National Bank of Canada

TSX:NA

Earnings Call Analysis

Bank Maintains Stable Credit Performance Amid Uncertainties

The bank began the fiscal year with positive signals in the market, but acknowledges ongoing economic uncertainties. Provisions for credit losses are at $120 million, relatively stable quarter-over-quarter. Impaired provisions modestly rose by 1 basis point to 17 basis points. The bank projected stable but growing delinquencies, maintaining a full-year target for impaired provisions at 15 to 25 basis points. Gross impaired loan ratio ticked up slightly, mainly due to the ABA segment's expected increase. Notably, more than half of the Canadian mortgage portfolio has been repriced at higher rates, and despite disparate geographical impacts, credit card and variable rate mortgage delinquencies remain low, pointing to a client base that's managing increased costs with resilience.

National Bank of Canada's Resilient Performance Amidst Challenges

In the first quarter, National Bank of Canada showcased robust performance, with key indicators such as earnings per share (EPS) reaching $2.59, a return on equity (ROE) surpassing 17%, and a Common Equity Tier 1 (CET1) ratio of 13.1%. Management highlighted both the successful capital deployment for long-term growth and their ability to keep costs down as pillars of their strong figures. Despite predicting a challenging 2024 with high interest rates and inflationary pressures, the bank stands ready to continue growing the business and providing shareholder returns, underscored by a dividend payout ratio at 42.4%.

Solid Growth Across Segments

Personal and Commercial Banking showed a healthy increase in pretax pre-provision earnings, growing 5% year-over-year on the back of increased loans and deposits, with the commercial book expanding 4% sequentially. Wealth Management set new highs with record revenues and net income, bolstered by a 10% increase in assets, partly due to market appreciation. Financial Markets generated record profits as well, with net income climbing 3% year-over-year. Corporate and Investment Banking also experienced a strong revenue lift of 4% from the previous year.

Strategic Positions in Credigy and ABA Bank

Credigy sustained its solid track in Q1, seeing a 6% sequential growth in assets, and a disciplined investment approach that's poised to yield high-quality returns. ABA Bank's performance remained solid, reflecting a significant 28% growth in client acquisition, which translated to double-digit growth in key balance sheet items and an 8% increase in revenues year-over-year.

Prudent Management with a Focus on Efficiency

The bank's prudent approach continues in capital, credit, and cost management, aiming to uphold its disciplined strategy. With a 5% rise in pretax pre-provision (PTPP) growth year-over-year and an efficiency ratio of 51.4%, management indicated that their cost control measures are leading to tangible improvements. Revenue increase was seen across various sectors, contributing to a solid financial performance, keeping expenses in check with a total growth of 4% year-over-year.

Continuous Investment in Technology and Positive Operating Leverage

Investment in technology continued, with a 4% cost increase, part of a strategy focused on automation and simplification. This investment was complemented by a lower amortization expense and led to an operating leverage of 0.6% for the quarter.

Robust Net Interest Income and Stable Margins

Non-trading net interest income saw a 5% quarter-over-quarter increase, with broad benefits seen across the bank's business segments. The non-trading net interest margin (NIM) climbed 7 basis points to 2.21%, emphasizing the bank's capacity to navigate the changing economic landscape.

Consistent Growth in Loans and Deposits with Strong Ratios

There was a significant year-over-year loan growth of 9% and a quarter-over-quarter rise of 2%. Deposits, minus wholesale funding, also grew by 4% year-over-year. These figures underline the ongoing expansion and resilience of all operational segments. A stable loan-to-deposit ratio of 98% as of Q1 aligns with the bank's diversified business model and favors continued multi-segment growth.

Strong Liquidity and Well-Diversified Funding

The bank's core operations are backed by a diverse and robust funding profile, with a disciplined approach to managing funding costs, contributing to a well-distributed deposit base. This strategy has been part of the bank's sustained performance, supported by a robust liquidity coverage ratio (LCR) standing at 145%.

Strength in Capital Ratio and Internal Capital Generation

Concluding Q1 with a resilient CET1 ratio of 13.1%, the bank signaled solid asset growth. Notably, the recent regulatory changes and risk-weighted asset (RWA) growth have been managed effectively, reflecting the bank's strong internal capital generation. Despite the macroeconomic uncertainties, the management's prudent stance across the bank has been constant.

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, and welcome to National Bank of Canada's First Quarter Results Conference Call. I would now like to turn the meeting over to Marianne Ratté, Vice President and Head of Investor Relations. Please go ahead, Marianne.

[Marianne Ratté, executive]

[Foreign Language] and good afternoon, everyone. We will begin the call with remarks from Laurent Ferreira, President and CEO; Marie Chantal Gingras, CFO; and Bill Bonnell, Chief Risk Officer. Also present for the Q&A session are Lucie Blanchet, Head of Personal Banking and Client Experience; Michael Denham, Head of Commercial and Private Banking; Nancy Pacquet, Head of Wealth Management; Etienne Dubuc, Head of Financial Markets, also responsible for Credigy; and Stéphane Achard, Head of International, responsible for ABA Bank.

Before we begin, I would like to refer you to Slide 2 of our presentation for information on forward-looking statements and non-GAAP financial measures. The bank uses non-GAAP measures such as adjusted results to assess its performance. Management will be referring to adjusted results unless otherwise noted.

Also, in light of the proposed legislation with respect to Canadian dividends, the bank did not either recognize an income tax reduction or use a taxable equivalent basis method to adjust revenues related to affected dividends received after January 1, 2024.

I will now turn the call over to Laurent.

[Laurent Ferreira, executive]

[Foreign Language] and thank you, everyone, for joining us. The bank delivered a strong performance for the first quarter, reporting EPS of $2.59, with strong momentum and execution across business segments. The bank generated ROE in excess of 17% and maintain a CET1 ratio of 13.1%.

Our results reflect effective capital deployment to generate profitable long-term growth, active cost management and simplification efforts to generate efficiencies as well as our commitment to maintain a prudent credit profile, both in terms of mix and reserves. Our discipline across these fronts is serving us well in an uncertain macro landscape and normalizing credit environment.

As anticipated, 2024 is shaping up to be a challenging year for consumers and businesses. Interest rates remain high and inflationary pressures are still at play. The housing supply imbalance is further pressuring Canadians, while we continue to see signs of softening labor market. As we look ahead, economic growth could prove challenging, which could translate into lower inflation and interest rate relief.

In this context, we entered the second quarter on solid footing, with prudent reserves and strong capital ratios. This enables us to support business growth and return capital to shareholders through sustainable dividend increases. Our dividend payout ratio stands at 42.4%, following the dividend increase announced last quarter. We will review our dividend in Q2, consistent with usual practice.

The earnings power of our diversified business mix and defensive posture provide us with resiliency and flexibility, as demonstrated by the performance of our business segments.

Personal and Commercial Banking continued to perform well in the first quarter, generating 5% year-over-year growth in pretax pre-provision earnings. This was supported by concurrent growth in average loans and deposits while maintaining resilient margins. Our commercial book grew 4% sequentially. Growth in personal loans remained slower, reflecting a lower level of mortgage originations. We will continue to be disciplined across our portfolio, balancing volume growth with margin and credit quality.

Wealth Management delivered a strong first quarter, with record revenues of $660 million and net income of $196 million. Momentum in fee-based revenue helped, with assets up 10% sequentially, in part driven by market appreciation. Net interest income grew 5% over the same period, benefiting from a strong deposit base.

Financial markets continues to grow and diversify its activities, delivering record net income of $308 million for the quarter, up 3% year-over-year. Revenues were up 14% from last year for Global Markets, with a solid performance across the franchise. This includes robust activity in securities finance and strong performance from our rates and commodities business.

Corporate and Investment Banking maintained a strong top line in the quarter. Revenues of $304 million were up 4% year-over-year, driven by net interest income growth, partly offset by lower M&A activity.

Our Financial Markets business remains focused on delivering net income growth for 2024.

Credigy delivered a solid performance in Q1, generating 6% asset growth sequentially. With strong momentum in investment volumes, the business deployed USD 1.3 billion in the quarter. Revenues were down year-over-year and sequentially, as comparative periods benefited from favorable items, including significant prepayment revenues. Excluding these items, net interest income was up 6% sequentially. Credigy's underlying performance remains strong, and our portfolios are diversified and primarily secured. With sustained momentum in deal flow and a disciplined investment approach, Credigy is well placed to continue delivering high-quality risk-adjusted returns.

Finally, ABA Bank delivered a solid overall performance in Q1. Momentum in client acquisition persists, with client count up 28% year-over-year, translating into double-digit growth on both sides of the balance sheet. Revenues were up 8% year-over-year and 4% sequentially. Deposit margins have been improving lately, with a more favorable mix in deposit growth. The business is focused on balanced growth in the near term, while continuing to benefit from a very attractive long-term outlook.

In conclusion, and mindful of the uncertain environment, we continue -- we remain committed to our prudent and disciplined approach to capital, credit and cost management.

Marie Chantal, over to you.

[Marie Gingras, executive]

Thank you, Laurent, and good afternoon, everyone. My comments will begin on Slide 7. The bank delivered strong results in the first quarter, with PTPP growth of 5% year-over-year and an efficiency ratio of 51.4%. Revenues increased 5% compared to last year. In particular, the top line grew 10% in financial markets, 5% in P&C Banking and fee-based revenues within Wealth Management rose 8%.

Our cost discipline is yielding results, with total expense growth of 4% year-over-year. Our action towards simplifying our products, processes and services are paying off.

Growth in salaries and benefits moderated to 3% year-over-year. Variable compensation rose 6%, in line with both strong fee-based performance and Wealth Management and revenues in financial markets.

On the technology front, cost increased 4% as we continue to invest by accelerating automation and simplification. This is partly offset by a lower amortization expense.

In Q1, strong revenue growth and continuous expense management resulted in positive operating leverage of 0.6%. Lingering economic uncertainty continues to make revenue growth difficult to predict. In this context, we remain prudent and focused on managing expense growth.

Now turning to Slide 8. Non-trading net interest income in Q1 grew 5% quarter-over-quarter and was broad-based. Most business segments benefited from strong balance sheet growth and higher margins. The all bank nontrading NIM increased 7 basis points sequentially to reach 2.21%. P&C NIM was stable from [indiscernible] strong level, as wider assets and deposit spreads were mainly offset by balance sheet mix. We are pleased with our Q1 NIM.

Predicting NIM in the current environment also remains challenging. Based on what we're seeing today, we expect all banks nontrading NIM to remain relatively stable from Q1, but may fluctuate up or down by a few basis points from quarter-to-quarter. As always, we maintain our balanced approach in managing NII with respect to volume growth, margins and credit quality.

Moving to our balance sheet on Slide 9. Loans were up 9% year-over-year and 2% quarter-over-quarter. All business segments contributed to this growth. Deposits, excluding wholesale funding, grew 4% year-over-year and 1% sequentially. Personal deposits rose 4% quarter-over-quarter, with continued growth in term deposits and $1 billion increase in demand deposits. Nonretail deposits were relatively stable over the same period.

We maintained a strong loan-to-deposit ratio of 98% as of Q1. Our ratio is aligned with our diversified business model and supports continued growth across all operating segments.

Slide 10 highlights our sound liquidity position and diversified funding profile. Our core banking activities continue to be well funded through diversified and resilient sources. The bank has a holistic view on deposits, and we remain disciplined around funding costs. This strategy contributes to a well-diversified deposit base and to the bank's strong overall performance.

LCR remained strong at 145%. It now reflects the implementation of OSFI's new regulatory liquidity treatment of cash ETF. Cash ETF balances were up 1.5% over the quarter. We prudently and consistently operate at liquidity levels that are well above regulatory minimum requirements.

And now turning the capital on Slide 11. We ended Q1 with a strong CET1 ratio at 13.1%, while generating robust asset growth. The adoption of FRTB and a revised credit valuation adjustment framework on November 1, reduced the CET1 ratio by 38 basis points, in line with our guidance. This amount was partly offset by methodology refinements representing 15 basis points.

First quarter earnings net of dividends contributed 41 basis points to our ratio, underscoring our strong internal capital generation capacity.

Organic RWA growth, mainly driven by strong momentum in Credigy's investment volumes and solid growth in our commercial and corporate banking books, represented 58 basis points of capital.

With lingering macro uncertainty, our prudent approach across the bank remains a focus. The bank's performance in Q1 was strong and 2024 is off to a good start. Our revenue diversification, our expense discipline and our strong capital continue to position us well to deliver profitable long-term growth.

I will now turn the call over to Bill.

[William Bonnell, executive]

[Foreign Language], Marie Chantal, and good afternoon, everyone. I'll begin on Slide 13. Since the end of last fiscal year, there has been some improvement in the macro context, with stronger equity markets and lower bond yields, reflecting increased optimism about inflation and growth. However, significant uncertainties still remain in the forward path of economic growth and interest rates. Certain components of inflation may remain sticky, which could complicate the job of central banks and unemployment rates are likely to rise.

Our base case economic forecast has the unemployment rate in Canada increasing to about 7% by early 2025. Against this macro backdrop, our credit portfolios have continued to perform very well in the first quarter, with total provisions for credit losses of $120 million or 21 basis points, relatively stable quarter-over-quarter.

Impaired provisions increased 1 basis point sequentially to 17 basis points or $99 million. Retail impaired provisions increased as normalization trends continued. Nonretail impaired provisions were stable quarter-over-quarter and due primarily to a few files in commercial banking in the health care and agricultural sectors.

Continued seasoning of acquired portfolios generated stable impaired provisions at Credigy. ABA's impaired provisions remained elevated as we expected and discussed on last quarter's call. Provisions on performing loans declined to $30 million or 5 basis points. The primary drivers this quarter were portfolio growth and an increase in overlays, partially offset by more favorable macro indicators and model calibrations.

Looking ahead, we expect delinquencies and impaired provisions to continue their upward path. We maintain our target range for full year impaired PCLs at 15 to 25 basis points, and still expect to end up around the middle of that range.

Turning to Slide 14. We continue to prudently build our allowances for credit losses, which reached more than $1.4 billion and represents a strong coverage of 6.6x our last 12-month net charge-offs. Performing ACLs increased for the seventh consecutive quarter and now represents 3.4x the last 12 months impaired PCL. In Appendix 10, additional metrics on our allowances are provided, which demonstrate our prudent coverage levels.

Turning to Slide 15. Our gross impaired loan ratio increased 3 basis points sequentially to 48 basis points. As we called out on the slide, the GIL ratio on our domestic loan portfolios was stable quarter-over-quarter at 31 basis points and has risen just 2 basis points from the same period last year, a good demonstration of our defensive positioning. The main driver of the increase in GILs was ABA, and we expected this. We began speaking about our expectations for higher impaired back in Q3 last year, based on trends we saw in software trade and tourism. As we expect the same trend to continue for another few quarters, I want to take a minute to share a few insights on ABA's impaired loans that we believe are important to remember.

First, similar to the performing portfolio, the average impaired loan size is about $65,000 and is well secured with average LTVs in the mid-40s. Second, retail trade and other services are the 2 sectors with largest GILs, as these sectors have been most impacted by lower discretionary spending and slower tourism recovery. Third, ABA's collections staff work closely with borrowers, many of whom continue to make periodic interest and partial capital repayments. For example, in the past quarter, about 36% of outstanding impaired loans received interest payments, and more than a quarter, received partial capital payments.

And finally, when a loan becomes impaired, ABA prudently takes Stage 3 provisions, which are significantly greater than the actual charge-off rates that is historically experienced. So although the economic context and the much longer collection cycle in Cambodia, mean that we expect the growth in ABA skills to continue and formations to remain elevated for a few more quarters, we remain very comfortable with the prudent level of provisioning and expect net charge-off rates to remain low.

Now looking at net formations at $173 million. Formations were flat quarter-over-quarter and reflect the ongoing normalization trends we discussed last year. ABA's formations reported in Canadian dollars declined in the quarter, however, remained elevated on a constant currency basis as expected.

On Slide 16, we present highlights from our Canadian RESL portfolio. The geographic and product mix remained stable, with Quebec accounting for 54% and insured mortgages accounting for 29% of total RESL. Higher risk uninsured borrowers represent less than 50 basis points of the total RESL portfolio. In 90-day delinquencies and uninsured mortgages and [indiscernible] remain very low at 9 basis points and 8 basis points, respectively.

You can find additional details on our Canadian mortgage portfolio on Slide 17. I'll note that more than half of the portfolio has now been repriced at higher interest rates, and clients continue to demonstrate their resilience. We have provided more insights on trends in 90-day delinquencies for the Canadian retail portfolio in the Appendix 9.

As discussed on previous calls, we have observed differences in the pace of normalization across products and geographies, and there are 2 trends that I'll call out from that delinquency table. First, credit card delinquencies now exceed their prepandemic level. Within this population, we find the client segment most impacted has been non-homeowners, a segment that has been absorbing significant increases in rental costs. I should also remind you that we have a relatively small card portfolio that represents less than 1% of total loans.

And second, variable rate mortgage delinquencies have continued to normalize, as borrowers have absorbed a significant increase in interest rates. Within this population, it is only the segment of insured variable rate mortgages that has delinquencies above their prepandemic level. Uninsured variable rate mortgage delinquencies remain relatively low at 17 basis points.

In conclusion, we are pleased with the strong credit performance again this quarter, which reflects our defensive positioning resilient mix and prudent provisioning. And with that, I'll turn the call back to the operator for the Q&A.

[Operator]

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

[Meny Grauman, analyst]

First question, Bill, you provided some color on credit trends you're seeing. I'm curious if there's anything -- any insights from a geographic point of view, Quebec versus the rest of the country, anything interesting there?

[William Bonnell, executive]

Yes. Meny, thanks for the question. I think we did mention in previous calls that we were seeing geographical differences. [indiscernible] to our weight particularly in unsecured exposure is heavier in Quebec. So we don't want to draw too many conclusions from them. But in our portfolio, we do see Quebec consumers appearing to have more resilience and performing better on a delinquency basis.

[Meny Grauman, analyst]

And then I wanted to ask about the dividend received deduction, specifically the impact there. And net of offsets, what was it in Q1? And what does that look like for the rest of the year?

[Etienne Dubuc, executive]

Yes. Meny, it's Etienne. So it is in line with what we said last quarter. The impact of the legislation reduced revenues in Q1 by $45 million compared to the previous year. And we expect an impact of around $60 million per quarter for the rest of the year.

[Meny Grauman, analyst]

And Etienne, that's including the offsets that you have?

[Etienne Dubuc, executive]

No. That is really the foregone gross up.

[Meny Grauman, analyst]

And then can you talk about the offsets? And the last time you mentioned it, but you didn't -- you weren't able to quantify. And I'm wondering if you could talk more about what kind of offsets you have and how big they are?

[Etienne Dubuc, executive]

So I think we don't want to narrow it down for offset. I think what we want to do is we're going to rely on the broad strength of our global markets franchise here and on our strong client coverage. So what we're seeing and maybe not directly related to those changes, but we're seeing strong client flow and structured funding trades, strong secured funding demand. And we are very, very active with our clients.

So one thing I'm really proud, if I want to talk about -- like the overall business and how we are managing to deliver performance is, for example, for calendar 2023, National Bank ranked first in total domestic bond trading in Canada. So that's our strategy. That's our commitment to be the best liquidity provider in Canada, and we continue to cement our presence in every listed contract and security, futures, options, ETFs, equities, where the goal is many through our leading trading technology to be the top market maker. That's how we will continue to grow the franchise.

[Operator]

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

[Doug Young, analyst]

Just on the dividend tax deduction removal. I just want to make sure I fully understand this, and I get a bit of the mechanics here. But we should see that more in the tax line. And I guess it was only in for 1 month of this quarter, if you can correct me if I'm wrong. And it's going to be in for the full, I guess, quarter for Q2, Q3, Q4. But -- and thanks for the dollar figure, but this is something that we should be thinking from a tax perspective. Is that correct?

[Marie Gingras, executive]

Doug, Marie Chantal here. So yes, there is also an impact on the effective tax rate. So if you look at the effective tax rate for Q1 2024, it was unchanged versus year-over-year at 19%. So 2 components in there. So first, of course, since the bank had not either recognized income tax deduction or the tax equivalent basis method to adjust revenues related to the dividends, it increased the effective tax rate. But remember that last year, we recorded the Canada recovery dividend and the additional 1.5% tax. Therefore, making the effective tax rate stable year-over-year.

Looking forward, so you would expect slight increase on the effective tax rate. Bearing in mind, though, that effective tax rate is also dependent upon other factors. But then again, as Etienne mentioned, going forward, for the financial market business, we still do expect net income increase in 2024.

[Doug Young, analyst]

Okay. That helps. And then just on the CET1 ratio, it was a fairly sizable increase in RWA related to book size this quarter, and I think it had looked at your loan growth. But was there other items? Like, I guess I'm going to assume this is related to mix. But if you can flesh that out. And then the CET1 ratio, I think it was mentioned in the prepared remarks, it benefited from 15 basis points from continuous refinements. Just hoping you get a little more detail on that.

[Marie Gingras, executive]

Yes, Doug, Marie Chantal. So on the last part of your question, we did have some refinements that totaled 15 basis points this quarter. They're following the implementation of the Basel III reforms. So they're related to some credit risk RWA related to derivatives and certain nonretail exposures. So going forward, there are possible further refinements and improvements to come, but we don't expect nothing of the same magnitude as that 15 basis points.

And on the first part of your question, in terms of RWA growth. So yes, robust RWA growth of 58 basis points, coming mainly from credit risk. And as I said in my remarks, we had very strong asset growth in Credigy, Commercial and Corporate Banking and a lower credit migration in our retail and nonretail books for about half and half. So 90% of the increase in RWA growth comes from asset growth.

[Doug Young, analyst]

Okay. And then maybe if I can throw additional one in here, just on the LCR 145 and you've reflected the cash ETF adjustment. It just feels high. And I do get that you want to remain conservative, whether it is much higher relative to where you need to be and [indiscernible] be peers. And so -- just curious your thoughts on that? And what is the cost, if any, you holding a higher LCR? Is there a cost on NIMs that if you brought that down, there would be an improvement. Just trying to understand that.

[Marie Gingras, executive]

Yes. So I think we've shared that before with you on the call. In terms of LCR, we do prefer to operate a little -- at levels that are a little higher than needed. We've been running with strong LCR and SFR for a while. It's part of our philosophy in terms of liquidity.

Now in terms of the level, you're right, it's still a bit higher than what we had expected. At the last call, I had mentioned 140, and we are now at 145. So of course, the big impact comes from the treatment of cash ETF, but it was partly offset with some funding that we did to see some market opportunities in Q1, which brought us back to 145%.

Now in terms of the cost, really, the high LCR doesn't have a high cost for us on the [indiscernible] NIM, so not material.

[Operator]

Our next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

If we could have a look at your Slide 9 and 10, I found that approach to describing your funding helpful. But there is one big component there that I could use a little more clarity on. The business and government deposits are such a big part of the overall piece, and they're so much greater than the business and government loans. Is there any way you could provide a greater understanding or clarity around what's in the business and government deposits? Like are these just operating deposits? Or do they have characteristics that might be a little more like wholesale funding? I think -- hopefully, I appreciate where I'm going with this. I want to understand the sort of the stickiness of those deposits relative to, say, personal deposits. That's what I'm working towards.

[Michael Denham, executive]

Yes, Mario. It's Michael Denham here. Yes, they are operating deposits. It's a mix of kind of sticky deposits with a lot of our commercial corporate banking and [indiscernible] cash management, et cetera. There are some deposits that are government that are less sticky, more renewable, but these are operating deposits and quite different to wholesale funding.

[Mario Mendonca, analyst]

And your experience over time, presumably, these have been a big part of national funding for a very long time. What's your experience been like? And I'm specifically referring to the deposits that are sort of somewhat less in terms of operating deposits, less operating deposits and more prone to leaving the bank in a period of declining interest rates because that's the sort of risk I'm thinking about right now. Rates come down, would there be -- is there any meaningful risk here that those deposits leave the bank or just go into another type of instrument within the bank?

[Michael Denham, executive]

I don't -- I think there's a competitive environment. So obviously, we need to be successful. We need to be in touch with our clients, we need to bid properly. But there's no concern that I have Marie around, an outflow of these in the event of a declining right environment with the provider that we make competitive in our approach.

[Operator]

Our following question is from Paul Holden from CIBC.

[Paul Holden, analyst]

First question is with respect to funding costs and your NIM. I mean you printed a pretty good quarter in terms of net interest margins. Not hearing the same references or at least not to the same degree of references to funding cost pressures as we've heard from some of your competitors. So I guess, part of my question -- my question I'm trying to get to is like why is that? Do you believe you're experiencing less funding cost pressures? Is it possible the dynamics within the Quebec market are somewhat different than the U.S. and the rest of Canada?

[Marie Gingras, executive]

Paul, I'll -- maybe what I can do is start by just giving an overview of the drivers of the NIM this quarter. It was -- we're quite pleased with the level, and it was a 7% increase sequentially and then I'll pass it over maybe to Lucie to complete.

So generally, in terms of the NIM, we benefited from better deposit spread across our domestic segments and P&C also benefited from better loan spreads. So those are the 2 first impacts. Then when you look at our slide on the NIM, we did have in our international segment annual dividends from our unconsolidated subsidiaries, that also contributed to the increase sequentially.

Looking ahead, we do expect NIM to stay generally stable. Deposits and loan spread seems resilient, thus far into Q2. However, we may experience some lumpiness from items such as the annual dividend or the ALM activities where the current environment characterized by high interest rate volatility can impact quarter-over-quarter results. So I think those are the main drivers that explains why our NIM is so resilient this quarter.

Does that help a little bit, Paul?

[Lucie Blanchet, executive]

And maybe I can give some color on the deposit spread. So when we look at the deposits, there are several components coming into this. So we still benefited from the noninterest-sensitive deposit that still continue to benefit from the [indiscernible] impact of the rate increases. And on the fixed term deposit, yes, we've seen more competitiveness there. The best spreads we've had there were at their peak in Q4 2022, and they've been coming down slowly and gradually since then.

But overall, it all blends in with the portfolio, but definitely, we see that. But again, we still benefited from the noninterest-sensitive deposits. And also in terms of deposit mix, it was neutral also on that front.

[Paul Holden, analyst]

Okay. So what I'm hearing is deposit spreads continue to benefit from asset repricing at a greater rate than deposit repricing. Okay. Okay.

[Lucie Blanchet, executive]

Yes.

[Paul Holden, analyst]

So I appreciate the cautious tone you've taken with the macro outlook throughout the prepared remarks. And maybe this is a question for Bill or who else wants to weigh in. But just wondering as you look at sort of cash flows within your customer deposits, what are you seeing that's worrying, if at all, any signs of pressure on discretionary spending, more going towards saving, more going down towards paying down loans. Some context there would be helpful.

[Lucie Blanchet, executive]

I'll start or?

[Unknown Executive]

Yes, why don't you start, Lucie. We'll do a tag team again.

[Lucie Blanchet, executive]

Yes. Thank you for the question. So in terms of, let's say, liquidity usage, we see the decrease in the demand deposit there for sure. So our customers are using their liquidity definitely there. And what we see is the consumer that is, I would say, prudent using their liquidity, we continue to see decreases in usage of, let's say, nonamortizing ELA, which is basically a variable rate mortgages. So the balances are down 6%, lines of credit are -- have been going down since the past year. They've stabilized now in Q1. And in terms of credit cards, we also see very disciplined consumer, at least in our portfolio, that are reducing their spend.

So the purchase volume we see and it started last quarter is reducing. So this is what we -- the trend we see right now, and we see them fully use their liquidity on that front. So really facing and addressing to the increase in borrowing cost.

[William Bonnell, executive]

And then maybe I can add on, Paul, from a -- what you see in the delinquencies in the table that we've added in Appendix 9, you can see that where the delinquencies have normalized the fastest or increase the fastest is where there's been more leverage in the consumers. So typically, the insured mortgage holder is first-time buyer, doesn't have the 20% down payment, and so it's not a surprise that we see a differentiation between the delinquency trends for insured variable rate and uninsured variable rate.

And in the credit cards, as I think I called out in my prepared remarks, to non-homeowners that are faced with increased living costs, rent, particularly, but also inflation in food and others, it's more stretched. So at a macro level, at an economic level, we should expect consumer spending to be muted or impacted negatively by that fact. And we'll see when the central banks lower interest rates and the delayed impact that we'll have, we expect on the delinquencies.

[Paul Holden, analyst]

Great. One last one I'm going to sneak in. Related to ABA, Bill. You referenced low LTVs, but prudent allowance build. So wondering if you can speak to the actual recoveries you've gotten on delinquencies that have transpired over the last year, just to give some sort of tangible evidence of what you've actuated here.

[William Bonnell, executive]

Sure. And I'll start off and I'll [indiscernible] to Stéphane afterwards. But just a reminder, we wanted to and continue to want to remain prudent, because we haven't been through an economic cycle with ABA. So from the beginning, we were pretty proactive at building performing allowances. And when loans become impaired at having a prudent level of Stage 3 allowances too. And as called out, the delinquency cycle or the recovery cycle is much longer in Cambodia than it is in Canada, but the experience that we've had this year.

Stéphane, do you want to share your?

[Stéphane Achard, executive]

Yes. Yes, Paul, I think one element which Bill is referring is we've been hammering the fact that the LTVs are really good, a 75% of the loans that we -- that were in Stage 3 on which we had to realize assets. In Q1, 75% of those resulted in no loss at all. And that's just to give you an idea, we're talking small loans with good collateral. So it's -- I don't think you'd see that in many environments. It's such a high percentage of Stage 3 that don't even result into a loss of any kind.

[Operator]

Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, analyst]

Bill, if I could just pick up there for a second. I mean you've given us a range of expectations for your Stage 3 provisions as you look to 2024. And I think if I was going to ask you, if you were going to get surprised, which business do you think would be the source of that surprise, relative to the range that you've given us?

[William Bonnell, executive]

That's a great question, Sohrab, but it sounds like a good discussion over a beer. But the -- I don't know whether I could give you fantastic insights of what we don't expect. I would say, there is a lot of -- stepping back, there's a lot of uncertainty in the North American and the global economic path forward. That's -- there's a lot of optimism that rates will come down, inflation is beaten and that, that will help support growth.

But it's certainly not a certainty. And trying to figure -- trying to assess the plausible paths ahead. There are many plausible paths ahead that would have 5-year, 10-year yields, much higher than they are now. There's other plausible path that would have 5-year 10-year yields, much lower than they are now. And it's not certain which one would be worse or better because it depends on why they arrive at those levels.

So I think the uncertainty could lead to, and depending on what the path would be, to performance that is generally in the economy that is less favorable than currently thought for wholesale. Others that are less positive than currently perceived in the market for retail.

But the -- why we are confident in giving our expectation for impaired provisions for the full fiscal year is based on with -- among all those uncertainties, we do know our mix, we know our geographic mix, our product mix, defensiveness and where we have our exposures to those sectors that are maybe more discretionary -- consumer discretionary linked or on consumer leverage or different parts of the economy and -- so we believe that our expectations that we've given for impaired provisions fit within the range of plausible outcomes in the time period that we gave. But I don't know whether that helps, Sohrab, but...

[Sohrab Movahedi, analyst]

It's very helpful. I will definitely buy you a beer. But I didn't hear you talk about ABA as a source of surprise there. So I guess that -- maybe from the size of this thing, it gives us an indication as to [indiscernible] around.

[William Bonnell, executive]

So there are similarities in what's happening in ABA's customer base, small businesses, same as in Canada, facing that uncertainty. So drivers of consumer discretionary spending in Cambodia, whether that moves up or down, that has a direct impact on the path for ABA -- ABA's Stage 3 performance.

So it's -- although it's a different environment with many differences, it is subject to many of the similar geopolitical monetary policy inflation impacts -- that impact the rest of the world.

[Sohrab Movahedi, analyst]

Okay. And if I can just ask a question to Etienne. I think you've reiterated the broad message that capital or financial markets 2024 earnings hopefully will be higher than the segment earnings in 2023. When you think about bits and pieces of that, Etienne, do you expect to get the earnings done through the top line? Or do you think it's -- you expect it to be more an expense management exercise to deliver higher earnings?

[Etienne Dubuc, executive]

Definitely the top line, Sohrab. And yes, we do reiterate our target of delivering net income growth for 2024. And we feel really good about the start of the year. Our balanced the performance has been so far, and we think the businesses are really well positioned to deliver net income growth.

On the interest rate side, we continue to see -- we will continue to see volatility as central banks determine when easing starts. That really bodes well for activity on trading, but also on the debt capital market side, as government and corporate issuers will look to take advantage of improved conditions to accelerate their borrowing programs.

And then you have the strength of the equity markets. That also bodes really well for our structured products franchise, where investors are back after a couple of quiet years. So sales are strong right now, which compensates for lower implied volatilities.

And on the securities finance side, as Laurent said in his script, it's been really busy, especially on the equity side, and we see it continuing for the next quarters. We see good client flows and really strong demand for our structured funding trades.

And then on the investment banking side, I touched on DCM already. Equity new issues could also get really busy, really fast. There's a lot of cash on the sidelines, a lot of pent-up demand. And that should help compensate for M&A that's been slower as we said. And we feel M&A will pick up more in the second half of the year. So overall, we feel good about delivering top line growth.

[Sohrab Movahedi, analyst]

And Etienne, you don't think you need materially more RWA to deliver on that?

[Etienne Dubuc, executive]

No.

[Operator]

Following question is from Nigel D'Souza from Veritas Investment Research.

[Nigel D'Souza, analyst]

I had a follow-up question for you on the delinquency data that you provided for Canadian Banking. And I noticed that the delinquency rate for the fixed rate mortgage book is running, not only all prepandemic levels but also below 2021 and 2022 levels. And I'm wondering if that's just entirely a function of those payments not going through a renewal cycle yet? Or if there's anything else at play that's keeping those delinquency rates lower?

[William Bonnell, executive]

Nigel, it's Bill. I'll take that one. Just to remind you that, that table is a snapshot of Q1 numbers in 2022, 2023, I don't have in front of me how that went for the Q2, Q3, where the peaks are. But there is, of course, variability quarter-to-quarter.

The general takeaway from that is that the delinquencies and the fixed rate mortgages overall remain low. And I think in our book, we are seeing that in Quebec, in particular, where, as we've talked about many times, the house prices mean lower mortgage ticket, so less consumer leverage more dual family incomes, diversified economy. It generates factors that support resiliency in our mortgage borrowers, and that's coming through in the numbers. So that's not a surprise to us.

For the fixed rate mortgages, we do have on the slides, we show you the maturity profile as they were renewing, remembering that some have already renewed. And overall, for our whole [ RESL ] book, more than half have already faced the higher interest rates, with renewals and with the variable rates having moved up. And we just -- as we look ahead at what will happen upon renewal for the fixed rate mortgages, there are a lot of metrics on that table in the slide, which give comfort. We look at it and slice and dice it very, very frequently internally.

However, when you look at the nature of those fixed rate mortgages for '25 and '26 renewal, there's a high percentage, which is insured. There is a relatively low LTV, which provides flexibility for the borrower or depending on where rates are at the time. The credit bureau scores are high. So we're quite confident in the resiliency of those borrowers.

Does that help, Nigel?

[Nigel D'Souza, analyst]

Yes, that's helpful. Just if you could add any color on the credit trends you're seeing for the fixed book that's already renewed? Anything there that you could point out or nothing worthy at the moment?

[Lucie Blanchet, executive]

Nothing in particular at the moment, I would say, because we've been very proactive since the bidding of the rate increase with our customer reaching out proactively sometimes up to 24 months before the renewal date, to do simulations with our customer, what would that mean for them at the current rate.

And we've had very good reception from our customers about that. And what message we hear is that we're okay, we have adjusted or we get into this dialogue where we implement systematic savings for them in preventing what's going to happen maybe in a year. So nothing in particular. I think we feel very confident with the fundamentals of our book.

[Nigel D'Souza, analyst]

Okay. Great. And then if I could just finish on a question on Credigy. You have more pressures in the U.S. banking space for asset sales, either for liquidity or capital. Are you seeing that kind of filter into Credigy? And just a reminder on the asset class as the Credigy is interested in, is that exclusive to residential mortgages? Or is it also open to commercial mortgage assets build?

[Unknown Executive]

So it's really residential mortgages. What Credigy does is consumer finance. And as you could see, Nigel, we had a great quarter of deployment, very balanced between portfolio purchases and structured lending transactions. So the teams made important acquisitions in the mortgage space, second lien and first lien. And also deployed business credit facilities in the mortgage space and the life settlement space. So all in all, a very balanced deployment.

And so we are seeing that even though the economy is doing well and you still see lingering government support, Credigy is able to execute, is able to find opportunities. And I think this quarter showed how well and reliably they're able to execute quickly and winning business by being fast, reliable and adaptable, instead of having to lead with price. So I think that's what -- that's how Credigy will continue to maintain and even improve its margins.

[Operator]

Following question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, analyst]

Maybe for Bill, I want to come back to the comment on the recovery cycle in Cambodia being longer versus Canada. Can you put some numbers around that? Like how much longer are we talking about? Like what I'm trying to get at is -- would it be fair to suggest that we could see the allowances attached to Cambodia sticking around a lot longer than we might expect coming through the other end of this challenging period for Cambodia?

[Stéphane Achard, executive]

So Lemar, it's Stephane. There's quite a bit of uncertainty, and it's difficult to assess how that recovery is going to turn around. And the first element of that is the reline of tourism, which is probably from an internal economy perspective, the main driver. It's been already a few quarters. We've been trying to say that the Chinese, Thailandese and Vietnamese tourists should be back. It's the case of the second 2 countries. But in case of China, it hasn't resumed. And until that really happens, it's going to be a bit tougher on the economy.

I do want to point out, however, that if you look at the whole Southeast Asian zone, Cambodia is one of the countries doing the best, and we're forecasting this year between 60 basis points and 100 basis points increase in the GDP. We're not back at the 7% or 8% growth that we've seen in the last 10 years, but 6% to 6.5% growth in GDP is fairly good.

So -- and the fact that these allowances could linger on for a while has to do with what Bill addressed about our collection process and the fact that the system over there is made in such a way where people work at the loans for a very, very long time and keep on making on the payments on delinquent loans for a long time. So it's a long process. But -- so we should expect those to stick around for the next 2, 3 quarters. We're confident that tourism is going to come back, probably toward the last latter part of this year.

[William Bonnell, executive]

And I'll just add on, Lemar, that the -- we think, as Stéphane mentioned, that the formations will remain elevated for the next 2 or 3 quarters, and then we expect that there could be some improvement information. The actual gross impaired loan balance, we expect to continue to grow longer than that, given the cycle time.

[Lemar Persaud, analyst]

Okay. And then maybe flipping over to Marie Chantal. Can you talk to what really drove the surprise on pretax pre-version profits and operating leverage versus the guidance offered last quarter? I think the comment was some positive operating leverage more weighted to the second half of the year and mid-single-digit TTPP growth would be due to the second half of 2024. But clearly, you guys put up a good quarter here.

So just wondering any comments on that? And then I'm wondering if you -- if I'm jumping the gun here, but is there upside to that mid-single-digit PTPV growth? Yes, any comments there would be helpful.

[Marie Gingras, executive]

Thanks, Lemar. So obviously -- I'm sorry? Okay. So we're very happy to obviously deliver positive operating leverage this quarter. As our efforts of the past many quarters are yielding results and bearing in mind that our top line also proved strong this quarter. So that explains what you call a bit of a surprise in terms of op leverage.

Just maybe want to go back to some of the comments that we made in the past couple of quarters and the fact that we were being very proactive in terms of expense management and being strategic in prioritizing and managing expenses, while balancing business growth and investment, we also mentioned that we were being focused on protecting our current talent base. So those efforts are really yielding results. And this is why we've mentioned last quarter that we expect the trend in expense growth to continue to slow down. So that's what you're seeing.

Looking forward, we've talked about it a couple of times today. Revenue growth will be dependent upon the economic trajectory. Therefore, we remain focused and disciplined around controlling cost. And so I think if you go back to your question about PTPP, with the uncertainty and the work that we're doing at the moment, we're still comfortable with the mid-single-digit range that we've shared with you guys last quarter.

[Operator]

Our following question is from Mike Rizvanovic from KBW Research.

[Unknown Analyst]

Probably one for Marie Chantal, just a quick numbers question, but is there any way you could give us a ballpark on noninterest-bearing deposits as a percentage of your total deposits? You're the only bank that does not disclose this. And so I just wanted to get a sense of the magnitude currently and maybe where it was before rates started rising. I'm just trying to get a sense of how much that might have placed factor in terms of your better margin performance the last little bit?

[Marie Gingras, executive]

So Mike, you -- just to make sure -- I just want to make sure I understand your question. So you're trying to figure out the proportion of our demand deposits overall?

[Unknown Analyst]

Yes, just your total deposits, what portion would you put into the bucket of noninterest-bearing? It's disclosure that all your peers have been putting out for a line. And I've never seen it with National. I'm just wondering if maybe you've had a different experience in terms of noninterest-bearing deposit runoff that we've seen in the last couple of years, almost 2 years now.

[Marie Gingras, executive]

So I think our -- as per our other banks, where we -- and Lucie shared it before, we saw demand deposits go down since the beginning of the interest rate hike. We're seeing it slowing down in the past couple of quarters. And in my remarks, I've also mentioned that nondemand deposits were up 1 billion. So I think we're seeing some shifts in there, even though it's slowing down in the retail side, as Lucie was saying.

[Lucie Blanchet, executive]

But just to give you some figure, maybe just on the retail side. Before prepandemic, demand deposits were 31 billion, and we are at 41 billion now. So like I was saying, there is still lots of liquidity in the system. So that's why we still continue to benefit from the late lag in the rate increases. It's still a big and important part of the deposit base.

Does that answer your question? I know it's a [indiscernible].

[Unknown Analyst]

Sorry, did you say it was 31 billion and it moved to what level?

[Lucie Blanchet, executive]

41 billion, 42 billion almost.

[Unknown Analyst]

Is that demand in notice like the OSFI category, which would include savings accounts or just pure noninterest bearing?

[Lucie Blanchet, executive]

Noninterest-bearing. But if you want to go into the details, we can probably take that offline.

[Operator]

[Operator Instructions] Following question is from Darko Mihelic from RBC Capital Markets.

[Darko Mihelic, analyst]

Thank you for squeezing me in, and I apologize in advance, I'm going to get super technical. Because I just want to better understand, so Etienne, in your answer with respect to the dividend impact, I was hoping maybe we can think about it or just if you can humor me a little bit, and if you were to look at the supplemental on Page 17, this is sort of where you show the trading revenues and the taxable equivalent adjustment.

And so I wanted to just maybe absolutely understand this the best way that I can, which is to say that in this recently reported quarter, it was $108 million. In your interim was what was a $45 million impact. And so would it be so simple for me to just say the $108 million would have been $108 million $45 million were it not for that, say, January and maybe portion of December where you did not claim the dividend tax credit? Is that -- is that the simple way?

[Etienne Dubuc, executive]

Well, it's not a perfect way to look at it, Darko, because positions move a lot. I mean these are not static set in time positions. So the $45 million is compared to what was taken last year. So it's really difficult to compare apples and apples here. So I think the $45 million is really more representative of what the impact was.

[Darko Mihelic, analyst]

And I guess that's what I'm looking for is maybe a little more insight, Etienne, because if I look at this taxable equivalent adjustment, it was 50 million in Q2 2022, shot all the way up to 161. So it's unclear to me how big of a business this was, and we've only really got about a month impact here. And I guess the question -- another way to phrase this, Etienne, and forgive me for phrasing it this way. But that you try and squeeze a bunch of it in.

[Etienne Dubuc, executive]

A couple of things there, Darko. First of all, it's more of a 2-month impact because -- remember, these -- most of our positions are mark-to-market. So when shares go ex dividend, they tend to do so in December and then the dividend is payable in January. So the impact is really covers also most of December.

The other thing is that our tax equivalent number also includes other things, which is really what comes from our European operations. So really, the difference in taxation where we do business in different jurisdictions, namely in Europe. So there, the revenues would be grossed up by the difference in taxation level. And so that represents the other part -- the main part of our tax equivalent benefit number.

[Darko Mihelic, analyst]

Okay. That's very helpful. But -- and then so turning to the 60 million sort of impact that you're sort of suggesting, is that -- did you base that off of last year's sort of average run rate? Is that the way I should interpret that?

[Etienne Dubuc, executive]

That's like year-over-year each quarter, the year-over-year impact.

[Darko Mihelic, analyst]

Okay. Okay. So let's sell it run rate, 240 million. And that's just the dividend component of that, if I'm -- or is that the entire business? So when I look at equities trading, for example, and you could say, well, last year, 240 of it would have been this [ 10 ]. Is that to say that that's 240 of the 904? Or is there more?

And what I'm getting at that you're trying to reprice this business, could that shrink it further? I guess that's where I'm ultimately going with this, Etienne.

[Etienne Dubuc, executive]

No, it's really that impact. So I don't think that there's -- I'm not sure I follow you, but really it is really a simple impact on the business.

[Darko Mihelic, analyst]

Yes. I mean let me ask you another way. You're still earning money on that business. It's just not -- it's just 240 less than before, correct?

[Etienne Dubuc, executive]

That's correct. And that business has not changed. That business is a client-focused business, where we tend to be long Canadian shares as a hedge to products, to ETFs, to other types of hedging. And dividend -- the dividend benefit was incidental to those businesses. This is not the reason why we do those businesses, but it was a nice added feature of these businesses.

[Darko Mihelic, analyst]

Okay. Fair enough. And I just a different question, completely different area that I wanted to talk to is Marie Chantal, in your prepared remarks, you referenced Slide 9. On this slide, the very title of this slide says it all. I mean, 98% loan-to-deposit ratio, and you referenced that as being strong, and that's up from 92%. Can you maybe provide a little bit of color on why you view that as strong? Where do you ultimately want to take that? And just why is 98% better than 92% better than 80%? Or am I thinking about this entire -- I just want to make sure I understand when you use the word strong, for a 98% loan-to-deposit ratio, I wanted to know exactly how you view that ratio why you view it to be strong.

[Marie Gingras, executive]

Thanks, Darko. So maybe on our loan to deposit, as I mentioned in my remarks, we really look at it from a total bank perspective and it really results from our diversified business model. And we've -- that ratio has been improving for a couple of years now. And when we compare it as well in the industry, it's very well positioned. So that's why we're saying that is strong.

[Darko Mihelic, analyst]

Maybe I'll ask it a different way. Would you prefer that ratio to be higher or lower?

[Unknown Executive]

Do you want me to answer that question, Darko?

[Darko Mihelic, analyst]

Yes, please. By all means.

[Unknown Executive]

We don't look at it in terms of -- we don't have a target for the ratio. And I think you asked me the question when I came to see you at your conference, the goal is really diversified business mix across all segments, both sides of the balance sheet. And as we continue to grow, obviously, we want the right balance. And so it's about overall liquidity metrics, term, different clients, different segments. So it's not about a ratio per se and focusing on one ratio, it's really about the business mix and the resiliency of the business mix through all cycles.

[Darko Mihelic, analyst]

Okay.

[Unknown Executive]

Does that help? Does that answer the question?

[Darko Mihelic, analyst]

Yes. Yes, it does. I mean I guess we're in a world that we're in, there just seems to be a real press for deposit and specifically non wholesale deposits. So there are many other banks that are suggesting they'd like to work that ratio down. Yours has gone up over time. And that's why I was curious as to where you ultimately wanted to see that. But I suppose if you're just looking at it from a point of view of diversification, I understand where you're coming from.

[Unknown Executive]

Great.

[Operator]

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

[Laurent Ferreira, executive]

Thank you, operator. So I discussed today on our call, the bank enters the second quarter on solid footing in what remains an uncertain macro environment. The National Bank team is focused on execution and delivering business growth, while maintaining our usual prudent and disciplined approach.

So on that note, I'd like to thank you all for joining us today.

[Operator]

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