National Bank of Canada

TSX:NA

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the National Bank of Canada's First Quarter 2020 Results Conference Call. I would now like to turn the meeting over to Ms. Linda Boulanger, Vice President of Investor Relations. Please go ahead, Ms. Boulanger.

[Linda Boulanger, Vice President of Investor Relations]

Thank you, operator. Good afternoon, everyone, and welcome to National Bank's First Quarter 2020 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-Heads 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 for everyone for joining us. Earlier today, we reported excellent results with adjusted net earnings of $620 million, up 12% from last year. Our performance was driven by continued growth in all business segments, disciplined cost management and strong credit quality. For Q1, the bank delivered a robust return on equity of 18.3%.Our credit quality remains excellent, reflecting our prudent approach to lending and a resilient economy. Québec's economy continues to perform well, fueled by net immigration at record levels. Population now grows at a rate of approximately 1%, double than in the U.S. Consumer sentiment remains supportive of no home problems. Unemployment averaged 5.1% in 2019, the lowest rate on record. The unemployment to population ratio for people aged 15 to 64 surged to a record 76.8%, more than 2% above the national average. Women's labor force participation rate stands at 87%, the third-highest among the OECD countries. The household net savings rate in Québec exceeds 9% currently, the highest in a generation and far above the Canadian average. Lastly, household leverage is moderate as housing remains affordable. Before moving to the business segments, let me briefly comment on the situation relating to the COVID-19 virus. While it is early, our team is closely monitoring the situation and its potential impact on the global Canadian and Cambodian economies. Now let me share some highlights of our business segments' performance going forward. Our P&C segment continues to have very good momentum on both sides of the balance sheet. In all, our retail and commercial businesses, we remain very focused on achieving the right balance between volume growth, risk management and margins. In that context, I am very comfortable with our current positioning. Our investments continue to be driven by our #1 objective of offering our clients the best experience. In Personal Banking, we're seeing notable progress in our clients' digital engagement, which is a key driver of client satisfaction and retention as well as efficiency. This is a direct result of investments in our data and digital infrastructure over the last -- past few years. In Commercial Banking, we have successfully completed the deployment of a new innovative financing platform for small business clients, resulting in much shorter approval and disbursement times. In addition, we've initiated an important transformation last year on the investment side of our Personal and Wealth Business lines. Our goal is to adopt a common and simplified adversary approach to deliver our clients a best-in-class integrated experience. So far, more than 2,500 advisers have been trained in behavioral advisory coaching. As an example of tangible results, the number of clients with systematic investment has more than doubled for NATgo, which is our new mass-market experience -- investment experience. Our Wealth Management platform delivered another quarter of double-digit earnings growth. Favorable markets and net inflows contributing -- contributed to generating strong assets and revenue growth. In the current environment, we continue to benefit from the shift to fee-based and managed assets, which allows our investment advisers to be more efficient and concentrate on delivering meaningful advice to their clients. During the first quarter, our assets under administration reached the $0.5 trillion threshold for the first time, highlighting the diversification and leadership of our franchise. We continued investments in talent and digital initiatives. We remain well positioned for future growth. Turning to financial markets, we delivered another robust quarter. Both global markets and investment banking benefited from the general recovery in the market environment from a year ago. Our differentiated business mix with a higher contribution from global markets continues to pay off. This quarter, witnessed sustained momentum in core equity niches, namely, securities finance and structured products as well as in fixed income. We continued investments in our financial markets franchise and favorable market conditions. Our outlook remains positive for the business as a whole. Our international segment continues to perform very well. As mentioned last quarter, Credigy has a robust pipeline and is expected to deliver double-digit earnings growth in the current fiscal year. In Cambodia, ABA Bank had another very strong quarter with net income up 71% and loans and deposits up 50% year-over-year. As mentioned on our last call, we are maintaining our current moratorium on significant additional investments in emerging markets. As we are entering a new year, our capital deployment strategy remains unchanged. Our #1 priority is to maintain strong capital levels. Second, we continue to invest in our businesses to fuel organic growth in our core markets with the objective of generating positive operating leverage for fiscal 2020. Returning capital to shareholders remains a priority for the bank. As mentioned on our last call, we put on hold on our buybacks during the first quarter to absorb regulatory adjustments. We are pleased with our current capital level, which is strong at a -- with our CET1 level at 11.7%. As usual, we provide -- we will provide an update on our dividend policy next quarter. To wrap up, I am pleased with our first quarter results. In an environment of macroeconomic and geopolitical uncertainties, all our businesses continue to have good momentum. Our capital is strong and we continue to manage our costs effectively. Our credit position remains excellent against a solid macro backdrop in Québec and Canada. On that, I will now turn the call over to Ghislain.

[Ghislain Parent, CFO & Executive VP of Finance]

Thank you, Louis, and good afternoon, everyone. The bank delivered a solid performance in the first quarter driven by good business momentum, disciplined cost management and strong credit quality. My comments today will focus on efficiency and capital, beginning on Page 7. We started the year with continued momentum on the efficiency front, delivering a solid operating leverage of 2.8% in our first quarter. Our P&C segment delivered positive operating leverage in Q1, partially driven by muted expense growth, resulting mainly from lower amortization following the write-down of obsolete technology recorded in the third quarter of 2019 as well as from savings related to distribution optimization. With P&C segment that continues to invest in its activity, we expect expense growth to normalize around 3% for fiscal 2020 and operating leverage to be positive. Our Wealth Management segment continues to perform well on the efficiency front with a positive operating leverage and an excellent efficiency ratio for the quarter. Our Financial Markets segment delivered neutral operating leverage, has a strong top line growth, was offset by higher variable compensation and higher transaction expenses. Both Financial Markets segment and U.S. Specialty Finance and International segment posted excellent efficiency ratios in the low 40s. Over the years, we have showed consistency in our ability to manage our cost effectively and achieve meaningful efficiency improvements. At the same time, we have made major investments in talent, client experience and technology. As we are progressing to our transformation journey, maintaining the right balance between investing to generate future growth while managing our costs prudently remains a key priority for the bank. Our transformation continues to bear fruit and we remain confident in our ability to deliver a positive operating leverage for fiscal 2020. Now turning to the capital review on Page 8. Our CET1 ratio stood at 11.7% at quarter end. Strong earnings growth contributed 39 basis points to our CET1, whereas risk-weighted assets had impact of 27 basis points, reflecting good volumes across all segments. The combined impact of accounting and regulatory changes occurred during the quarter reduced CET1 by 17 basis points in line with expectations. Our total capital ratio stood at 16% at the end of the quarter and our liquidity coverage ratio at 144%. To conclude, we are pleased with our capital and liquidity position, which we view as prudent at this stage of the cycle. On this, I'm turning the call over to Bill for the risk review.

[William Bonnell, Chief Risk Officer & Executive Vice]

[Foreign Language], Ghislain, and good afternoon, everyone. I'll begin on Slide 10. The performance of our credit portfolios remained strong last quarter, having benefited both from a supportive economic backdrop as well as from our overweight Québec and underweight unsecured consumer lending profile. Total provisions for credit losses were $89 million or 23 basis points, unchanged from last quarter and 1 basis point lower than the same quarter last year. PCLs on impaired loans totaled $82 million or 21 basis points in Q1, in line on a quarter-over-quarter and year-over-year basis. Lower impaired PCLs at Credigy were offset by higher impaired PCLs in Financial Markets. Credigy's performance continued to match our expectations as declining provisions tracked the amortization in the unsecured consumer portfolio.Total PCLs on performing loans were $8 million in the quarter. Excluding the international sector, PCLs on performing loans were $12 million or 3 basis points, primarily due to portfolio growth and revisions of forward-looking factors. In Q1, we adjusted several factors in our pessimistic scenario to take into account potential negative economic impacts of the coronavirus. These adjustments led to higher-performing PCLs, primarily in non-retail loan portfolios. Looking forward, we'll continue to be vigilant in monitoring changes in the macroeconomic environment. We maintain our target range for total PCLs in 2020 and expect to end up close to the middle of the 20 to 30 basis point range. Turning to Slide 11. Our gross impaired loans declined to $677 million last quarter and our GIL ratio improved by 1 basis point to 43 basis points. Net formations were lower in our P&C segments. The increased informations in the Financial Markets segment related to one account in Western Canada in the electricity generation sector and was partially offset by lower formations at Credigy.On Slide 12, you'll find a review of our retail mortgage and HELOC portfolio. Insured mortgages account for about 39%, followed by HELOCs at 33% and uninsured mortgages at 28%. Orders in the province of Québec account for the majority of the portfolio and exposure in the GTA and GVA remains modest. In summary, we were very pleased with the good performance of our credit portfolios in the last quarter. Our overweight Québec and underweight unsecured consumer lending continue to position us well for strong performance in the current economic context. And on that, I'll turn it back to the operator for the Q&A.

[Operator]

[Operator Instructions] Our first question is from Meny Grauman from Cormark Securities.

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

Just a question on ABA, specifically. I'm wondering if you're seeing any signs of economic weakness so far in Q2, if you change your outlook at all? Obviously, the coronavirus is one factor, but also the partial suspension of the duty-free access for Cambodia. I'm wondering how you view those risks given for ABA, specifically.

[Louis Vachon, President, CEO & Director]

Thanks, Meny. This is Louis. So on Cambodia, the first thing, the European community action, that was not a surprise, that was already factored into our budgets and forecast for 2020. What obviously was a surprise was the virus. As you may have seen, Moody's just revised its expected growth for Cambodia from 6.5% growth in 2020 down to 5.5%, mostly on the impact of -- on the tourist industry, which is currently being felt. So far, I think we don't have a huge amount of precedent -- historical precedent with that operation. So far, in January and February, we haven't seen any negative impact on the franchise. By granted, I think it's too early to see whether what the impact would be. So I think we'll have more to say on that on the next call. My sense, the way I think we look at it as a team right now is that if it's -- if the virus is a -- reduces growth globally for 1 or 2 quarters, I think the momentum of that business and the fact that we've been conservative on the credit side, I think, should still allow us to generate good double-digit growth in earnings in that business. If we move to a more pessimistic scenario of the virus causing a full-fledged global recession, then I think that's -- we're probably a little less confident on that prediction. But then at that stage, I would probably assume that PCLs in Cambodia would be not our #1 priority or concern.

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

Understood. And just a follow-up. Have you made any changes to the way you're monitoring operations on the ground there, especially from a risk perspective?

[Louis Vachon, President, CEO & Director]

Nothing significant. No. I think we continue -- I think there's been, as you know, very few documented cases. So in terms of operations on the ground right now and monitoring, we haven't changed anything specifically.

[Operator]

Our following question is from Steve Theriault from Eight Capital.

[Stephen Gordon Theriault, Principal & Head of Research]

If I could start with a question on Credigy. We're starting to see the last couple of quarters and this quarter, in particular, the assets ramping, I wanted to ask, should we expect to see the type of seasoning and rise in PCL, maybe next year, maybe in 2021 back to the levels we saw at the tail end last time. So just want to get some color there, not fully appreciating maybe the mix of what you're putting on the books this year?

[William Bonnell, Chief Risk Officer & Executive Vice]

Steve, thanks for the question. It's Bill. I'll start off and maybe Ghislain will add. So as you know, the PCL impact is very dependent on what type of assets Credigy is seeing opportunities in. Generally, the -- in the consumer unsecured portfolio, which generates most of those PCLs, the weight of their portfolio is significantly lower than it was when we reached the peak. It was over 30%. I think now it's down to around 20%, 23%. So there -- it depends on whether we see further opportunities in the consumer unsecured, but I don't expect in 2020 to be anywhere near where we were in 2018 and '19. Anything else?

[Stephen Gordon Theriault, Principal & Head of Research]

That's summarized possibly in 2021 as the assets you're putting on now season or not necessarily?

[William Bonnell, Chief Risk Officer & Executive Vice]

Yes. So I think the -- in the performing PCLs, it will be driven by the growth in the portfolio. And at the end of 2019 and, again, this quarter, the impact was from the amortization of the consumer unsecured. So I would expect that to taper and I would expect to see some performing PCLs growing higher during the -- by the end of the year.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay.

[Ghislain Parent, CFO & Executive VP of Finance]

Yes. And maybe Bill -- sorry, this is Ghislain. So I just want to add. So I think that on the credit side, what Bill just mentioned is okay. And I just want to reiterate that what we said last quarter that we expect double-digit growth for revenues and net income for 2020. So we reiterate what we said in the last quarter.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay. And just the other item for me was, do I want to ask just on that utility and the manufacturing PCL we see this quarter, did they spend some time in Stage 2? Or were those -- did they skip directly to Stage 3?

[William Bonnell, Chief Risk Officer & Executive Vice]

No, they spent -- the utility in the Financial Markets had been in the watch list and been in Stage 2 for quite a while. And that's why you'll see that the -- there is a migration from Stage 2 provisions to Stage 3 provisions for that. That's why even though we made some changes in our scenario to take into account the COVID-19 virus, financial Markets still had a reduction in the performing loss provisions, primarily because of the migration. So that -- it had been in the Stage 2 for a while.

[Operator]

Our following question is from Doug Young from Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Just on the P&C Banking, the guidance for 3% mix growth through the year. You obviously put up 1% in Q1. Just trying to get a sense of -- you're obviously going to ramp-up expenses over the remainder of the year. Can you talk a bit about what that's related to? And then if the revenue growth environment is tough out there, do you have the levers to kind of pull back on that if need be?

[Lucie Blanchet]

Yes, it's Lucie. I'll start and maybe Ghislain can complement. So on the expense this quarter, the lower expense is really due to some savings in the write-off and also efficiency in the distribution network. It is expected to normalize throughout the year to end up between 2% and 3% as guided previously. And on the revenue growth, I would say that the revenue growth is also in line with the expectations that we have on margins and it is expected to have slight decrease in margin this year. So we will still end up with a positive operating leverage like Ghislain explained.

[Doug Young, Diversified Financials and Insurance Analyst]

And then just, I guess, maybe a little bit further, and, I think, that in the prepared remarks and I forgot who mentioned this, but putting capital to work to drive positive operating leverage, is there thought of need to have another restructuring charge within your organization? Or do you feel comfortable with where you stand from a cost structure perspective?

[Ghislain Parent, CFO & Executive VP of Finance]

Well, it's probably during my remarks. But no, there's no restructuring charge budgeted for this year, and it's not in the plan and we're not even discussing it within the bank.

[Operator]

Our following question is from Sumit Malhotra with Scotiabank.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

I just want to start by picking up on revenue within the Personal and Commercial Bank and maybe following on where Doug was going there. Louis said many times in the years I've covered this bank that Québec is a no boom, no bust province or marketplace. It's certainly been a boom for a few years now. Yet when we look at either loan growth in the consumer book, the commercial portfolio and the year-over-year in revenue, despite the fact your margin's actually only down 1 basis point, those numbers are towards the lower end of the group, and in some cases, at the very low end. Why do you think it is that your revenue has trended that way during such a strong period economically for the province? And candidly, do you think you've been somewhat too risk-averse in some of the areas where there's an opportunity to drive more top line growth?

[Louis Vachon, President, CEO & Director]

I'll start. And so I think -- Sumit, I think we've been pretty consistent on our narratives that, yes, we're very happy with the performance of the Québec economy, but at the same time, we want to make sure that, a, we've been conscious that we've been -- we feel we're late in the business cycle. And that's why we want to continue to -- one of our business we put on the balance sheet, we want to make sure that it's a good terms and conditions from a risk perspective and also at decent margins. So we've been here for a long time. We're very comfortable with our position in the province. We are very sensitive to market share over the mid- and long-term. We're a little less sensitive to market share over a short period of time. And, I think -- for us, I think, it would just make sure that we manage the volume growth at the right thing. And we'll see -- listen, if there is no recession within the next 3 years, you may be proven right that we were a little bit too conservative too early. You know what, I think, as a team, that's a risk we're willing to live with. So anything else to add Stéphane?

[Stéphane Achard]

Yes. This is Stéphane, Sumit. So I'll just add as well. We often talk about house prices being lower in Québec. The same applies basically to the business markets, real property, whether it'd be lender premises for entrepreneurs or lower value. So the individual transactions, whether in ag or in manufacturing are always lower. So that always impacts over and above the balance between risk and balanced growth. It's also a reality of the Québec dynamic which explains the lower asset growth.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

So if I hear you, it is a commentary on your risk appetite and if expenses are going to increase over the coming 3 quarters -- you've got a nice start on operating leverage, you're going to be positive for the full year, but it's not -- you're willing to give some of that back if the opportunities you see for lending is not where you think the risk appetite lies. That's the synopsis I hear from you?

[Louis Vachon, President, CEO & Director]

Yes. And I think, Sumit, I -- correct me if I'm wrong, but I think we've been pretty consistent on that, right? So particularly in areas like commercial real estate, yes, we have an appetite for commercial real estate. We don't have a limited appetite for commercial real estate. So if you put some cap on commercial real estate growth by necessity, we may, for a short period of time or for the -- a year or 2, underperform other people that don't put a cap on commercial real estate loan growth.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And I'm going to stay with you for my second and last question, and maybe to go on with that theme of consistency. There's nobody in this group that's been more consistent when it comes to the wholesale business than National has. And again, today, in a quarter where there're some pretty big numbers, you guys seem like you do a nice steady performance there irrespective of what's going on. To that end, we heard Bill's comments in the risk commentary. It was all centered around credit risk. We'd be curious to hear, a lot of stuff we see in the tape this week in terms of worst weeks since '08 in terms of equities, bond yields at record lows. You and I were talking on these calls in '08. It doesn't feel like that this week to me as it did back then, but I just would like to hear your thoughts on how the bank and the dealer, more specifically, thinks about risks in your trading portfolio and more accurately manages those risks in periods like we've had this week as far as market risk and potential trading losses is concerned?

[Louis Vachon, President, CEO & Director]

Laurent, you want to take that one? Or you want me to answer? Or -- okay, go ahead.

[Laurent Ferreira, Chief Transformation Officer, Executive VP & Co]

Sure. I think you've heard us also in the past. When it comes to trading, we generally have a risk profile that's sort of defensive, rates, credit and equity. And it's above that balance that Louis is talking about in terms of growth and good risk management. And so it does reflect in our results. You're right, stable growth. And also, whenever there is a risk on, which we've seen at the end of last year, we participate, but we're also careful in that as well. So that's why I think you're seeing a little bit more stable revenues overall. I don't know if that answers the question, Sumit or?

[Louis Vachon, President, CEO & Director]

But as we have all have enough scars around the table, we know that when it comes down to trading income, there's always room for surprises. But I think strategically, the key thing is for us is to stay to businesses where we feel we have an expertise in value added. And explaining the, again, this quarter, the difference between our results and that of our competitors would probably -- they had a bigger rebound. The bigger difference is the size of their U.S. franchises versus ours. So number one, risk management, the strategic risk management. And we don't feel we have a comparative advantage in U.S. credit than U.S. capital markets business and we stick to the business we know.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And more to the point, last thing. You've told us over the years that the bank tends to be long volatility when it comes to trading operations. I think we and other banks have discussed, there can be good volatility and bad volatility depending on positioning and how trading trends. Is there anything -- and I'm not asking you to give me the P&L for this week, but is there anything in periods of dislocation like this that stands out to you negatively from the bank's positioning and a risk perspective?

[Louis Vachon, President, CEO & Director]

No. I think it's so far, good volatility. Bad volatility would be volatility that at some point would start impacting the M&A pipeline and -- so that's what we would watch out for.

[Operator]

[Operator Instructions] Our following question is from Nigel D'Souza from Veritas Investment Research.

[Nigel R. D'Souza, Investment Analyst]

If I could turn to PCLs for a moment in your Personal and Commercial Banking segment. So that increase that occurred in the quarter, it looks like, one, it was first driven by higher provisions on performing loans for Personal Banking loans. So one, what's driving that higher provisions on non-personal banking loans given the strength we're seeing in the Québec economy? And the second factor appears to be higher provisions on credit card receivables. And what's the factor driving that higher? Does that have anything to do with the rule change at all? Or are there other factors at play there?

[William Bonnell, Chief Risk Officer & Executive Vice]

Thanks, Nigel. I'll start off on that. If you look at Slide 27 in the SIFI, actually the Stage 1 and Stage 2 provision increase for P&C is really coming from commercial rather than personal or credit cards. I think quarter-over-quarter, the performing loan provisions are lower a bit in Personal Banking credit cards, partially because of the strength in the Québec economy and Québec consumer. The commercial banking one, the increase -- the majority of that comes from the change we made in our forward-looking macroeconomic factors. As I mentioned at the end of last quarter, we -- it's still fairly early to try to assess what the final impacts will be of the coronavirus, but we felt it prudent to make some adjustments in our pessimistic case and we tweaked a little more negative, 3 factors, which we thought would had a higher chance of being impacted, that being commodity prices, stock markets and corporate credit spreads. And naturally, that impacted the non-retail part of the portfolio. So that's what you see in the Commercial Banking, and that's really what you see overall for P&C and their loan losses. Impaired loan losses pretty stable quarter-over-quarter in P&C. It was the performing in the commercial book that had the increase. Does that answer your question?

[Nigel R. D'Souza, Investment Analyst]

Yes. So is it fair to say that as of right now, you're not expecting any uptick in performing PCLs on the personal side?

[William Bonnell, Chief Risk Officer & Executive Vice]

Well, listen, we will follow the macroeconomic events. We think that the coronavirus, if the impacts continue, it will felt -- be felt first through performing and in the nonretail sector of the portfolio.

[Operator]

Our following question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

I just wanted to go back to the P&C segment and just on the revenue. When I look at Personal, on a year-over-year basis, loans were up 4%, revenue is up 4%. And then when I look at Commercial, it was up 6%, but revenue is only up 3% year-over-year. Maybe just trying to understand maybe the variance on the commercial side, if you could provide some color?

[Stéphane Achard]

Certainly, this is Stéphane. So the reality is, if you look at revenues from our loans business, they were actually up in excess of 6%, but the overall revenues were only up 3% as we've let go off marginal returns or marginal margin deposits and that impacted the overall revenues of the business. And those were largely on the governmental side and we report our governmental institutional deposits as part of the commercial. And that's the main reason you see this lag. And that's pretty much has been clean, you should see it bounce back up to its regular levels in the future.

[Scott Chan]

Okay. And just lastly, on the international side, if I kind of track the employees, it's been increasing sequentially every quarter. This quarter, it was up 11% or up 700. When do we see an inflection point? And I'm assuming this is at ABA, when do we see an inflection point where that kind of stabilizes and kind of directionally, I think, it helps us makes us look at the earnings trajectory on that platform as well too, which continues to be robust?

[Louis Vachon, President, CEO & Director]

Scott, the -- this is Louis. I think we're still opening branches. I think the -- a lot of the staffing, you're right, is -- almost all of the staffing increase is related to ABA. And some of that is obviously corporate and control functions, but most of it is the additional staff in branch. So we're still expecting to open some branches in 2020. And then we're -- with the team right now, we're working on plans for 2021. So I think at some point, we will communicate what the plans will be for branch opening in 2021, but it's pretty much related to that. And once we slow down the opening of branches, then clearly, I think, there should be a slowdown in hiring of staff in Cambodia.

[Operator]

Our following question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, Analyst]

I just wanted to pick up where, I think, more or less Sumit left off. Louis, the bank relies more heavily than others on trading revenue. I think 16% of the overall revenue comes from whether it's equity or fixed income and commodities and the like. Probably equity trading revenue is 7%, 8% of the top line for the bank. What sort of a number do you think we should be thinking from a volatility perspective around that number, if we look at this quarter, last number of quarters?

[Louis Vachon, President, CEO & Director]

On quarter-to-quarter, Sohrab, I think that's a tough question. I think that's not quite the way we look at the business. I think we tend to look at that within the bank at my level at having great and greater diversification in terms of our revenue sources. That is why strategically, we created a fourth reporting segment in the last 3 years with international. And even within Capital Markets, I think the hope is that we have diversified sources of revenues from the different businesses we have that ideally will not always be perfectly correlated. And that mix at some point will bring some good return on capital, but at some point also have acceptable volatility. And that's what, I think, we've tried to produce in the last, God knows, 15, 20 years. So I don't -- we have a particular target in mind of how much equity trading will represent in terms of the business. I think we tried to understand what we think are the correlation patterns and risk patterns between the different businesses and ideally have a mix of business that's not -- that in most scenarios will tend to produce a decent return on capital. Laurent, anything else you'd want to add on that?

[Laurent Ferreira, Chief Transformation Officer, Executive VP & Co]

Sure. I mean the business mix is different versus others. And then we've talked and we said that in the past, this is a client flow business. So it is a niche that we've worked on year-over-year and that we've invested in people and technology and we're quite comfortable with it. So I think demonstrating, in terms of results and resiliency, it's been there. So not a target, but definitely a place where we're comfortable. We're comfortable with the risk. And we definitely have built up some expertise in that space.

[Sohrab Movahedi, Analyst]

Maybe if I can just follow-up, I mean, again, at the total bank level, when you say you're comfortable, are you comfortable with it growing as a percentage of the overall revenues?

[Louis Vachon, President, CEO & Director]

Well, I think -- over time, as you know, I think we've been pretty stable over the last 4, 5 years, I think the -- we've been comfortable with the percentage of revenue coming from the whole -- whole side -- wholesale side of the business. And I think that had a positive impact on our performance and on our multiple. So I think in terms of guidance, I think, we're looking to grow wholesale, Sohrab, at about the same speed as the whole franchise, which is 5% to 10% per year. And I think we can [indiscernible] on that in the last few years on that.

[Sohrab Movahedi, Analyst]

Sorry, and just one last question, maybe, I don't know if it's for Laurent or for Bill. I'm looking at the supplementary financial information where you have the derivative financial instruments kind of broken down. The credit equivalent number on equity and commodity contracts has doubled year-over-year. I'm not so sure, does that basically mean that credit risk associated with the equity business has doubled year-over-year?

[William Bonnell, Chief Risk Officer & Executive Vice]

I don't believe so. That may actually be a question for Jean Dagenais. And Laurent will take a crack on that.

[Laurent Ferreira, Chief Transformation Officer, Executive VP & Co]

I'll take a crack. Most of these contracts are collateralized. So no, there's not a significant increase in terms of credit within. I mean, there's third-party risk, but it is daily collateralized.

[Louis Vachon, President, CEO & Director]

And maybe remember, we spoke last quarter about the SACCR impact and change in it from year-over-year. I think it was difficult to compare, but we can look at it. Jean will give you a call back off-line.

[Operator]

Our following question is from Mario Mendonca from TD Securities.

[Mario Mendonca, MD & Research Analyst]

Louis, could you help me think through Cambodia. And what I'm glad with here is, has the bank's risk appetite changed at all in terms of loan growth? I mean, I know, you're opening a lot of branches and that's what's driving this very strong loan growth, but have you revisited your risk appetite vis-à-vis Cambodia in the context of this virus?

[Louis Vachon, President, CEO & Director]

Short term, the answer, Mario, is no. We have not done that. And the reason is that so far, and I appreciate it's very early, and the portfolio is still aging, and we have yet to see how well it will age. It's certainly so far aging quite well. But we've been -- and the reason we did not feel the need to do that is that our lending model and our business model has been the same ever since we've invested in ABA and to control, namely the last 5 years. And we target -- 95% of loans still target exactly, so it's small, family-owned businesses, where we have the real estate as collateral. And so we stayed very, very -- within that niche and we still -- we are very, very comfortable with that. So it's not that we're in credit card or unsecured and auto loans, things that are very -- in very volatile and very correlated to the business cycle. We feel that we have good protection given the fact that we have real estate collateral on these loans. So we have not changed anything with the team so far. As I said, we're still assessing exactly what the impact will be on the economy. And then from there, if there are changes, we'll let people know. But short term, no Mario, we have not made any changes.

[Mario Mendonca, MD & Research Analyst]

So if ABA, if it's growth, as usual, and let's just all sort of cross our fingers here and hope this COVID issue becomes a distant memory soon enough. If that continues to grow, and Credigy, clearly, you've guided that, that we're going to look at double-digit loan growth there? And finally, if you're spending in domestic P&C levels off at about 3%, then it seems logical to suggest that that business unit like Cambodia and Credigy business unit could exceed 15% of total bank earnings by the end of this year, say, like, let's, call it, Q4 2020. Is that a number -- first of all, does it make sense to you? And are you content with them?

[Louis Vachon, President, CEO & Director]

The answer is yes, Mario. There's a possibility. Now I'm looking around the table here. And I think everybody wants to -- in terms of revenue growth want to maintain their percentages, but -- in terms of business lines, but what that scenario you just described is a possibility.

[Operator]

We have no further questions registered at this time, I would now like to turn the meeting back over to Louis Vachon.

[Louis Vachon, President, CEO & Director]

Thank you, everyone, and we'll talk to you for the results of the second quarter. Thank you very much. Have a good day.

[Operator]

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