect the system. Is that the idea?
Correct. Yes. I mean, to be clear, we're -- National Bank is responsible for protecting its clients and our information and data. So we're not looking to hide behind the government. However, should we come at -- under attack by state actors, we do expect the appropriate government agency to be able to react and also very importantly, to coordinate response with the private sector. And I think we're -- we -- as I said, I think the federal government took a big step forward on that with the announcement yesterday.
Okay, great. And my next one is for Bill, and you were careful to highlight that the additions to the Stage 2 allowances, that new fund category from IFRS 9, not the result of a change in the economic outlook but because of business growth, I guess. How -- can you help me understand that a little bit better? Why -- when you originate more loans, why wouldn't those just be increasing Stage 1? Or is there -- is it not necessarily the one where there -- I guess, there's more perceived risk in the specific sectors, in which you originated those loans.
You're right, Gabriel. Thanks for the question. The -- I was referring to Stage 1 and 2 together. So I think with the noise in IFRS 9, those new pages in the supp pack, can take us a while, a few quarters, for you to see exactly where to find the underlying story. I think on Page 25 of the supp pack, you can see -- you can decipher through some of the noise in the reporting. New originations generated $28 million in Stage 1 allowances, and that was partially offset by transfers back and forth between the other stages and repayments. And generally, when the economy is stable and without any changing assumptions in the economic assumptions, you would expect that the volume of growth would be the main driver.
Okay. I guess, the last one I'll ask on commercial lending, and Diane, I echo the happy retirement sentiment there. But commercial lending, we saw the bank, I think it was 5% growth in commercial lending growth last year ex oil and gas runoff, and that's the same number we're getting out of the gate. Different geographies, obviously a factor, but your peers are putting up double-digit growth in commercial lending. Are there any sectors that you're -- you want to get more aggressive in? Or alternatively, are there any areas where you're being conservative?
Well, let me just tell you that first of all -- well, thanks for the kind words and first of all, in terms of the growth, the 5% growth -- and that's what we are showing for the first quarter as well. It may give the impression that we're performing below our peers. However, our core commercial business is actually growing at about 8%. At this point last year, we decided to exit the noncore lending activities in the -- some foreign countries. The runoff of this portfolio will continue for the next 2 quarters. The hit, Gabriel, is about $500 million a quarter with $20 billion left in that portfolio. So we continue to favor a very disciplined approach to growth by balancing our market shares or margin improvement in risk management. So that was in the whole spirit of what we did. Now going into the -- 2018, we continue to expect high single-digit growth for our commercial book, and we certainly believe that we will do this with a particular focus on the specialty verticals that we're very keen on and also probably better in our primary market in Quebec.
Our next question is from Nick Stogdill from Crédit Suisse.
If I could start with the trading revenue. Obviously, very strong. Maybe your thoughts on the drivers and what you're seeing to start the second quarter. And then in the supplement, if we look on Page 14, a lot of the growth was in the other trading category. If you could give us some color what's in that, that would be helpful.
Okay, for the trading, there was nothing really specific in the first quarter. In fact, I think all business line did very well, and we're very pleased because, again, it's the balanced business that we have across the financial market that is very important. And I keep mentioning for the previous quarter, we worked very hard to have all those entity working all together and be sure that it's always client-driven and not necessarily positioning in the market. Then the client activity was quite good for us in the first quarter. It show up in many activities. The mix of business and the mix of profitability is different, but the overall, I think it's quite good. It's quite good, but it's comparable to the first quarter of 2017. It's only 1% above, but we managed through the volatility to do pretty well.
Q2 so far?
Q2, so far, we -- well, remember that February was quite volatile as a start. Then we've been saying that we were protecting the book against the volatility, then we've -- we're doing quite well right now. We're okay, we're -- but we cannot predict the future, and we'll see how the volatility will translate in the market. But the one activity that we can talk about is really the M&A activity, and we had a big jump in the first quarter. Nontrading revenue was up 22% -- or 25%. And in mainly, it's how the business related to M&A, ECM and BCM, then we did quite well with the client again. Then -- and we are expecting to see the signs in the market continue to be good for us and the activity is still there for the next quarter. But again, M&A book is quite big. It's quite interesting right now and is promising, but it all depends on how the market will react. Anyway, it can come and disappear very fast. But right now, we're pleased with the -- what we have on our end.
Okay. And then just the other trading line, the $48 million this quarter, that's up pretty meaningfully from the last 2 years. Any sense on what's on that or I can follow up offline?
Well, that's not really -- to central market. That's 48 million, it's treasury revenue.
Treasury, okay.
Yes.
Okay, great. And then just one more numbers question. I see employees outside of Canada are up 9% from last quarter, up 40% from last year. Can you just refresh me on what's driving the growth? I know back in 2016 that might have been the international, but is that still what's driving the international business in Credigy or something else?
The big increase in employees is coming from ABA Bank. On a global basis, that's where it's coming from. I think they have 11 branches more than they did a year ago, plus they're expanding their operation. So I think the one area we've had big increases in...
In MDMB mortgages.
And -- yes. And also we've had an increase in some specialty functions in Canada, so mortgage specialist for instance.
Any employees outside Canada, sorry?
No, that's ABA across Canada. In Canada, I think it's relatively -- it's all specialized functions, like mortgage specialist, I think that's one area and a few -- some more resources in the call center for instance.
We have a question from Meny Grauman for Cormark Securities.
I just wanted to ask a more detailed question on ABA falling on Nick. Just in terms of the performance that we're seeing now consistently quarter-after-quarter, it looks pretty strong. So I'm wondering -- I appreciate reiterating the moratorium, but if you just look at the financial metrics, is there anything to suggest that this -- I don't know if you want to call it, an experiment or foray into the international business was anything other than -- or is anything other than successful? And if you could just comment on that and sort of is there anything your -- that surprised you so far into that foray?
Well, suffice it to say that we were very pleased, so far, with the performance of ABA. But at the same time, as you know, I think the verdict will be out once we have a full and complete economic cycle. And I think that's -- I think what we'll find out once we've gone through. I think we need a few more years to gauge the finality of the investment. But so far -- suffice it to say, so far, we think we have the right platform, we have the right team, we've met the team. I think we're very happy with the investment we've made there. The other investments in Africa, I think it's too early to really -- to decide whether they will be a permanent feature of the core businesses of National Bank or whether there will be a tactical investment. So on those -- on the African investments, we're still in the "learn and wait and see" mode.
If I could just turn to Quebec specifically, in the prepared remarks, you noted the -- I guess you call it, the sanity of the Quebec housing market. I'm just wondering if you're seeing any signs that some of them, the more speculative activity, some of the craziness that Toronto and Vancouver are now known for are sliding over the border into Montréal. Is there anything there that you're seeing?
Not so far. Diane is still -- looking at her, she says no. I think the only areas -- as you know, the only area we've seen increased activity by nonresident buyers have been a few neighborhoods in Montréal: Westmount, Town of Mount Royal, Pointe-Claire, Beaconsfield and Brossard. So that's 6 neighborhoods out of 30 in the greater Montréal area, and that's where we see more presence. But, frankly, a bit stronger demand in the real estate market in Montréal has been bringing the market closer to equilibrium as opposed to flipping it over the -- over on a nonequilibrium side. So I think it's been generally positive. What we see, so far, from the Montréal market is about a 5.5% increases in prices in 2017. So this is as good as and as close as to Goldilock as you can hope for now. So.
The next question is from Sumit Malhotra from Scotia Capital.
Let me just stay with the housing and mortgage question. Rather than overheating, when I look at your mortgage numbers, I think we talked about this a little bit last year, but your mortgage growth, the way you present it to us, looks like it's about 3% year-over-year. Certainly, a couple of points below what we're seeing for the industry average. And the Quebec numbers are even slightly lower than that. I think from your disclosure in your supplement, it's about 2%. Just wanted to get an update from you then. This sometimes comes up when loan growth is a bit slower. Is this a purposeful decision on your part, whether it's from a risk or a spread perspective? Or are you seeing just enhanced competition in the market that's maybe led to a slower level of mortgage growth?
Diane?
Okay. Thanks for that, Sumit. I'm going to give you some color on this. Our current growth reflects our strategy to favor our primary market, where we, as what we've said, we currently experience solid market conditions and also favor our own sales force. You will recall that in Q1 of 2017, we made a change to our broker channel strategy, which had and as expected, a negative impact on volume starting in Q2 of 2017. So in the last 12 months, we originated $1.4 billion less in broker deals. That's a 2.5% hit on our mortgage growth for the last 12 months. So in Q1 of 2018, as an example, we originated $400 million less in broker deals than we did in Q1 of last year. And we know that this situation will stabilize in Q2 of this year. And the one thing which Paradigm Quest in Quebec did, they didn't have an office in Quebec. And actually starting in Q4 last year, they've actually put a team together. So we should see some uptick there as well as when Louis talked about the increase in the number of FTEs, we've hired also a number of mortgage specialists for our branches and also to cater to the realtors. So I do expect, for 2018, to grow at nominal GDP. We'll come at to the 4% to 5% range. And the negative impact of B20 will be largely offset by the introduction of those mortgage specialists in our branches, our complex center as well as in the field. So we continue to expect that more than half of our mortgages will be originated in Quebec and the vast majority, more than 75%, will come from our own sales force.
So that year-over-year 3%, obviously, that -- let's call it, the channel decision you've made is impacting that. One thing you didn't mention there was the new regulations. We talked to some of the banks about this with B20 having now been in for about 2 months. How has that impacted your origination since the start of the year?
The B20 will not since the beginning of the year because that's pretty -- it's fairly new. But I do expect this to have a 5% impact, negative impact on origination and probably a 1% in our -- in the growth. So -- but considering all that, we still expect to grow at nominal GDP because of what I said, because of the fact that we will reposition ourself in the broker channel and the fact that we've added significant capacity in the mortgage specialists and mortgage development managers.
That's helpful. Next one, probably for Ghislain, 2 numbers questions. First off -- and sorry if I missed it, do you have an interact gain that was included in your results? And then secondly, I think you said operating leverage of 2% on an all-bank basis, full year, is a reasonable target. And just to be clear, that's taking into account a 4% Op leverage number in Q1?
Your first -- thank you for your questions, Sumit. For interact, yes, we have a gain of $4 million in our Q1 results. And on your second question, the answer is yes. We continue to focus on efficiency across all sectors of the bank. That being said, 3 of our plans that I would like to mention. First, we are cognizant about the high revenue growth we are delivering. So cost this is even more important when the business is good. Second, we don't favor the short term at the expense of the long term. So we are not focusing only on efficiency ratio. We continue to invest massively into the transformation. And to your point, third, although we delivered a strong operating leverage in Q1, we are maintaining our target of close to 2% for our fiscal 2018.
All right. And obviously, you've had some very big numbers in that regard. So I think it's reasonable to expect some moderation. Last one for Louis, just to go back to that budget commentary from yesterday. Someone asked about the capital markets' revenue impact but just in general, from -- for buyback activity. Over the last 2 years, we've seen many of the banks, including National, participate in these third-party agreements in which you have been able to repurchase shares or the industry has been able to repurchase shares at a discount to market value. Is this one of the transactions that we will see less of going forward as a result? I certainly understand that doesn't preclude you from just buying your stock through traditional measures. But is this one of the things worth talking about?
Yes, yes. So I think the transactions where you would buy the stock at 4%, 5% discount, I -- and that's -- I don't think that will be available anymore. So we'll just be buying at market.
And that's just a capital allocation decision like it always was?
It is, indeed. Yes.
The next question is from Robert Sedran from CIBC.
I guess, Diane, let me add my well wishes to the pile, I guess. I had a follow-up question on your answer to Gabe on the commercial runoff book. I'm not sure I heard correctly what it was, and so I wonder if you can just give a little more color on it and perhaps tell us how large it was before it started running off.
Okay. Well, the decision -- so what I did say is that our growth is -- our core commercial growth, really what the business is all about in the commercial segment, our growth year-over-year is about 8%. So that's what I said, and the reason why we're not showing 8% is because of a decision we made in the last quarter of last year to exit 2 countries. It was Brazil and Turkey, where we were actually lending to some financial institutions at a very favorable rate. So it wasn't great for our margins, and it wasn't -- not that it was too risky, but we decided that wasn't our core business. So we decided to exit that market completely. So we're running off that portfolio, and we're running off at about $5 million -- $500 million rate each quarter. So that actually is taken off of the growth that we are making in our core business. And we are now left with about $1 billion worth of outstanding that we will actually runoff within the next 2 quarters. So by the end of this year, this will be taken off completely. So if you want to look at how healthy our commercial business is, is you have to look at the fact that we're growing our revenues by 12% year-over-year this quarter, and this comes from a diversified business activity. It's lending, it's growth in deposits and it's also noninterest revenues because we have great activities in our FX and derivatives in loan fees. So, all in all, our commercial businesses is actually doing quite well.
Okay. I just -- I guess I was a bit confused by Brazil and Turkey being in Personal and Commercial Banking. Are there any other countries that you're lending to internationally in that segment?
My point exactly, that's why we're exiting.
Yes, it is also -- it was part of the trade finance business.
Exit.
It was within trade finance, it's not -- going around and lending to businesses in Turkey and Brazil. It was within the trade finance portfolio, and we would have backup guarantees with banks in these countries. And I think it was the right decision to decide. That was absolutely not core to our mission.
Okay, I appreciate that extra color on that. Bill, I wanted to ask a question about IFRS 9. And I know -- I hear well what you're saying, but I guess after listening to you and Louis for several calls now, tell us how good things are in Quebec, I might have thought a bit of a reversal was coming. And so I'm trying to understand how much is art and how much is science in terms of IFRS 9? Because I understand it's based on your projections, but I just figured, given how strong things are that there might have been a bit of a reversal. And so are you able to just be a little more conservative in your assumptions to keep some powder dry, I guess?
It's art or science or sorcery. I've also considered that. That's my view on IFRS 9. But I think I'll start, and then I'll let Bill add color. I think we're being very conservative here. And as you know, on the models, we have room to be conservative, and you should expect us to be very, very conservative. 10 years into an economic expansion, I think we're going to -- within the reasonability of the model -- and I have Jean Dagenais looking at me right now. But within the reasonability of the model, you should expect us to be very conservative on level 1, level 2.
The only thing I'd add, Rob, was that you mentioned we've been talking about the strengthen and the growth of the economy for a couple of quarters or at least a number of quarters. So the difference between November 1 and January 31, we remain positive, the economy is doing very well, but we did not significantly change our view forward-looking.
So okay. Just a quick follow-up though, I mean, you made an interesting comment, Bill, in your prepared remarks, where you said it's late cycle. If it proves that we're a mid- to late cycle, in other words, this does go for a while longer, is there a point at which the model suggests you sort of have to release some of these reserves back into earnings? Or is it always about your projections looking forward?
So sure, Rob. I think the -- you can certainly see that if the economy remains very, very strong, you could see upgrades, higher or better risk ratings across companies in the commercial book and in retail as well. So there's going to be movements back and forth between Stage 1, Stage 2. You'd expect more moving to Stage 1 in a very strong economic cycle. So some of it is baked in. What I was referring to is forward-looking, we've got our base case, downside case, up -- upwards case, and we didn't change any of the scenarios in those cases or our probability rates against them.
The next question is from Sohrab Movahedi from BMO Capital Markets.
We don't usually go to the capital regulatory capital disclosures supplement, but on Page 24, you provide a perspective on the purchased credit protection, if you will, or protection purchased or sold. The notional value on that is down quite substantially quarter-on-quarter. Would that have helped with the trading revenue?
I think so. Which Slides?
23, 24.
In the -- maybe we'll take it off-line, I don't know. But it's in the supplementary regulatory capital disclosure.
I think Ghislain maybe can follow-up line -- online but I believe from some previous quarters, I think that our CHT, our mortgage securitization CHT activity, the derivative gets captured in that line of the derivative. So if we were doing less bulk insurance, I would assume that there'd be some decline in that number, but Jean can look through that...
Yes, we'll get back to you on that.
And then Louis, I mean, Diane just talked about the exiting of some of these noncore books. Bill is talking about exercising, call it, prudence late in the cycle. You've talked about yourself, at least I've heard you on a couple of occasions talk about the prudent approach to risk.
Yes.
Is there -- can you give us a sense of the trade-off decisions you're making, whether it's the approval rates on the next corporate loan, whether it's how you may have altered the decision-making on the frontline? I guess, what I'm trying to get a sense of is, is prudent approach to risk coming at a cost?
Yes. It's a very, very good question. So I mean, that's one that we, as an executive team, we ask ourselves on a daily basis and at the risk committee of the bank, we ask ourselves on a weekly basis. But so far, I think in terms of action, we're -- I think we've -- we actually sacrificed volume. I can only point right now to our decision to exit the third-party brokers and to redefine on a much more narrow and stricter risk box our relationship with Paradigm Quest. So that is impacting our volume growth in mortgages, and we assume that decision. We live with it, and I am convinced -- as a team, we're convinced that it's the right decision to make. The rest, Sohrab, is more anecdotal. I think I mentioned in the previous call that Bill and I have had to -- are saying no more often now at risk management committees. We see some sign -- I'm not forecasting, and no one here is forecasting a recession, nor do we claim to be able to forecast the next -- the timing of the next recession. All I'm saying is that we've had a 10-year now economic expansion, and we do see some late cycle behaviors coming in. Deals with higher leverage ratios, weaker covenants, so I think it is an environment where we want to exercise caution. Our goal -- our strategic goal is to ideally, given our overweight in Quebec and our overweight in unsecured, we -- if -- when the next downcycle comes, we do want to be able to outperform. And are we sacrificing a lot of growth right now for that target? I don't think so. Are we being selective? Yes, as we should be. And that is our job to do so.
That is excellent. Can I just clarify one thing? The decision on the mortgage volume growth and the Paradigm Quest, was that a risk decision? Or was that a profitability and margin decision?
It was a profitability and margins. I think we -- as you know, we're agnostic about mortgage brokers. We were out of that market and then in 2010, '11, we came back in that market. And basically, we realized that we were having lower margins. And despite our best efforts, we were not succeeding in cross-selling these clients and onboarding these clients that we wanted to. And at the end of the day, it was -- I think it was the right decision to make.
And I guess, Louis, from your management -- from your discussion with the management, with the board and what have you, when -- like, what do you have to see to feel good about the fact that you did actually outperform? Like, is it on the PCL line that you will outperform in the downcycle? Is it on the reduction in revenue growth line? What sort of metrics do you think you're -- I don't mean it in a combative way, I just want to make sure what sort of metrics should we be looking at to make sure we see it.
I think, again, it's not in my KPI's for 2018. Again, I'm not forecasting -- and as a team, we're not forecasting a recession in 2018. But I think over a medium term, whenever the next -- over a 3- to 5-year time horizon, ideally, our PCLs, do -- we want to remain below the industry average in terms of PCLs and ideally, that should be also reflected in the volatility of our earnings. So I think the proof will be in the pudding, ultimately.
The next question is from Darko Mihelic from RBC.
I just have a few questions on provisions for credit losses, and I'll be referring to your Slide 10 of your investor presentation. And my first question is a simple one. The movement in Credigy losses from 117 basis points to, let's say, 179, I realize the accounting's a little different, but for all intents and purposes, is that all coming from the Lending Club?
Primarily yes. It's from the seasoning of the lending -- of the portfolio of unsecured.
Okay. And what I've noticed is also that the loan portfolio with Credigy has barely moved. So can you maybe speak to some of the seasoning aspects of the loan portfolio at Lending Club and whether or not it actually is going to runoff relatively quickly? Or is that portfolio going to stick around for quite some time?
When I think about 2018 and that portfolio, what I expect is an increase in dollar PCLs due to seasoning in the first half. Towards the middle of the year, there'd be some balance with some amortization, as there's additional paydowns in the portfolio. And there will be a stabilization at a lower dollar level. So you will -- I would expect to see lower dollar provisions in the second part of the year. Does that answer your question?
I suppose it helps. What's the duration of the Lending Club portfolio?
Yes. I think average, it's 18, 24 months average.
Yes. It's quite short, Darko.
Okay. And I guess with respect to the way you've sort of characterized it, I mean, the -- I suppose the way you've looked at it or the way you've described it is, you hit the midpoint of your range for the first half of this year, largely as a result of the Credigy provisions being elevated and then somewhat peeled back and -- towards the back half of the year. I guess what I'm interested in, in maybe better understanding, especially since you're saying that this is within your expectations, is it possible, for example, that in Q2, we're actually looking at a provision for credit losses at the high end of the range, let's say, 30 and then in the back half of the year, watch it fall back down to the bottom end of your range? Or will it be a little more stable than that?
I think it will be a little more stable than that. But you see there is volatility with the IFRS 9 in Stage 1 and 2, and it's very difficult to predict that exactly. And there's also some volatility in the POCI. It's very difficult to predict that. So taking out some of the accounting volatility in the new regime, I would expect it to be not at the extreme levels but a little more stable.
And just -- so just to wrap-up on Credigy then, the portfolio is not really in runoff yet. Is that a fair statement? Is that why we're seeing the balances relatively stable quarter-over-quarter? Or is it that there actually is runoff, and you're finding other portfolios or other places to invest with Credigy to backfill as the Lending Club loans runoff?
Your second question is correct. So there is certainly opportunities that Credigy is putting capital to work, not in that market, the unsecured, but certainly, there is -- and maybe Ghislain could comment on that.
Yes, maybe a general comment on the growth for Credigy. Credigy has shown a real ability to grow over time. So when you look at the growth of since 1-year, you will know the average assets are up to 39% since last year. So we remain positive and confident in Credigy's ability to continue to grow the portfolio and adapt to various market conditions and types of assets. So what I can say, Darko, is that the current top line is good. There's a lot of activities and in terms of our great assets, trajectory for Credigy is growth for the future, for sure.
And just to be crystal clear, the growth from here on in at Credigy is not in unsecured type of lending that's similar here to Lending Club. So we should expect a significant drop off in provisions even as the portfolio grows?
Correct.
We have a question from Mike Rizvanovic from Macquarie Capital.
Just a quick one on the IFRS 9, maybe for Louis. Just at a very high level and granted this is the first quarter where IFRS 9 has been used on your provisioning for this at the Stage 1 and 2, and we've seen quite a divergence among the banks. So I'm just thinking, if we think about this from a higher level and just going out maybe over the course of the next year, and I know you can't speak to any specific competitor, but just as a group collectively, should we not expect at least some consistency in how Stage 1 and Stage 2 are provisioned at least at the domestic level? I mean, you're all looking at the same numbers pretty much on the economy. Should we not expect to see some level of convergence? Or do we need to start maybe thinking about the banks' potentially, the very different light between each other in terms of how they provision going forward in a post-IFRS 9 world?
Yes. Mike, Bill Bonnell will answer that one.
Yes, maybe I'll start off and Ghislain can proceed. But from a risk perspective, you would expect to see some differences in the provisioning based on the product mix and geography mix across the banks. So I would expect that higher unsecureds could lead to higher provisions in -- amongst some banks versus those that are more heavily weighted to secured. I think different geographies can have a significant impact. So I don't know that you'll see a convergence to the mean, if that's your question.
Not a convergence but just something that looks a bit similar, especially on the domestic lending. Like, I get it, there's differences on product mix for sure. But just on the macro side, like you're all -- you all look at the same numbers. I'm just a bit curious as to why we've seen such a material divergence, and I'm just wondering if that can persist going forward.
When we see economies reports on the state of the economy and the expectation, we see various opinions from various people, and they're all looking at the same statistic and the same economy. So you can have very diverge view on what the future will look like.
[Operator Instructions] We have a question from Scott Chan from Canaccord Genuity.
Louis, when I look at the U.S. Specialty Finance in the international line, your net earnings were up a lot year-over-year off when we comp, but down over the last few 2 quarters. As the comps get tougher heading into Q3, what kind of organic growth rate is satisfactory for National within this international segment?
As you know, we had given targets at our Investor Day about 18 months ago for that business, and we're well ahead of these targets. So I think ABA, as you can see -- let me divide that, ABA is chugging along at a nice steady pace. Credigy, clearly, the transaction we did with Lending Club sort of accelerated the revenue growth for a period of time. And now we're repositioning the portfolio to deal with the aging of that portfolio as we go ahead. But that being said, as Ghislain has mentioned, I think we're confident. On ABA, I think things continue to chug along pretty well. On Credigy, we're still hopeful to still generate a year-on-year increase in revenue and profitability for '18 over 2017. So I would expect by the time we -- the -- that the Lending Club portfolio has a smaller impact on the general business at Credigy that we will go back to less volatile and essentially more predictable revenue growth.
Thank you. There are no further questions registered at this time. I would like to turn back the meeting over to Mr. Vachon.
So again, thank you all for listening to this call, and we'll talk to you on May 31. Thank you very much.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.