National Bank of Canada

TSX:NA

Earnings Call Transcript 2023-Q1

[Operator]

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

[Linda Boulanger, Senior Vice President, Investor Relations]

Thank you, operator. Good afternoon, everyone and welcome to our first quarter presentation. Presenting this afternoon are Laurent Ferreira, President and CEO of the Bank; Marie Chantal Gingras, Chief Financial Officer; and Bill Bonnell, Chief Risk Officer. Also joining us for the Q&A session are Stephane Achard and Lucie Blanchet for Personal and Commercial Banking; Martin Gagnon, Head of Wealth Management; Denis Girouard and Etienne Dubuc Co-Heads of Financial Markets; and Ghislain Parent, Head of International.

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 Laurent.

[Laurent Ferreira, President and Chief Executive Officer]

Merci, Linda, and thanks everyone for joining us. The bank had a good start to the year with strong results across our business segments and robust margin performance. We generated superior return on equity above 18%, highlighting the strategic diversification of our earnings streams. In a highly uncertain macro environment, we are maintaining a defensive positioning with a disciplined approach to capital, risk and cost management. Our capital level is strong with a CET1 ratio of 12.6%, well above regulatory requirements. This places us in a very good position to deploy capital in our businesses and drive superior organic growth.

On capital deployment, our priorities are unchanged and in line with our strategy. First, maintain strong capital ratios; second, invest in business growth; and third, return capital to shareholders when appropriate. Our credit portfolio continues to perform well. Underlying credit conditions remained strong in Canada. Nonetheless, given the uncertain macroeconomic outlook and consistent with our disciplined approach, we are building additional reserves.

Turning now to our business segments, Personal and Commercial Banking delivered a strong performance in the first quarter. Revenues were up 17% from last year, mainly from deposit margin expansion and balance sheet growth. While our outlook remains positive, we are seeing a slowdown in retail and commercial loan growth with higher interest rates impacting client demand. That being said, we are pleased with the sustained momentum on the customer acquisition and satisfaction fronts with strong digital onboarding and engagement, key drivers to client experience and efficiency.

We are also seeing tangible results from our commercial and private banking differentiated model implemented last year. Wealth Management delivered a record performance in the first quarter. Net income increased by 16% year-over-year, reflecting our well-diversified revenue mix. Again, this quarter, we delivered very strong NII growth, supported by higher interest and a strong retail-based deposit franchise.

Financial Markets generated strong results in Q1 reflecting broad-based strength across the business. Corporate and Investment Banking delivered the second best performance on record, propelled by robust lending demand, M&A mandates and sustained performance in DCM. Global Markets performed well, led by strength in our rates, commodities and foreign exchange businesses. This is on the back of an exceptional performance in equities last year. The performance of our financial markets franchise demonstrates its resiliency, earnings diversification and ability to adapt to market conditions through the cycle.

Turning to our International segment, ABA Bank had another solid quarter, generating strong balance sheet growth. Strategic investments in business growth are bearing fruit. In the first quarter of 2023, ABA’s client base surpassed the 2 million mark, representing a 39% increase over last year. While global economic growth is moderating, the underlying fundamentals of Cambodia are strong, and China’s reopening is expected to be positive. In this context, we expect double-digit growth for ABA for fiscal 2023. Longer term, the outlook for Cambodia remains very attractive.

Finally, Credigy experienced continued momentum with assets up 5% sequentially. This was driven by the acquisition of high-quality, longer-duration secured assets. The portfolio remains defensively positioned with 92% secured assets. Taking into account the realized pipeline, we are well positioned to deliver double-digit asset growth for the full fiscal year.

Moving to the macroeconomic environment, while labor markets remain healthy, macroeconomic uncertainties are growing with persistent inflation and rising interest rates. We’re also starting to see the impacts of monetary policies on consumer behavior and business investment. At this point in time, the path of interest rates, inflation and economic growth remain uncertain. Having said that, the bank is on solid footing, while NII tailwinds from interest rates are subsiding and growth in some sectors is normalizing, we continue to see attractive opportunities across our business. With our strong capital position, the quality of our credit portfolio and the diversification of our business model, we are well positioned to weather the uncertainty ahead and generate continued profitable growth.

Let me now speak to the recently announced senior leadership changes made in support of our strategic priorities and as part of our succession planning process. Martin Gagnon is retiring from the bank on April 1. Under his leadership, our wealth management business experienced significant growth, cementing this segment as a key growth pillar for the bank. Upon Martin’s retirement, Denis Girouard will be taking the interim leadership. Ghislain Parent will also retire later this year. After 13 years at the bank, including 10 as Chief Financial Officer, Ghislain has played an invaluable role in the bank’s performance through the years, notably in the achievement of solid financial results. In the context of Ghislain’s retirement, Credigy will return under the leadership of financial markets, and Stephane Achard will transition to a new role to lead our international activities, namely ABA Bank.

I am pleased to welcome Michael Denham to the senior leadership team as Executive Vice President and Head of Commercial and Private Banking. Michael joined the bank 1.5 years ago as Vice Chairman, Commercial Banking and Financial Markets. Previously, Michael was President and CEO of BDC, where he was instrumental in doubling the commercial franchise in Quebec and across Canada. I look forward to working with Michael on growing our position in Quebec and in Canada. We have a strong bench and leadership team at the bank and these changes underpin our vision for the bank. I would like to sincerely thank Martin and Ghislain for their outstanding contributions during their respective tenures. I wish them both the very best.

With that, I will pass it over to Marie Chantal.

[Marie Chantal Gingras, Chief Financial Officer]

Thank you, Laurent, and good afternoon, everyone. Turning to Slide 7, the bank delivered a solid performance in Q1. Revenues increased 7% year-over-year, with a strong top line in all business segments, continued balance sheet growth and strong margin expansion, excluding trading. Pre-tax pre-provision earnings grew 5% year-over-year with continued organic growth in all business segments. Expenses increased by approximately $120 million year-over-year. Part of the increase is attributable to the reversal of a $20 million provision in the same quarter last year related to a provincial salary tax.

Excluding the reversal, expenses grew by approximately $100 million or 8% year-over-year. This was largely driven by talent acquisition and inflation in 2022 as well as higher technology expenses related to fast and new investments, supporting continued growth across the bank. Our balanced approach to business growth and investment continues to generate a strong all-bank efficiency ratio, which came in at 51.7% and with best-in-class ratios in select business segment. For fiscal 2023, we continue to work towards achieving positive operating leverage and mid- to high single-digit PTPP growth. For the second quarter, however, we foresee continued pressure. In this context, we will be strategic and selective in managing expenses, notably related to new hirings, technology investments and discretionary spending.

Now turning to Slide 8, total net interest income, excluding trading was strong, coming in at $1.4 billion this quarter and up 29% from last year, reflecting solid volume growth and margin expansion. For P&C, net interest income was 23% year-over-year, mainly driven by higher deposit margins and balance sheet growth. Wealth management continued to benefit from a strong deposit base in the context of increasing interest rates, with net interest income up 75% from last year.

Net interest income increased 11% year-over-year for USSF&I. Balance sheet growth and prepayment revenue at Credigy contributed to the increase, partly offset by lower margins. Total bank NIM, excluding trading was up 15 basis points on a sequential basis, reflecting higher deposit margins following interest rate increases and partly offset by lower loan spreads.

Total bank NIM of 2.19% reflects non-recurring revenues representing approximately 4 basis points. These include a prepayment revenue at Credigy as well as an interest recovery on a previously impaired loan in corporate banking. Excluding these elements, total bank NIM was 2.15%. We are pleased with the strength of our margin profile. It is underpinned by our longstanding balanced approach to managing volume growth, profitability and credit quality.

Moving on to our balance sheet on Slide 9, loans were up 12% year-over-year. Asset growth was strong in Corporate Banking and USSF&I, while loan growth is moderating in Commercial Banking. Demand for retail mortgages continues to slow down, driven by real estate market conditions. Deposits, excluding wholesale funding, grew 16% year-over-year, a good reflection of our diversified model and focused on deposits in all segments. Term deposits grew significantly in light of client preferences in a higher interest rate environment. Looking forward, we remain disciplined on both sides of the balance sheet, balancing growth and margin.

Now turning to capital on Slide 10, we maintained a strong CET1 ratio ending Q1 at 12.6%, while generating solid balance sheet growth across the franchise. First quarter earnings net of dividends added a solid 44 basis points to our ratio. This highlights the capital generation capacity of our diversified business mix. Excluding foreign exchange, RWA growth represented 61 basis points of capital. This was largely driven by balance sheet growth in Corporate Banking, Commercial Banking and USSF&I, partly offset by a reduction in counterparty credit risk.

During the quarter, we recognized unfavorable credit migration, representing 7 basis points, largely due to declining housing prices, impacting LTV model and methodology updates, represented 3 basis points of RWA increase. We’re pleased with our current capital position. It provides us with the flexibility to deploy capital across our segments and return capital to shareholders.

In conclusion, the bank delivered a strong Q1 supported by organic growth across our businesses, solid balance sheet growth and margin expansion with high capital levels, a diversified earnings stream and a resilient business, we entered the second quarter in a solid position.

With that, I’ll turn it over to Bill.

[Bill Bonnell, Chief Risk Officer]

Merci, Marie Chantal and good afternoon, all. I will begin on Slide 12. While the future path of inflation and interest rates continue to add to uncertainties in the macro environment, strong employment and saving levels supported another period of solid performance across our credit portfolios. In the first quarter, provisions on impaired loans declined to $20 million or 4 basis points. Retail impaired provisions were stable at $24 million, remaining well below pre-pandemic levels.

In the non-retail portfolios, we benefited from net recoveries, which can be lumpy from quarter-to-quarter. And provisions declined quarter-over-quarter in the International segment as ABA’s moratorium-related impairments peaked as we had expected in the fourth quarter of last year. Our provisions on performing loans totaled $58 million or 11 basis points. The primary drivers of the allowance build this quarter were portfolio growth updates to our forward-looking scenarios, and we increased the weight of our pessimistic scenario again this quarter to reflect heightened macro uncertainties.

Looking ahead, we’ve maintained our fiscal year 2023 guidance on impaired PCLs at 15 to 25 basis points and currently expect to be in the bottom end of that range. Current underlying conditions, particularly the strong level of employment and consumer savings are supporting a slower rate of normalization of impaired PCLs than we had expected, and the normalization we are seeing in the retail credit portfolios is occurring at different speeds across products and geographies. The same factors we discussed last year inflationary pressures, geopolitical risks and the direction and timing of interest rate changes are still present and all contribute to a less certain outlook. In these uncertain times, we are very comfortable with our defensive geographic and business mix as well as our prudent level of allowances.

Turning to Slide 13, total allowances for credit losses increased to almost $1.2 billion. Performing allowances increased to $946 million, which is just 11% below its pandemic peak. This improves our coverage of last 12 months impaired PCLs to 7.1x and our coverage of our pre-pandemic level of impaired PCLs to 3x. In the current macro context, we believe it is prudent to hold these significant levels of credit allowances.

Now on Slide 14, gross impaired loans declined quarter-over-quarter to $793 million or 38 basis points. Net formations declined significantly to $21 million, benefiting from net repayments in the corporate loan portfolio and stable retail formations. In prior quarters, I mentioned that we expected ABA’s formations to peak at the end of last year, and actual performance in the first quarter was better than expected, leading to negative net formations of $13 million. Credigy formations increased in the quarter, primarily due to normal seasoning in the consumer unsecured portfolio in line with our expectations. Consumer unsecured accounts now for only 8% of Credigy assets.

On Slides 15 and 16, we provide details on our RESL portfolio. The geographic and product mix remained stable with Quebec accounting for 54% and insured mortgages accounting for 29% of total RESL. House price declines caused an increase in LTVs on uninsured mortgages and HELOCs to 57% and 51%, respectively. About one-third of mortgages have variable rates and investors account for about 11% of all RESL borrowers. When looking across the portfolio for tail risks, we see that uninsured borrowers with a credit bureau score of less than 650 and LTVs greater than 75% and represent less than 50 basis points of total RESL. While higher rates have already impacted the housing markets through lower volumes and easing prices, the resilience in our RESL portfolio remains strong. Delinquency rates remain well below pre-pandemic. This is particularly the case in our Quebec portfolio as the province is benefiting from better than national average rates of unemployment and savings. This resilience is translating into mortgage delinquencies increasing at a slower rate in Quebec than in other regions of our Canadian portfolio.

In summary, we are pleased with the credit performance again this quarter and remain very comfortable with our defensive positioning, our resilient mix and a prudent level of allowances.

And with that, I will turn it back to the operator for the Q&A.

[Operator]

Thank you. [Operator Instructions] First question is from Paul Holden from CIBC. Please go ahead.

[Paul Holden, CIBC]

Thank you. Good afternoon. So Laurent, you had pretty cautious outlook in your prepared remarks. And then Bill highlighted that there was an increased weighting towards the pessimistic scenario. And I don’t disagree with that view at all, in fact, completely aligned with it. But just wondering if there’s anything you’re seeing currently and experience today that justifies that position or really, is this just based on a forward outlook?

[Laurent Ferreira, President and Chief Executive Officer]

Paul, thank you for your question. I mean we are definitely seeing the impact of the monetary policy, the impact on mortgages, commercial loans. So we’re clearly seeing normalization in terms of growth versus what we saw in 2021 and throughout 2022. And we are also near the end of the positive impact on deposits from rising interest rates. So those are the things that we have in mind now. Having said that, if you look at our business model, I think we’re really well positioned, one defensively across all businesses. So in terms of a potential downturn, but also more on the offensive side, right, our capital position, our capital strength, I think, provides us with opportunities to keep growing our balance sheet across Canada. We see opportunities in financial markets, commercial as well, private banking in most sectors. But it’s not just about balance sheet growth. It’s – we also I think that there are opportunities for us to keep growing our wealth franchise. So we are – I think it’s – we see the impact, obviously, of interest rates. But at the same time, we know that there are opportunities for us to keep growing.

[Paul Holden, CIBC]

Makes sense. Second question is with respect to net interest margins. Your NIM looked quite a bit different than peers this quarter and don’t expect you to comment on the peer results. But in terms of your own results, like, can you talk a little bit more about shift in deposit mix, you highlighted strong growth in term deposits. Like why didn’t that have the same kind of drag on NIM as we would have seen with some of your peers? What was – what do you believe was the offset there? Was it just your ability to deploy that into higher-yielding asset growth? Or is it something different?

[Lucie Blanchet, Head, Commercial Banking]

Yes. It’s Lucie. I’ll start with P&C and Marie Chantal can complement for the rest of the bank. So yes, we had – we’re pretty happy with our margin resiliency this quarter. I would say the increase in deposit spread, mainly on the demand of non-sensitive deposit spread represents the main – the lion’s share of that. So it’s about 60% of the increase – on deposits, we also benefited from repricing on some of our fixed term deposits. While the migration from demand to fixed deposits have been somehow limited. And we expect that also to continue to diminish until the rest of the year. And on asset spreads, I guess our discipline is paying off in making our asset spread a little more resilient, reducing the drag on margin, while it has certainly impacted some of the loan growth. And there was a little bit of the business mix also with assets going outpacing deposits. So that’s basically the story of this quarter for P&C. Marie Chantal, do you want to add anything for the rest of the bank?

[Marie Chantal Gingras, Chief Financial Officer]

Well, maybe what I can add is our strong deposit franchise in wealth management also contributed to our NIM expansion this quarter. And as Lucie said, our ground approach in managing NII is paying off, as you can see. And maybe just a reminder that we had two nonrecurring items in our NIM coming from Credigy and in a lesser extent from FM, which represents about 4 basis points. So yes, we are very happy with the NIM expansion that we’ve demonstrated so far. And going forward, we continue to focus on our balanced approach in managing NII with respect to volume growth, margins and credit quality.

[Paul Holden, CIBC]

Okay. And final question for me, and this one is probably directed to Bill. Any update you can provide on experience with your variable rate mortgage customers just in terms of how they’re handling the higher monthly payments? And any notable change in client behavior among that cohort? Thank you.

[Bill Bonnell, Chief Risk Officer]

Sure, Paul. Thanks. I mentioned in the prepared remarks last quarter that I kind of expected to see some dispersion of performance across products, geographies and as I mentioned in today’s prepared remarks, a bit of the same that we are seeing that. So I think the story in our retail credit portfolios is one of normalization, and it’s happening at different speeds. If I look at the – by product, the products that are normalizing most quickly would be the consumer unsecured. So credit cards, certainly, on the impaired Stage 3 losses is still well below pandemic. But when you look at 30-day delinquencies, it’s back pretty close to pre-pandemic levels, and a little bit below the pre pandemic levels in Quebec, a little bit above outside Quebec. The next product would be the variable rate insured mortgages. So those are the higher LTVs, of course, and we are seeing an increase to above pre-pandemic levels for that. And in the other variable rate and the fixed rate mortgages, it’s largely a geographic dispersion, so again, for the whole portfolio, well below pre-pandemic levels, however, normalizing a little bit more quickly outside Quebec. Does that answer your question, Paul?

[Paul Holden, CIBC]

It does. That’s helpful, thank you. And that’s it for me.

[Operator]

Thank you. The next question is from Meny Grauman from Scotiabank. Please go ahead.

[Meny Grauman, Scotiabank]

Hi, good afternoon. Want to stick to margins and just better understand the dynamics in the P&C segment. I appreciate the answer to the previous question. But when I look at the loan-to-deposit ratio in your P&C segment and stack it up to peers, it looks like it’s the highest. And I guess, common thinking suggests that, that should be somewhat related to relative margin performance. So I’m just wondering how to think about that. How does that gap get filled? And could it be the answer – is the wealth business – So I’m just curious about that?

[Lucie Blanchet, Head, Commercial Banking]

Well, it’s Lucie. I’ll start, and I’ll see if my colleagues want to complement. And I think it’s really happening in – first, in the deposit in the deposit spread dynamics, we may have seen, let’s say, lower shift from fixed – from demand to fixed deposits over the past quarters. And we’ve seen that also start to normalize. Also, this quarter, we have some government deposits that mature, which were at lower margin. So that may count in a little bit. And definitely, I think we have less of a drag on the asset spread. So that helped overall the margin expansion.

[Meny Grauman, Scotiabank]

But can I think about there is still a reliance on wholesale funding in that segment in order to bridge the gap between the loans and the deposits or how does that work?

[Marie Chantal Gingras, Chief Financial Officer]

Can you maybe explain a little bit on the question? I’m not sure I’m getting the sense of it, sorry?

[Meny Grauman, Scotiabank]

Just in terms of – like I would have expected that there is a reliance on wholesale funding and P&C specifically. And so we know that the cost of those are going up. So I appreciate your answer, but I’m just wondering if there’s any more sort of insight you can provide in terms of – am I just thinking about it incorrectly? Or as you highlight, like there’s just offsets there. You are seeing some upward pressure, but then what you highlighted is offsetting that. Is that – how do I think about that?

[Marie Chantal Gingras, Chief Financial Officer]

So maybe the last thing I can maybe add as a complement for the P&C is that we’ve also benefited from the attractors of our non-sensitive deposits, already in our NIM. So maybe that does explain a little bit of the NIM expansion on the P&C side.

[Stephane Achard, Head, Personal Banking]

The other thing I’d add, Meny, is – it’s Stephane here, on the commercial side, there’s no really reliance on wholesale funding, if you go back and you look at our last 6 years, deposits have grown actually faster than the asset side on the commercial side just as an example. So it’s really much more how we play with the deposits be it on the governmental side and attract or let go of the margins that are not playing in our favor at various times, and Lucie as well explained that.

[Meny Grauman, Scotiabank]

Got it. And then if I could just follow-up just in terms of guidance on the margin. Apologies if I missed it, but just especially at the top of the house, what’s – what should we be thinking about as we move throughout the year in terms of how the margin develops?

[Marie Chantal Gingras, Chief Financial Officer]

Hi, It’s Marie Chantal. So on the outlook, as you know, environment is quite uncertain. So making NIM predictions is quite difficult to do with precision. There are many moving parts, so interest rate trajectory, balance sheet mix, competitive dynamics. But what we see today, considering no further increase in rates, we – NIM – all NIM, excluding trading, may subside in the next few quarters. Of course, as I said, absent of any further interest rate increases. That said, we still expect to maintain a strong and healthy NII through 2023, and as communicated in the past, we do not look at NIM in isolation. So our primary focus is on growing the franchise, deploying capital organically for our clients and generating strong NII, while balancing margins and credit.

[Meny Grauman, Scotiabank]

Thanks for that.

[Marie Chantal Gingras, Chief Financial Officer]

You are welcome.

[Operator]

Thank you. Next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

[Gabriel Dechaine, National Bank Financial]

Good afternoon. We don’t say goodbye to Ghislain, you still here until Q4, I guess, okay. On ABA, I saw the expenses pick up quite noticeably there. And I’m just wondering, is this a one-time kind of step-up in investment? Or are we entering a phase here where that could continue because of the growth that’s taken place over the past few years and you got to kind of buck up your back office or something like that.

[Operator]

I’m sorry for the interruption the moderator’s line is disconnected. So I’ll have to dial in back [Operator Instructions]

[Gabriel Dechaine, National Bank Financial]

Am I live here?

[Operator]

Yes, you are. Please stay on the line. I am sorry.

[Gabriel Dechaine, National Bank Financial]

Okay.

[Operator]

[Operator Instructions]

[Gabriel Dechaine, National Bank Financial]

It’s a hot mic moment here.

[Operator]

Please go ahead. You are back on the phone. Mr. Dechaine, maybe you could repeat your question, I’m sorry, disconnected while you were asking.

[Gabriel Dechaine, National Bank Financial]

I was wondering if there was something I said.

[Laurent Ferreira, President and Chief Executive Officer]

We were wondering, same thing, Gabriel

[Gabriel Dechaine, National Bank Financial]

Awkward feeling there for minute. Anyway, I was asking Ghislain about expenses at ABA. We saw them jump pretty materially year-over-year. And I’m wondering if we’re entering – if this is a one quarter kind of thing or if there’s a phase there, where you need to step up investment because of the growth that ABI has had over the past few years and back off as compliance, whatever.

[Ghislain Parent, Head, International]

Thank you, Gabriel. So I would say that there’s two main reasons. The first one is, if you remember, first quarter last year, we were still in COVID. So it was a COVID quarter. So the level of expenses was low. And as Laurent mentioned in his prepared remarks, ABA continues to expand its client base. 39% increase year-over-year, 9% increase quarter-over-quarter. So the expenses are more linked, I would say, to the asset client growth than the revenues. So as the COVID situation improved, we ramped up investments to support recent and future growth of the franchise, mainly by adding more people, more than 1,000 people in the past 12 months. We have invested in our branch and self-service banking network, as well in our leading mobile solutions. So, if you look at the efficiency ratio, Gabriel, is still very good at 35% or – in fact, it’s below 35%. So a healthy low level, I would say. And for the rest of the year, Gabriel, we expect expense growth to decline in Q2 and more importantly, in the second half of the year. So you could say that Q1 is a special quarter in terms of expenses, and you won’t see that kind of growth in the coming quarters.

[Gabriel Dechaine, National Bank Financial]

Got it. And then, I guess, more broadly on expenses. And I’m getting the message on the environment slowing, the tailwind from margins is abating and more cautionary on some of the top line items. On expenses, I’m not quite sure I got what you were saying there, whether we could still have another big quarter for investment spending. So operating leverage will be tough in Q2 and then moderation thereafter or something else? Maybe you can help clarify that?

[Marie Chantal Gingras, Chief Financial Officer]

Yes. Gabriel, it’s Marie Chantal. So just as a reminder, our expenses grew this quarter, excluding that $20 million reversal grew 8%. So let’s start from there. while expense growth may vary from quarter-to-quarter in the following year. It’s not expected to remain at the Q1 level. So excluding variable compensation, as of our expense growth this quarter is related to talent acquisition and retention, and we have stabilized those investments made to support growth and client experience.

[Gabriel Dechaine, National Bank Financial]

So great, down from this level perhaps? Is that...

[Marie Chantal Gingras, Chief Financial Officer]

Yes. So Q1 level is not expected to remain at this level for the next following quarters. So as I said in my remarks, we continue to work towards achieving positive operating leverage for the year. So continued our discipline.

[Gabriel Dechaine, National Bank Financial]

Perfect. And just a quick 1 for Bill. I saw Credigy, the PCL number was almost matching last year’s entire total. I think most of that’s performing though, if you can maybe break it down a little bit?

[Bill Bonnell, Chief Risk Officer]

Yes. Sure, Gabriel. You’re right. Most of it is performing. I think two-third was performing. In the script, I talked about some expected seasoning in what’s now a relatively small portion of their book of consumer unsecured.

[Gabriel Dechaine, National Bank Financial]

Okay, enjoy rest of your day.

[Bill Bonnell, Chief Risk Officer]

Thanks, Gabriel.

[Operator]

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.

[Doug Young, Desjardins Capital Markets]

Hi, good afternoon. Just on the sell-in ratio and the risk-weighted asset movements. It looked like market risk, I mean, your trading was quite good, but looked like market risk RWA was down and your counterparty credit was down. It seems to be somewhat of a trend across the group. I’m just wondering if you can kind of elaborate on what drove that. And then when I look at the quality, I know you talked about migration, I think it was $600 million or $700 million of RWA movement or 9 or 8 basis points or 6, I forget what it was. But when I look at your stat supplement, suggest that it’s about $1.5 billion of increase in RWA because of deterioration of quality. And I would imagine some of that migration, perhaps some of that is the addition of the portfolio of Credigy. So just hoping to get some clarification on that.

[Bill Bonnell, Chief Risk Officer]

Thanks, Doug. And maybe I’ll start on your last part of your question on migration and then hand it back to Marie Chantal for the first part. I think Marie Chantal in her prepared remarks called out that migration – the biggest part of migration was related to higher LTVs in the mortgage portfolios. So as you know, the capital calculation includes a loss given default model and we refreshed those loss given default models. And I think best practice is at least annually. But when there is a change in the market, like we have seen with a significant decline in house prices, we don’t wait till the end of the year to reflect that. So, we did reflect the house price decline in our models for RESL capital – credit capital, and that’s what was the main driver of the migration. Does that help answer you that part of the question, and I will pass it back to Marie Chantal if so.

[Doug Young, Desjardins Capital Markets]

Yes. And then just the quality, though, it looked like it was more than that in terms of the deterioration in the quality. So, I think the migration was part of it. Is there another part of it that caused the quality to increase RWA in the quarter?

[Bill Bonnell, Chief Risk Officer]

Anything else to call out Marie Chantal besides that?

[Marie Chantal Gingras, Chief Financial Officer]

No. Maybe I will jump in with the counter-party credit risk. So, it was driven – the variation was driven by mark-to-market changes in derivatives mostly. And in terms of book quality, just to complement on Bill’s response, still on the CCR. It was driven by normal course hedging in the CVA desk and some positive counter-party credit migration.

[Doug Young, Desjardins Capital Markets]

Okay. And anything on the market risk RWA side?

[Bill Bonnell, Chief Risk Officer]

Nothing special to call out, Etienne anything?

[Etienne Dubuc, Co-Head, Financial Markets]

No, it’s really a reflection of the increased deployment in our corporate lending portfolio.

[Doug Young, Desjardins Capital Markets]

Okay. And then second, just maybe kind of put this together on the NIM side. It sounds like in terms of your outlook that you are expecting NIM to kind of come back a little bit. I mean excluding the two unusual items, use that as the starting point and then come back over the next few quarters. Should we anticipate no real NIM expansion from this level throughout the year, or is the back half looking better? Just trying to get a sense of how this will evolve through the year. And then the wealth management NII up 75%, I mean I don’t think that gets swept into P&C banking. You can correct me if I am wrong. Is that been a big – can you maybe dive a little bit into that?

[Marie Chantal Gingras, Chief Financial Officer]

Yes. So, maybe I will start with the first part of your question, and then Martin could complement on the wealth side. So, in terms of NIM’s outlook, as I have said, there are so many moving parts coming up depending on interest rate trajectory, balance sheet mix. Lucie mentioned that our migration between demand and term was not as high as maybe we could have expected. So, depending on how it goes, it’s really hard to say. So for now, we think it may subside a little, but I think it will be in a better position next quarter to give more precise outlook.

[Doug Young, Desjardins Capital Markets]

Okay. And then on the wealth management NII.

[Martin Gagnon, Head, Wealth Management]

No, there is no – the wealth – this is Martin. So, the wealth management net interest income is not included in P&C, so it is distinct. We are a large contributor to the all-bank NIM because National Bank is the most exposed bank to wealth management. And then when you look at our business, we have 100% retail business. We don’t have asset management or anything. So, that brings a lot of demand deposit, retail demand deposit that I have talked about in the past, brings a lot of optionality, and we are capturing our net interest income optimization strategy that we put in place a while ago.

[Doug Young, Desjardins Capital Markets]

And has that peaked out? I mean it seems like that’s been quite strong growth is, like is there more room to kind of drive further NIM expansion in that division?

[Laurent Ferreira, President and Chief Executive Officer]

Maybe I will jump in. I think our message overall is you have seen rates go up by 400 basis points in 2022. And we are not expecting that this year. And you have heard Ghislain say that rates are probably on pause. So, I think our message overall is we are near the end of – at least the expansion from interest rates. But as we mentioned in my remarks, and I think Marie Chantal just mentioned, there is a lot of uncertainty still in the market, and they will depend, right. It will depend on the business mix. It will depend on markets. So, I think our overall message is that we do feel like we had a significant expansion, and we are not going to see the same kind of level, obviously, this year, but it’s too early and too much uncertainty to give you more precise information at this point. I don’t know if that helps you.

[Doug Young, Desjardins Capital Markets]

No, it does. I appreciate the color. Thank you.

[Operator]

Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.

[Mario Mendonca, TD Securities]

Good afternoon. As you can probably tell from the nature of the questions, we are all sort of struggling to understand how National can deliver such strong margins, especially in the context of Meny’s first question, where – I mean I think all he was highlighting there is that the gap between your deposits and loans in the best of retail is large. There is a very big funding gap on this rank. And you would have expected some dynamic that was reminiscent of what we saw at another bank earlier this week, but we are not seeing that. So, let me go about this a different way. Can we look at your securities yield, what I am getting at here is the gross is interest that the bank reports because we don’t have to look at NIM by segment. We can just look at these individual components. The securities interest for this bank relative to those securities that you are holding, that return has increased by leaps and bounds, and I have tried to compare it to what we are seeing at your peers. And in National’s case, the securities yield is well above any of your peers and has been increasing far faster than your peers. And I am happy to share the numbers, but certainly not right now. Could you help me understand what National does differently that allows for this kind of securities yield? And why it’s increased so substantially, but we are just not seeing that your peers, is there anything you can offer?

[Bill Bonnell, Chief Risk Officer]

Maybe, Mario, it’s Bill. I will just take a first interact. I think for going through the details of securities yield, maybe we will do that offline because I don’t know that we will see what your numbers look like. But I think one part of Meny’s question, one part that you were describing that’s missing from the equation is it’s, you are forgetting about the wealth franchise that we have, which is very different. So, looking at P&C alone does not mean that everything outside P&C is wholesale funding. And I think that’s the missing piece. And I understand when you are comparing, trying compare apples-to-apples, our wealth franchise, the nature of the business and the weight of the business requires a broader look across. And I think that’s why Marie Chantal brings it back to the top of the house, all-bank NII and NIM ex-trading. But my suspicion is that’s what generates the confusion when you are looking to try to compare. But maybe Marie Chantal, anything else to add?

[Marie Chantal Gingras, Chief Financial Officer]

I think that resumes it well.

[Mario Mendonca, TD Securities]

Thank you. Bill, would you then suggest that it might be wise for us to look at that funding gap in domestic retail, and I am just using the numbers right out of your supplement, like the $60 billion funding gap in domestic retail, and essentially look at that in the context of $40-some-odd billion of excess deposits in your wealth management business, is that a more sensible way to look at your business, just say, hey, those wealth management deposits, they are valuable, and they help close that funding gap. Is that right?

[Bill Bonnell, Chief Risk Officer]

Yes, you are absolutely right. Yes, for sure.

[Mario Mendonca, TD Securities]

Okay. So, that solves one part of a mystery for me. So, if we could then go back to the initial question. What I am getting at here is – let me give you some numbers to think about. Your securities interest, this is the gross securities interest and, hey, I know that a lot of that relates to your trading book, too. Unfortunately, I don’t know securities interest ex the trading book, it’s not disclosed. But that securities interest hit $600 million this quarter. That’s a very big number in the context of the security book. So, what are you investing in, like how do you get – that’s a big number?

[Laurent Ferreira, President and Chief Executive Officer]

Mario, are you referring to the number that’s next to our NII, like the non-interest income?

[Mario Mendonca, TD Securities]

No securities interest. The gross securities interest is $596 million. Like your loan interest is $2.9 billion, your securities interest is $596 million. I hope and I know, I am looking at this different from the way the banks talk about margins. Normally, we talk about domestic retail, wealth or whatever margins, all-bank margin, but that’s not the way I want to look at it anymore. I don’t find that helpful. I found it a lot more helpful to look at the component parts of the bank’s NII. The way – frankly, the way it’s done in the U.S. and the security for this bank is huge.

[Laurent Ferreira, President and Chief Executive Officer]

Mario, we would love to continue the discussion on this here, but I think we should take this offline because we are not quite sure exactly how – what you are referring to. And I think – and we will take that conversation with you. No problem. So, I think I would like to stop it here because we are not quite sure how to answer your question here.

[Mario Mendonca, TD Securities]

Okay. But just for the record, this is your disclosure. This is nothing I am making up. This is right out of your disclosure. But I will happily take it up with the bank.

[Laurent Ferreira, President and Chief Executive Officer]

Thank you, Mario.

[Operator]

Thank you. The next question is from Darko Mihelic from RBC. Please go ahead.

[Darko Mihelic, RBC]

Hi. Thank you. I wanted to actually talk a little bit about a few things other than margin, but also related to NII. So, I am looking at your loan growth statistics for Canada P&C. And I am looking at virtually every category. So for example, mortgages 5% growth for year-over-year, personal loans, credit cards, commercial 12%. In each and every category, your growth is the lowest amongst the companies that have reported so far. And that was not the case a year ago. A year ago, you were actually in many places the highest growth in many different categories. So, I am wondering if this sort of slowdown or tapping of the brakes on loan growth is intentional, is it being done through pricing, terms, or is it just maybe just a – I mean it looks like it’s been happening now for some – we watch the loan growth sort of slow over time. And I am just curious if it’s intentional and if it isn’t, then that’s fine, but wondering if you could just comment on your loan growth relative to industry.

[Lucie Blanchet, Head, Commercial Banking]

Right. Thank you, Darko. It’s Lucie. So, some of it is intentional. Some of it isn’t. So, if we take for example, the mortgage book, I assume the mortgage book will we – we like our strategy, which is focused on our proprietary channels, which is allowing us to anchor the relationship with our customers. And our internal channels, the decline in origination we observed is in line with the market decline. However, the portfolio growth is impacted by the white label channel, which have really been challenged with the market condition. And since 2022, I mean every quarter, 2022, we have slowly ramped down that channel considering the margin compression we were facing. And it came to the extent that in Q1, for example, that channel did not contribute to origination, while it represented historically about 10% of our origination. So, it does have an impact on our growth rate. That being said, that channel remains important, but it’s just the market conditions that are not there. And again, I think also on the mortgage growth, we have – you heard me talk about our balanced approach, and I think we benefit from, I mean lower pressure on asset spreads. On the credit card, the credit card portfolio is growing according to our anticipations, except that the payment rate of the credit card business remains elevated, which is good on the credit side, but which is dragging down the revolving balances impacting the NII a little. And the auto loan book, which is the other big portfolio in the retail business, actually, the auto loan book is doing quite well. It did last year. It continues to do it this year with double-digit growth, good margin, stabilized margins. So, that’s the positive. Stephane, do you want to comment on the commercial?

[Stephane Achard, Head, Personal Banking]

I will just mention that you are right as to what you saw, Darko, with regards to the growth in commercial. For example, during COVID, we outpaced most of our peers because we decided to deploy capital on the insured real estate market as Canadian businesses had lots of liquidities, and we are not necessarily borrowing all that much. We have reverted back to deploying the capital to the Canadian businesses and lesser on the real estate side – insured real estate side over the last few months. And you are also right in the second part have seen that there has been a slowdown over the last two months. We will see how that reverts. I think January was a peculiar month. It’s not a full month, lots of people and businesses on vacation. So, we are really anxious to see the following few months how demand is going to pick up with the loan growth. But historically, we always want it to be middle of the pack in asset growth, combined with good margin controls and sound cost management. That’s been our recipe.

[Darko Mihelic, RBC]

Okay. Thank you. That’s very helpful. Thank you.

[Operator]

Thank you. The next question is from Joo Ho Kim from Credit Suisse. Please go ahead.

[Joo Ho Kim, Credit Suisse]

Hi. Thanks. Just a couple of quick ones here. Just following up on that seasoning discussion on the portfolio at Credigy, I am just curious if that process is finished or could we see losses sort of increase on the impaired side as the portfolio matures further from here?

[Bill Bonnell, Chief Risk Officer]

Thanks. It’s Bill. I will take the question. We expect that it will continue. It could from quarter-to-quarter through the year, it could vary around this point, increased a little bit. But the majority of the PCLs that we see and expect to see in Credigy is from growth. As Laurent mentioned, the pipeline is strong and when the assets are brought on the Stage 1 PCLs come upfront, so that’s what we expect to drive most of the PCL growth this year at Credigy.

[Ghislain Parent, Head, International]

This is Ghislain. Maybe I just want to add what we saw in Stage 3 this quarter and what we expect for the next quarters is in line with expectations on the unsecured consumer loan portfolios. It’s in line with the expectation.

[Joo Ho Kim, Credit Suisse]

Got it. Thank you. And just last one that – it’s just on a growth outlook overall, I am hearing sort of more normalization in growth from the domestic P&C business, not just for National, but I think overall industry, but the growth outlook seems much more robust, as you mentioned, from Credigy and also ABA. So, just curious what’s driving that sense of optimism for those businesses specifically? And how we should think about growth from there in a slower sort of a macro environment?

[Ghislain Parent, Head, International]

Yes. This is Ghislain. So, I will start with ABA. The mid-term economic potential of Cambodia is still very positive on many fronts. First, they still have strong drivers such as high-growth economy on the bank market for overall demographics, so it’s still there. Second, I would say that the return of Chinese investors and tourists later this year will help, the signature of free trade agreements with China and Korea also and the infrastructure investments that we have done recently in airports, roads and ports. So, this is the global economic picture, I would say. However, the current economic growth in Cambodia is impacted like we are in Western countries by global uncertainties, geopolitical tensions, supply chain constraints and high inflation. So, we continue to see double-digit growth for loans and deposits, and this is what we see also for the rest of the year. And so this is – so the country is slowing down in terms of economy. But once again, the mid-term potential is still there. So, the bank is doing very well in these conditions. So, this is why we reiterate our double-digit growth guidance 2023 for 2023 and for the coming years as well. For Credigy, you know that the context – the current context, especially the context of the economic environment at the end of 2022, beginning of 2023 is very good for Credigy. We made a lot of investments over the last six months. During the quarter, we invested more than $600 million. So, it’s been a very good quarter for Credigy. And so we expect that it’s going to slow down a bit for the rest of the year. But again, it’s going to be – in terms of asset growth for 2023 is going to be double digit for Credigy. And – but at the same time, we – so we are very comfortable with the defensive portfolio. And the team is still very prudent in its development.

[Joo Ho Kim, Credit Suisse]

Thank you. That’s helpful. Thank you.

[Operator]

Thank you. This concludes today’s question-and-answer session. I would like to turn the meeting back over to Mr. Ferreira.

[Laurent Ferreira, President and Chief Executive Officer]

Okay. Thank you very much. On behalf of all employees, I would like to thank again, Martin Gagnon and Ghislain Parent. This is their last call. So, thank you very much for everything that you did for the bank, and we will be back in the second quarter. Thank you.

[Operator]

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