National Bank of Canada

TSX:NA

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen. I would now like to turn the meeting over to Mrs. Linda Boulanger, Vice President of Investor Relations. Please go ahead, Mrs. Boulanger.

[Linda Boulanger, Vice President of Investor Relations]

Good afternoon, and welcome to National Bank's 2019 First Quarter Results Presentation. Presenting to you this afternoon are Louis Vachon, President and CEO; Ghislain Parent, Chief Financial Officer; and Bill Bonnell, Chief Risk Officer.Following our presentation, we will open the call for questions. Also joining us for the Q&A session are Stéphane Achard and Lucie Blanchet, Co-Head of P&C Banking; Martin Gagnon, Head of Wealth Management; Laurent Ferreira and Denis Girouard, Co-Head of Financial Markets; and Jean Dagenais, Senior VP, Finance.Before we begin, I refer you to Slide 2 of our presentation providing National Bank's caution regarding forward-looking statements.With that, let me now turn the call over to Louis Vachon.

[Louis Vachon, President, CEO & Director]

[Foreign Language], Linda, and thank you, everyone, for joining us. Earlier today, we reported solid results. On the back of favorable economic fundamentals, we saw positive momentum in our P&C and Wealth Management segments as well as our businesses outside of Canada. Our Financial Markets business also performed well in the context of significant market volatility and lower client activity industry-wide.Efficiency remained a top priority during the quarter, and we delivered a strong ROE of 17.2%. We continue to carefully manage our capital to maintain strong capital levels. Our CET1 ratio was 11.5% at the end of the quarter, providing us with a flexibility to invest in our business and return capital to shareholders.Credit quality remains strong in our overall portfolio, reflecting a sound economy and our disciplined approach to lending. The economic backdrop remains favorable, particularly in our core market.The unemployment rate remains at historical lows in Québec. Economic growth is at levels that support consumer spending, stability in the housing market and healthy public finances. Québec households have a higher savings rate and a lower average debt due to better housing affordability and full employment of the prime-age population.Now let me share some highlights of our business segments. Our P&C segment delivered strong results in Q1, with net income up 7%. Our performance was driven by continued momentum in both retail and commercial on both sides of the balance sheet as well as good cost control.In mortgages, actions taken over the last few years to reposition our distribution model are producing the desired impact with solid volume growth of 5% for the quarter. We are well positioned to benefit from Montreal's strong and healthy real estate market. The number of home sales in Montreal is increasing at a faster rate in the decade with much more affordable homes versus other major Canadian cities and the strong economy attracting buyers.In both Personal and Commercial Banking, we continued to balance volume growth, margins and credit quality in order to position the bank to continue to perform well throughout the complete cycle. Looking forward, our overweight positions in the Québec market in secured lending and in Commercial Banking are favorable in the current economic environment.Turning to Wealth Management. Q1 was another strong quarter with double-digit earnings growth. Our results demonstrate the benefits of our unique and diversified business mix and lower correlation to markets. Let me give you a few specific examples. During the quarter, National Bank Investments benefited from its CashPerformer products and Private Banking 1859 achieved strong growth, despite the market correction. Our Wealth business is further diversified by National Bank Independent Network, a sizable and growing business that provides mission-critical services to independent wealth managers.Our Financial Markets segment had a relatively good quarter, despite challenging market conditions and a tough comparison against a record quarter in 2018. In this context, our global markets business delivered a solid performance, driven by increased client activity in commodities and interest rate derivatives. Our lending book continued to grow and remains in good shape. However, heightened market volatility in November and December put a damper on new issues industry-wide, and we completed also fewer M&A transactions.Since the beginning of 2019, markets have performed better and investor sentiment is improving. Looking forward, the outlook is positive and our pipeline remains solid for the year. Moving onto our fourth segment, ABA Bank had another strong quarter with net income up 50%. Loan and deposit volumes were up 55% and 80%, respectively, and a dozen new branches were added in last year. As for Credigy, our strategy remains for disciplined growth with the same return objectives and risk box.Turning now to capital deployment. Our strategy remains the same. Our first priority is to maintain strong capital ratios. Our second priority is to invest in business growth in our core markets. Our focus continues to be on organic growth initiatives with the objective of enhancing client experience and generating positive operating leverage between 1% and 2%. And our third objective -- priority is to return capital to shareholders through sustainable dividend increases and share buybacks.In terms of buybacks, we repurchased 1 million common shares in the first quarter, and we have approximately 2.5 million shares remaining under our current program. Our plan is to complete the current program and provide an update during Q2 earnings call in May. As usual, we will provide an update on our dividend policy next quarter.Our transformation journey is progressing well and producing tangible results. We're making substantial investments in technology and digital initiatives that are translating into improved client satisfaction and efficiency gains.To wrap up, I am satisfied with our performance for the first quarter. Our businesses have good momentum and are well positioned to deliver future growth. We are managing our cost efficiently, and our capital is strong. In addition, the resilience of the Québec economy gives us comfort at this stage of the cycle, and we remain vigilant in balancing our objective of sustainable growth and prudent risk management.While recent months have been characterized by market volatility, macroeconomic fundamentals in Canada remain positive overall, and our leadership in Québec provides solid support for growth. In that context, the outlook remains positive, and we are reiterating our midterm objectives for the year.On that, I will turn the call over to Ghislain.

[Ghislain Parent, CFO & Executive VP of Finance]

Thank you, Louis, and good afternoon, everyone. My comments today will focus on efficiency and capital, beginning with Page 7. For the first quarter of 2019, our efficiency ratio stood at 55.1%, a 20 basis point improvement sequentially and up 20 basis point year-over-year, essentially due to the decline in revenues from Financial Markets.P&C and Wealth Management both achieved significant efficiency ratio improvements as well as positive operating leverage this quarter. The U.S. Specialized (sic) [Specialty] Finance and International segment maintained a solid efficiency ratio at 39%, and its negative operating leverage for the quarter was essentially driven by network expansion at ABA Bank.We expect our new digital solutions and process simplification initiatives to drive customer acquisition, revenue growth and efficiency gains. In the last 2 years, we showed consistency in the ability of all segments to generate positive operating leverage and better efficiency, while keeping clients at the center of everything we do and while positioning the bank for long-term growth.Efficiency and operating leverage remain a top priority for the bank. During the first quarter, we showed our ability to adjust cost rapidly in a lower revenue growth environment. Looking forward, we expect positive operating leverage coming from all segments for the rest of the year. Therefore, we maintain our 1% to 2% operating leverage target for fiscal 2019.Now for the capital review on Page 8. Our CET1 remains strong at 11.5%. As anticipated, the implementation of the standard approach for counterparty credit risk, SA-CCR, reduced our CET1 ratio by 25 basis points. That being said, our solid organic capital generation of 38 basis points more than offset the increase in our risk-weighted assets as a result of business growth and volatility.At the end of the quarter, our total capital ratio stood at 16.3%, and our liquidity coverage ratio was 139%. We are pleased with our current capital and liquidity positions. On this, I'm turning the call over to Bill for the risk review.

[William Bonnell, Executive Vice]

[Foreign Language], Ghislain, and good afternoon. We had another strong performance across our loan portfolios, which benefited from the continuation of good underlying economic conditions. In our primary markets, employment levels remained robust. The housing market in Québec remained healthy as activity accelerated, but price growth remained moderate. During the quarter, capital markets were volatile, reflecting uncertainty in the future path of interest rates and growth. Looking at Slide 10, PCLs on impaired loans decreased to $77 million or 21 basis points in the quarter, driven by excellent performance in Commercial Banking and stable credit performance across the rest of the businesses. Excluding Credigy and ABA, PCLs on impaired loans remained close to cyclical lows at $46 million or 13 basis points. While we know that commercial provisions can be lumpy from quarter-to-quarter, this ongoing strong performance is a sign of a benign credit environment.PCLs on performing loans increased in Q1. Revisions to our macroeconomic variables and IFRS 9 model inputs as well as portfolio growth led to $15 million in performing loan provisions in the Canadian loan portfolio. At Credigy and ABA, PCLs on performing loans decreased by $8 million, tracking the amortization of the unsecured consumer portfolio at Credigy. Total PCLs were $88 million or 24 basis points, up 4 basis points, due primarily to the POCI recovery at Credigy last quarter.On Slide 11, details of impaired loans are provided. Our gross impaired loan ratio improved 2 basis points quarter-over-quarter to 41 basis points due to repayments in Commercial Banking. Net formations declined by $31 million from last quarter to $58 million, again, primarily driven by repayments in commercial lending.On Slide 12, details of our Canadian mortgage and HELOC portfolio are provided. The mix in this portfolio remains stable with insured mortgages accounting for the largest share at 41%. The distribution across provinces also remained stable with Québec representing 54% of the total. Uninsured mortgages and HELOCs in GTA and GVA represent 10% and 2% of the total portfolio and had LTVs of 52% and 49%, respectively.In the appendices, you'll find further details of our loan portfolio and market risk metrics. To conclude, we are very comfortable with the positioning and the performance of our loan portfolios. Looking ahead, we maintain our total PCL target range of 20 to 30 basis points for 2019 and expect to be close to the middle of that range.With that, I'll turn the call back to the operator for the Q&A.

[Operator]

[Operator Instructions] The first question is from Steve Theriault from Eight Capital.

[Stephen Gordon Theriault, Principal & Co]

A couple things for me, maybe starting on with the Wealth division. The NII and margin were up quite substantially. I can see the deposit balance is higher. Could we get a bit detail there? I'm wondering if this is perhaps money moving out of markets given the volatility in lending and deposit accounts, but would maybe get some detail there, please.

[William Bonnell, Executive Vice]

Sure. So it was a net interest income quarter, for sure, coming roughly half from volume and half of it from the 3 interest rate increases we had last year being fully reflected. When you look on the volume side, you are right. We had strong increase in balances in our IIROC channels that contributed to that, as well as the strong inflows in our CashPerformer, which is a major business for us. So that would essentially explain it.

[Stephen Gordon Theriault, Principal & Co]

And if we look ahead from there, if we take half of the margin improvement, is that -- would you expect to give some of that back in a -- with the volatility and the market's heading the other way or not necessarily?

[William Bonnell, Executive Vice]

I'm not sure what to answer. The interest rate outlook...

[Stephen Gordon Theriault, Principal & Co]

I'm just wondering if you think that, that margin lift is partially temporary or if it should be a new basis as we think of going forward?

[William Bonnell, Executive Vice]

I don't see any specific trends. The margins on this product have increased a little bit over the last couple of years. I don't see that decreasing for any reason, but I don't have a strong outlook on this.

[Stephen Gordon Theriault, Principal & Co]

Okay. And then second thing -- thanks for that -- for Ghislain. Just a quick question on capital. You had the counterparty impact of 25 bps this quarter. I know the timing is uncertain, but can you size or remind us of the size of what you'd expect the other piece that got delayed, the securitization component? What that'll have? I know it could be 2020. It could be 2021, but be nice to have a sense of what that is.

[Ghislain Parent, CFO & Executive VP of Finance]

Well, I don't think that we have an answer for that question for the moment.

[Louis Vachon, President, CEO & Director]

No, we're still evaluating this impact. It's not for many years again. It will depend on the portfolio, what is the situation at the time it happens. So we do not have any guidance at this time.

[Operator]

The next question is from Meny Grauman from Cormark Securities.

[Meny Grauman, MD & Head of Institutional Equity Research]

As revenue growth slowed, particularly in Financial Markets and Wealth, you were able to really put the brakes on expenses and even we saw them declining on a year-over-year basis. I'm just wondering if you would view this slowdown in expenses as repeatable as conditions arise. And just some insight into how you achieve this expense performance.

[Louis Vachon, President, CEO & Director]

I'll start but then I'll pass it along to Ghislain or -- so some of that was -- is embedded in our incentive compensation. So both in Wealth Management and in Financial Markets, lower level of some activities automatically lowered the comp structure. So that was automatic. For the rest, I think, as you know, we've been very disciplined on managing our costs. But we're satisfied that we're investing the right amount of money into technology where we have to invest and certainly also in marketing, where, I think, you've seen that we've actually accelerated our spend in terms of marketing and advertising. And we'll certainly maintain that also. I think that's giving very good results for us so far. So we'll take it -- Meny, we'll take it one quarter at a time. So suffice it to say, we're not -- I think we're hopeful that the Q1 experience, especially in capital markets in terms of new issue and M&A, was a one-off and certainly appears to be that way. We still see -- on the revenue side, we still see the main driver of capital markets for us in the last few years have been the growth of our franchise, the M&A super cycle and the growth in infrastructure in the country. And we see these trends intact. They are still ongoing as far as we're concerned. So in that context, we're hopeful that in the next few quarters the revenue line will be better on a year-on-year basis than it was in Q1.

[Meny Grauman, MD & Head of Institutional Equity Research]

And I mean, Ghislain, you touched on it, but maybe just to expand a little more in terms of what you're seeing so far in Q2 in terms of capital markets business, especially M&A and new issue. We heard yesterday from a U.S. bank that seem to suggest that conditions were still not very good, but wondering obviously a different perspective from you guys.

[Louis Vachon, President, CEO & Director]

I'll start and then I'll pass it along to Laurent or -- as I said, I think, we're -- certainly, things have improved from what we saw in November and December. So that's quite clear that we're trending better than we would at that time. And then for the midterm, there will be month-to-month and quarter-to-quarter fluctuations. But as I said, the -- what we saw as the fundamentals of the M&A pipeline and we think -- which by the way impacts not only Financial Markets, it has a positive impact also for Commercial Banking. That trend is still intact, and the pipeline is very good still. Laurent, anything to add?

[Laurent Ferreira, Executive VP & Co]

Yes, sure. If you look at the miss, the shutdown in the corporate activity in November, December was industry-wide. And without market uncertainty, our underwriting and advisory flow would have brought us up versus last year. So it is really about the lack of activity in those 2 specific activities. In terms of outlook, we've seen already an uptick in underwriting. We're very confident in our trading performance, and our M&A pipeline is still very strong.

[Louis Vachon, President, CEO & Director]

So we saw the comment also yesterday from JPMorgan, but trading will fluctuate. But I don't think we've seen anything that drastic in terms of reduction in trading as what they suggested.

[Operator]

The next question is from Gabriel Dechaine from NBF.

[Gabriel Dechaine, Analyst]

So Louis, you used the term one-off earlier in describing the market. And I just wanted to tie that into the operating leverage performance that started the year on a soft note. So are you really looking at that performance as a one-off result from a really bad market, which is totally reasonable? Or does it push you to do something more dramatic? I mean, restructuring charges and stuff like that seems like would be a knee-jerk reaction, but I'd like to hear your thoughts.

[Louis Vachon, President, CEO & Director]

Thanks for the question, Gabriel. I -- basically, I think I want to be clear on this. We're not looking at any special charges relating to layoffs or anything like that. We are being disciplined and selective in our hiring as we always are, but we're not contemplating special charges and layoffs at this stage.

[Gabriel Dechaine, Analyst]

Okay. Good to hear. Next question actually is for Bill. And specifically on the -- what's driving the additions to Stage 1 and 2 allowances under IFRS 9? It looks to be like in -- excluding the movements in the Credigy and international business, it looks to be primarily in the commercial book, including $16 million this quarter. Credit conditions are pristine in commercial lending. And what's the behind the scenes driver there?

[Louis Vachon, President, CEO & Director]

Thanks, Gabriel. I'd say 2 things. First is, as I mentioned in my comments, that we did revise our forward-looking macroeconomic assumptions to build in some more uncertainty for the future. The impact of that was felt more in the nonretail than in the retail. And the second factor I'd say is, when you look at retail, you have to always look at product mix as well. So the percentage of a portfolio, which is secured versus unsecured will have -- will impact how big the change in the assumptions will have on the ECLs.

[Gabriel Dechaine, Analyst]

And in the nonretail, was it some sectors, in particular or was it the wholesale loans versus like the C in P&C? Where was the -- or was it spread across a bunch of categories?

[William Bonnell, Executive Vice]

It was spread across pipelines. So some of the factors in macroeconomic models, credit spreads and equity and GDP growth. So it really does impact the whole portfolio.

[Operator]

The next question is from Robert Sedran from CIBC Capital Markets.

[Robert Sedran, MD & Head of Research]

Just a couple of quick questions on the mortgage business, please. The first on volumes. And Louis, you pointed out the strength of the Québec and the Montreal market, in general, and 5% would definitely be better than what we're seeing in a lot of other places. I noticed that the end -- toward the end of the quarter, there was a partnership with M3 that became public as well. Should we expect growth in mortgages to accelerate as you bring on some more broker-originated mortgages or is that not going to be a material impact?

[Lucie Blanchet]

Yes, it's Lucie. So for the outlook on mortgage, we -- in the current condition, we expect to grow the mortgage book around the [ minority DP ]. So obviously, the Montreal market and the Québec market is biased in LC. But with the partnership with M3 for 2019, we will start, let's say, slowly, put the model into place, learn from it and see from that what we can leverage in terms of growth. But for 2019, the partnership will quite be small into the overall mortgage growth that is planned.

[Robert Sedran, MD & Head of Research]

Okay. And one of the trends we're seeing, I guess, in some of the jurisdictions where there is less growth in the mortgage business is some pretty significant price competition that's really compressed margins. Can you talk a little bit about the margin experience in Québec? And how that might be tied to your overall margin performance this quarter?

[Lucie Blanchet]

Yes, so the decrease in margin this quarter is mainly explained by the higher margin on deposit. That was offset by the decrease in loan margins. So the loan margin this quarter has been put under pressure through the year and also in Q1 due to the narrower prime-based spread that happened between November and February, and this is also due to market competitiveness. So it's really both components. The narrower prime-based spread has recovered since February, but the explanation here is more structural with the Wealth business. So we -- when there are important prime-based variations, P&C and Wealth actually face narrowed situations in terms of NIM. That's why we presented our NIM results combined with Wealth this quarter where we see we're up 3 bps year-over-year and sequentially 1 bps for the quarter.

[Robert Sedran, MD & Head of Research]

Okay. And specifically on mortgage spreads, are they hanging in? Or are you seeing them tightened as we're seeing in the rest of the country?

[Lucie Blanchet]

It's tightened, for sure. Market competitiveness on mortgage is there. Last year, everyone was fighting for the market share. It's been a little less pressured, but it's still there, for sure.

[Operator]

The next question is from Doug Young from Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Just wanted to go back quickly to the noninterest expense and operating leverage. And I think, Louis, last few years, you've done a great job bringing down the mix ratio and getting operating leverage. And I think it was removing cost out of the system and it was my understanding going forward that it's going to be more driven by keeping cost constant, but really driving revenue growth. And where I'm going with it is, I'm just -- if revenue growth doesn't come back, and I know you're hopeful it does, but if it doesn't come back, is there more levers here for you to pull to kind of reduce cost?

[Louis Vachon, President, CEO & Director]

Well, there is always, but you have to balance that versus short-term considerations versus long-term considerations. So I think we -- there's always more levers. But the levers you don't want to touch are those that's going to weaken the franchise over the long period of time. That's why I said when you look at our results, Doug, this quarter, again, I think, pretty much was in line. I think, our P&C business is doing fine. Wealth is doing fine. Our international business is fine. So -- and then we had a more difficult quarter in capital markets. So that's why I said before, we become too concerned about the operating leverage. And that, I think, is too early for that, especially since we see signs and the pipeline has remained strong in capital markets. That's why, as a team, we looked around and say, "Hey, guys, are we still on line for what we provided for midterm guidance in -- at the Q4 call?" And the answer at this stage is still yes. I think we can still make that happen. So that's why we're sticking to plan A at this stage.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then just Credigy, I guess, few points here. Just the Lending Club obviously had a pretty big hiccup. Doesn't seem like there is any implications for you and your business that you've done with Lending Club, but I just wanted to check. And then it looks like you -- your loan book actually increased sequentially. And I wonder if there was some acquisition that was made. Or there is starting to -- you're starting to see some progression on building of the Credigy loan book offsetting some of the Lending Club rolling off?

[Louis Vachon, President, CEO & Director]

Yes, thanks, Doug. The -- no, so, as you know, I think our performance on the assets that we acquired from Lending have been very good, certainly in line and probably, in fact, a little bit better than we had anticipated. If you recall, we didn't just buy assets from Lending Club. We were presented from loans from Lending Club, and we would do our own selection. So the loans will go through the underwriting criteria of Lending Club and then they will go through also the underwriting criteria and selection and risk box of Credigy. So that's why I think at the end of the day, our loan portfolio from them probably did pretty well. So we're satisfied with that particular transaction. For the rest, yes, we started doing some more loans, a few more. We're seeing more volume from FinTech players in the U.S. -- new innovative players. And we signed a couple of these deals. Ghislain, anything to add on that front?

[Ghislain Parent, CFO & Executive VP of Finance]

No.

[Louis Vachon, President, CEO & Director]

Nothing. Okay.

[Ghislain Parent, CFO & Executive VP of Finance]

Well, you know, the current market conditions are still very challenging for Credigy. So when it's going to be better, like we are confident that Credigy will be able to grow the balance sheet. For the moment, essentially, it's a small transaction and mostly in secured lending.

[Doug Young, Diversified Financials and Insurance Analyst]

And these are performing?

[Louis Vachon, President, CEO & Director]

Yes, they are mostly performing. They are very, very small portfolios of nonperforming, but most of it is prime securities and performing.

[Operator]

The next question is from Sumit Malhotra from Scotia Capital.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

I want to go back to the P&C segment and the M3 partnership, please. Maybe it's a bit more philosophical, so that one's probably for Louis. A couple years ago, the bank took a step back from the mortgage broker channel and some of the facets you said it were -- it was an expensive channel to transact in and there was a lack of cross-sell. So I wanted to get an update from you on what's changing your thinking in that regard and are the economics that much better for the bank to reenter?

[Louis Vachon, President, CEO & Director]

Sumit, great question. Here is a short -- if I had a time machine, there is a lot of things I would do differently. One of the things we would do differently is, I think, our positioning versus the brokers market outside of Québec is, I think, the decision we took 2 or 3 years ago was absolutely the right one. We were not getting the margins we were expecting and we were not getting the cross-sell numbers that we were hoping for. With the benefit of hindsight, however, when we look at the business we were originating in Québec from third-party brokers, that was not the case. We actually had much better cross-sells. And that's why we're not changing the policy. We're nuancing the policy, being more selective because I think our chances -- because our physical network is much bigger in Québec, the chances of onboarding these clients with products more than the mortgage is actually far better. And our track record is actually much better in Québec than it is outside of Québec. So that's why we're making a very targeted geographical change to our policy. The second thing, which is very important, is the back office -- these loans 3 years ago used to be done the old-fashioned way with a pretty manual paper back office. The agreement with M3 that we're talking about is going to be completely straight-through processing involving the SAP mortgage platform that we put in place over the last 4 or 5 years. So it's a targeted market with much better track record and new technology. So that's why, again, as Lucie mentioned, we're going to start small, test the concept. But we think that the chances of success partly because of historical track record is much better -- is better on that front. Lucie, anything to add? Did I miss anything in my answer?

[Lucie Blanchet]

No, you read it all.

[Louis Vachon, President, CEO & Director]

Okay. Does that make sense, Sumit or...

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Yes. I think you answered some of where I was going to go, is that I think this company, M3, is active outside -- or outside of Québec as well. But your relationship with them sounds like at least initially is limited to Québec only?

[Louis Vachon, President, CEO & Director]

Correct.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And maybe just the second part of this and I think I have an idea where you're going to go with it. I would say usage of the mortgage broker channels have been one of the key areas of differentiation between the Canadian banks in their Personal Banking divisions in Canada. And one of the factors cited by those that have exited is that we're not as comfortable with the risk profile in terms of origination and documentation, and we've certainly heard about that from some of the smaller players in the sector over the last couple years. How much control or how much confidence do you have that the National Bank philosophy for underwriting and documentation is followed by your new partners?

[Louis Vachon, President, CEO & Director]

So Lucie will answer that part.

[Lucie Blanchet]

Yes. Thank you for the question. I would say that when we exited the mortgage broker channel, it represented at the time about 40% of our origination. So with the partnership with PQ and M3, if we add M3 to that, we don't expect to go above 25%, 30% of our origination with the broker channel. That's one thing. And the second thing is that through the usage of our internal SAP platform processing those loans, we get the broker channel underwriting and standards at the same level -- absolutely at the same level than what we have in our own proprietary channel. So we're very, very confident about that process. And I don't know if you want to add anything to that, but it's really for us a major foundation for the quality of the mortgage broker loan coming forward.

[Louis Vachon, President, CEO & Director]

I think you've addressed it.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

I'll move to the other part of the segment, commercial. And if we can go back a number of years, Louis, you and the team gave us some reasons as to why commercial loan growth was going to be an area of consistent growth, and that's certainly been the case not only for National but for the industry as well. The other side of the balance sheet we're seeing very strong deposit growth coming out of commercial clients in Canada. And I think this is Stéphane's side. The commercial deposit growth is up into the double-digits now in Q1. Is there something -- I don't know if thematically is the right word, but is there something specific you would point to that has the loan growth in the commercial side having run at a double-digit pace for a good period of time? But now we're also seeing deposits accelerate there. What is it about the environment or maybe specific to your business that's causing the deposit growth for commercial borrowers to accelerate?

[Louis Vachon, President, CEO & Director]

So 2 elements. Firstly, a lot has to do with the realignment and the emphasis we put through the sales force. So we've aligned the competition plans to reflect then moving the account managers from lenders to -- and in the commercial side it's not always been easy to really deposit gatherers as much as lenders. So there is a cultural side to the answer. The other element as well is the fact that we've grown a very sizable business in governmental loans throughout the country, and that has balanced as well and has yielded the 12% year-over-year growth you see in overall deposits.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Last one for me. I'll keep this one quick. Just thinking always about your potential uses of capital, we had a chance to meet with your ABA management team in the fall. And I have in my notes that it was mentioned there was at least a possibility that the bank might be able to transact on the 10% minority stake that they don't own in the coming year. Just an update on 2 fronts. Number one, what exactly is the mechanism by which that stake could transact? Is it a call option or put option on the part of the current owner? And how does pricing get determined for this asset? And do you have an approximate capital impact that would result in?

[Louis Vachon, President, CEO & Director]

Ghislain, you want to take that one or?

[Ghislain Parent, CFO & Executive VP of Finance]

Well, the way that it works essentially, the current owner has a put on 10%. You -- just as a reminder, we hold 90% of ABA Bank. So essentially, at a certain date, the owner has to come back to us essentially to give us his decision. So it should be sometime in June, July this year that we would know. We don't know his decision yet, so we will have to wait. And essentially, in terms of capital, I don't have it in mind, so I will have to come back to you. But I think that calculation is rather simple to maybe...

[Stéphane Achard]

We already have most of the goodwill in that business anyway. That's why the costs most. So the impact should not be very material.

[Louis Vachon, President, CEO & Director]

And the price is set at a multiple of book value that was predetermined when the negotiations took place. And suffice it to say if we -- we'd be happy to buy at 10% of that price.

[Ghislain Parent, CFO & Executive VP of Finance]

I'm -- I've been told that the impact will be 0 on capital.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Yes. I think the punchline here is if we're thinking about ways that National Bank may deploy its capital position, while you'd be happy to buy this, this isn't a major use of proceeds.

[Louis Vachon, President, CEO & Director]

Yes. No, it's not major, and I think we'd be happy, and we don't know what's going to happen. But the minority shareholder would lose most of his shareholders rights if he does not exercise his put. So we still think the probability are pretty good that he's going to exercise the put.

[Operator]

The next question is from Sohrab Movahedi from BMO Capital.

[Sohrab Movahedi, Analyst]

Louis, maybe I'll just -- I'll pick it up there. Maybe just -- I know you've gone through the priority for the capital and you've talked about the buybacks. And I think previously you've talked about not being necessarily valuation-sensitive because you were trying to offset some of the dilution from the past. Is that any different now? I know you kind of talked about the 2.5 million shares left on the current program. But just philosophically, given the outlook for the economy, like do you feel like you need to run with higher capital or do you feel like the capital levels are sufficient and anything above and beyond what's required for organic growth can be returned to shareholders?

[Louis Vachon, President, CEO & Director]

I think, as I said, we're very comfortable with our -- where our capital positioning. In this quarter, we knew that the SA-CCSR (sic) [ SA-CCR] was going to impact us. And as you saw also I think we lost a few beats because of the pension fund. So we became a little bit more prudent in January on the buyback. Just because if you recall, in early January, the macroeconomic outlook also was a little bit more defensive, generally. So we're comfortable. If we see opportunity, I think, we have room on the capital to do a bit more things. But we know that our capital is precious. And one thing I think we've done pretty well, as an organization, historically, is to manage our capital pretty effectively. So we continue to do that. So we have room to continue. I think we'll finish the 2.5% -- the 2.5 million shares that we have to do over the next quarter or 2. And then, I think, we'll have room to renew another program. But as we -- I said clearly in my opening statements, the priority is organic growth. As you saw, we saw pretty decent usage of capital from an organic standpoint in Q1, mostly on the lending side. Both commercial and corporate lending is growing well. And mortgages at 5% is pretty good too. So we see room to deploy some capital organically. And for the rest, we'll see -- on acquisitions, we're always on the lookout, not internationally, as you know. We are -- our moratorium is still there, but in other sectors in Canada. But we don't see a lot of opportunities right now. So that's basically where we stand in terms of capital deployment.

[Sohrab Movahedi, Analyst]

Okay. And just, again, philosophically, I guess, to get a sense on the expenses. I mean, I think, you said you will not do anything that will hurt the franchise as far as trying to manage to an operating leverage number. I'm just curious to know what are some of the expense levers that you have at your discretion that are not franchise impacting that you can pull on from time to time?

[Louis Vachon, President, CEO & Director]

I can name 2 certainly. One is, as you know, as all banks were optimizing, our real estate footage. We don't plan to shrink significantly the number of branches we have. But we do want to make our new branches -- and as we renew branches, and also as we build a new head office in Montreal, we want to get some gain on real estate. So real estate is one that there's still room for improvement over the next few years. The other one is, as you know, we're investing in technology. So we've gotten to the bottom of efficiency gains using technology either for us, and I suspect for the rest of the industry the answer is no. I think there's still a lot more room for efficiency gains using technology. So those 2, I think, are some of the current levers that we have right now, which, depending on the macroeconomic environment, could be accelerated, if we had to.

[Sohrab Movahedi, Analyst]

Okay. And just one last one on the Canadian P&C. I think lots of good color around the strategy with M3 and the mortgage volume growth and how that will probably impact, I guess, more so beyond 2019. But if we could just fast forward to a scenario where 25%, 30% of your originations are coming through the M3 relationship, will that be one of these trade-off will pick up a little bit more volume, but it may come at a narrower margin?

[Louis Vachon, President, CEO & Director]

Well, that's certainly not the hope. And that's -- as you know, we're -- 25%, by the way, Sohrab, is both Paradigm Quest and M3. So it's not just M3, right. So just to make sure that we very well do close those well. So you raise a very good point. I think we're -- that's why we're starting small with M3, because our hope is that in terms of cross-sell and margins that we're very close to where we would be or at we would be with our own internal network. Lucie, anything to add?

[Lucie Blanchet]

And if I can add to that. With that level of originations, combining PQ and M3, PQ brings us a fair amount of insured mortgages, which, from a pricing perspective, is good on the mortgage book. And also notwithstanding that, the pricing strategy with M3 will be also consequent with our internal channel to avoid any new channel conflict on the pricing front. So I wouldn't say it would have an impact on the margin.

[Operator]

The next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, MD & Research Analyst]

Just to maybe just help me understand this a little bit better. The formations in Credigy remain sort of what they have been over the last few quarters. I suspect that's still Lending Club that we're seeing there. But there was also a release of the Stage 1, Stage 2 PCLs. Now, I guess, those 2 wouldn't be directly related. But what's the dynamic there that would have GILs move higher but the release play out at the same time?

[Louis Vachon, President, CEO & Director]

Bill is looking forward to answer that question.

[William Bonnell, Executive Vice]

Mario, thanks for the question. So for Credigy, as Louis mentioned, the Lending Club portfolio has performed pretty well exactly as we hoped, a little better perhaps. And as I described, I think, throughout last year, the dynamic of unsecured portfolio growing and then aging and then amortizing, in this stage, where it is amortizing, it's natural that the PCLs on performing loans will decline as the volumes go down. We're in the stage where the PCLs -- formation PCLs on impaired loans have stabilized, and we expect to see those decline through the year, more in the second half than the first half. And the formations will -- are going to be tied to the PCLs on impaired. Does that answer your question?

[Mario Mendonca, MD & Research Analyst]

So the formations -- sort of. The formation then should start to taper off later this year?

[William Bonnell, Executive Vice]

Correct, yes.

[Louis Vachon, President, CEO & Director]

Does that answer the question, Mario or you want to take it offline with Bill? It's up to you.

[Mario Mendonca, MD & Research Analyst]

No, the topic isn't as interesting -- that interesting. So I'm content with that answer. The just...

[Louis Vachon, President, CEO & Director]

Bill is not taking it personally.

[Mario Mendonca, MD & Research Analyst]

Different kind of question, this one's far more interesting. You've given us some pretty clear guidance on operating leverage remaining healthy for the remaining of the year and for the full year. Can you offer something similar on your 5% to 10% guidance for the year? I know it's midterm, but I think in the past, you've given us a little comfort there on the full year as well.

[Louis Vachon, President, CEO & Director]

I think the two are highly correlated, Mario. I think I'm sure you've done the numbers. So the two would be pretty correlated. So I think, as I said, the team is still working on those midterm objectives. We're not changing them. It's too early for -- to change the objectives.

[Mario Mendonca, MD & Research Analyst]

And it would apply to the year as well then?

[Louis Vachon, President, CEO & Director]

Yes.

[Operator]

The next question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

My first question is just a clarification question. Lucie, I think you talked about your expected mortgage growth rate in '19. And did you say it would kind of coincide with Québec normal GDP growth?

[Lucie Blanchet]

Yes.

[Scott Chan]

And what is that 2%, 3%?

[Louis Vachon, President, CEO & Director]

No, but -- no, I think it's more 4%, 5%.

[Lucie Blanchet]

Between 4%, 5%.

[Louis Vachon, President, CEO & Director]

If you remember I think annualized -- Québec was annualized 6% in November, nominal. Now we don't expect that to continue, but in November the nominal GDP for Québec annualized was 6%.

[Scott Chan]

That helps. And just taking a step back on Page 7. I'm just looking at the assets, AUA and AUM institutional, sort of AUM under individual and mutual fund. And if I look at all 3 categories, all the assets increased immensely, sequentially up 5% in a down market. What's the reason for that? Is it just like new client assets, positive net sales? It's just a big divergence versus peers.

[William Bonnell, Executive Vice]

So, first of all, assets under administration was all related to NBIN growing their business year-over-year. Now if we look at AUM, there's a couple of counter trends. When you look at the IFIC numbers, all of mutual fund at all the banks had outflows in mutual fund's assets. We were the least impacted, nominally. Of course, we start with a lower base, but we actually perform quite well in being roughly flat when billions left the industry. But that's a small component of AUM for us. The 2 bigger components of AUM are NBF where we saw strong inflows as well as 1859. So within NBF, we're talking about the managed money assets and 1859 is all management. And those were 2 strong inflows.

[Operator]

[Operator Instructions] The next question is from Gabriel Dechaine from NBF.

[Gabriel Dechaine, Analyst]

Actually Mario asked my question on Credigy there. So I don't need an offline call either. Thanks.

[Operator]

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

[Louis Vachon, President, CEO & Director]

So thank you, everyone. And we'll talk to you next quarter. Thanks again. Bye.

[Operator]

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