National Bank of Canada

TSX:NA

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to National Bank of Canada second quarter results conference call. I would now like to turn the meeting over to Mrs. Linda Boulanger, Vice President of Investor Relations. Please go ahead, Mrs. Boulanger.

[Linda Boulanger, Vice President of Investor Relations]

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

[Louis Vachon, President, CEO & Director]

[Foreign Language], Linda, and thank you, everyone, for joining us today. Earlier today, we reported another solid quarter with earnings of $558 million and an EPS of $1.51, up 5% from last year. On the back of favorable economic fundamentals, our performance was driven by positive momentum in our businesses, disciplined cost management and strong credit quality. This translated into an industry-leading return on equity of 17.8%. We are maintaining strong capital levels with our CET1 ratio at 11.5%, providing us with flexibility to invest in our business and return capital to shareholders. Credit quality remains strong across our portfolio, reflecting our disciplined approach to lending. The economic backdrop remains favorable in Canada, and we continue to benefit from the strength and diversification of the Québec economy. The unemployment rate fell below 5% last month in Québec, the lowest level on record. Labor force participation rates reached record highs of 89% for prime-age workers and 87% for women. With very good housing affordability, Québec consumers have been able to maintain higher saving rates and lower debt levels than the rest of Canada, making the province's economy more stable and resilient. Consumer business confidence remains strong, reflecting a favorable cyclical backdrop and sound public finances. Looking forward, the economic outlook remains favorable. Budget surpluses in Québec enabled the government to finance some election commitments. This, combined with a larger infrastructure plan compared to what was presented a year ago, translates into Québec's economy being supported by fiscal stimulus in the 2019 and 2020.Now let me share some highlights on our business segments. Our P&C segment delivered strong results in Q2 with net income up 9%. Our performance was driven by continued momentum in both retail and commercial on both sides of the balance sheet, with the good cost control translating into an operating leverage of 3%. We continue to focus on balancing volume growth, margins and credit quality. Looking forward, we are comfortable with being overweight Québec and overweight secured lending, which we view as favorable in the current environment. Our Wealth Management segment has grown significantly in recent years. Good volume growth, favorable market conditions and our focus on advice and distribution supported another good quarter. Looking forward, based on the strength and diversification of our business model, we are confident that our Wealth Management franchise can deliver double-digit earnings growth over the cycle.Turning to our Financial Markets segment. Corporate and investment banking delivered a solid performance. Our lending book continues to grow and remains in good shape. Improved market conditions during the quarter were conducive to better ECM and DCM origination. Our overall new issue and M&A pipeline remain strong for the second half of the year. During the second quarter, our global markets franchise generated low revenues against a record quarter in the equity business in 2018. The shortfall is mainly driven by our revenue mix and lower equity trading activities, particularly in the first half of the quarter. Over the past 2 months, investor sentiment has been improving and activity picked up significantly, supporting our optimism for the remainder of the year.Moving on to our fourth segment. Our strategy for Credigy remains for disciplined growth with positive outlook going -- looking forward. ABA Bank had another very strong quarter with net income up 81%, loans up 53% and deposits up 80% year-over-year. We are very satisfied with Credigy and ABA's performance, and we will concentrate our effort and capital on those activities. As I've mentioned in prior calls, we are maintaining our current moratorium on significant additional investments in emerging markets until the end of 2020. Turning now to capital deployment. Our strategy remains the same: maintaining strong capital ratios; investing in business growth in our core markets, our focus continues to be on organic growth initiatives with the objective of enhancing our client experience and generating a positive operating leverage; and thirdly, returning capital to shareholders through sustainable dividend increases and share buybacks.On that note, this morning, we announced a $0.03 increase in our dividend, bringing our dividend per share to $0.68, up 5% from the previous quarter. We also announced a new NCIB program, which will allow us to purchase up to 6 million shares over the next 12 months. To wrap up, I'm pleased with our performance in the first half of the year. Our credit quality is excellent. We have strong capital ratios, and cost management remains a priority throughout the organization. Our transformation is progressing well. We are investing strategically in our people, our brand and in technology to position the bank for long-term growth. In the current environment, the resiliency of Québec's economy gives us additional comfort, and we remain disciplined in balancing our objectives of sustainable growth and prudent risk management. In that context and based on the strength of our overall franchise, our outlook remains positive for the remainder of the year. On that, I will now turn it over to Ghislain.

[Ghislain Parent, CFO & Executive VP of Finance]

Thank you, Louis, and good afternoon, everyone. My comments today will focus on efficiency and capital, beginning on Page 7. The bank delivered a solid performance, driven by good business momentum, disciplined cost management and our strong credit quality. Over the years, we have showed consistency in our ability to manage our costs effectively and achieve meaningful efficiency improvements. At the same time, to further enhance our customers' experience and generate efficiency gains, we have made major investments in our people in -- and in technology. As we are progressing through our transformation journey, maintaining the right balance between investing to generate future growth while managing our costs prudently remains a key priority for the bank.For the second quarter of 2019, our expenses were up 3.4% year-over-year and flat quarter-over-quarter, reflecting our continued focus on managing our costs throughout the organization. For the first half of the year, our expenses were up 1.8%. This low level of expenses shows our ability to adjust costs rapidly in a lower revenue growth environment.Turning to operating leverage by segment. P&C and Wealth Management segments delivered solid revenue and expense performance, translating into operating leverage of 3% and 1%, respectively. Financial Markets delivered lower revenues this quarter, translating into negative operating leverage. Looking forward, we are not overly concerned, as our Financial Markets business remains a highly efficient franchise with a low-cost structure. Financial Markets' efficiency ratio was low at 44% in the second quarter. In addition, this segment has seen good revenue momentum towards the end of Q2 carrying into Q3. Looking ahead, we are confident this business is positioned to deliver good revenue growth and positive operating leverage.As for our International segment, efficiency ratio was still 42% in the second quarter. Operating leverage at ABA Bank was robust given very strong revenue growth, which outpaced network expansion-related expense growth. The negative operating leverage at Credigy was mainly revenue-driven, considering the maturity and repayment of certain portfolios as well as the mostly fixed nature of the expense structure. With 2 quarters behind us, we are now targeting a positive operating leverage at the bank level for fiscal 2019. This is supported by: First, a strong outlook for Financial Markets in the second half of the year; and second, a continued disciplined approach in cost control.Now for the capital review on Page 8. Our CET1 ratio remains strong at 11.5%, supported by a solid internal capital generation of 38 basis points over the quarter. Our risk-weighted assets increased by approximately $2 billion during the same period or 24 basis points of CET1, mainly as a result of a larger book size in commercial and corporate lending. We expect the sale of Fiera to add approximately 25 basis points to our CET1 ratio in Q3. At the end of the quarter, our capital -- our total capital ratio stood at 16.2% and our liquidity coverage ratio at 141%.During the quarter, we bought back 1 million common shares, bringing total share buybacks to over 6.5 million shares over the last 12 months. We are pleased with our capital and liquidity positions, which provide flexibility to invest in our business and return capital to shareholders. On this, I'm turning the call over to Bill for the risk review.

[William Bonnell, Executive Vice]

[Foreign Language] Ghislain, and good afternoon, everyone. Credit performance continued to be strong in the second quarter, and the general themes remain the same. First, our credit portfolios are well positioned with an overweight Québec and underweight unsecured consumer lending profile. Second, the Québec economy continues to perform well with strong employment, a healthy housing market, a good fiscal position and high levels of consumer confidence. Third, credit performance in our Credigy portfolio continues to meet or exceed our expectations. And finally, we continue to see opportunities to prudently grow the portfolios in a disciplined manner.Looking at Slide 10. PCLs on impaired loans totaled $84 million, an increase of 2 basis points from last quarter. Higher provisions in Commercial Banking were partially offset by lower provisions at Credigy, which benefited from the ongoing amortization of the Lending Club portfolio. I would note that while there was an increase in commercial PCLs from last quarter's very low level, the increase was related to a couple of files in different sectors, and we see it as normal lumpiness in the commercial portfolio, not a change in the trend of credit performance. Excluding the Credigy and International segment, impaired PCLs across our Canadian retail and wholesale loan portfolios were just 18 bps in the quarter and 16 bps year-to-date, pretty flat to the year-to-date 2018 level and remaining close to cyclical lows. PCLs on performing loans were $10 million lower in Q2, again helped by lower provisions at Credigy. Excluding the Credigy and International segment, performing loan PCLs amounted to $9 million or 3 basis points mainly due to portfolio growth. Total PCLs were $84 million or 23 basis points in the second quarter, lower by 1 basis point quarter-over-quarter and 4 basis points year-over-year. Overall, we remain very comfortable with the performance, the quality and the mix in our credit portfolios. Turning to Slide 11. Our gross impaired loans ratio was flat year-over-year at 42 basis points. The 1 basis point increase quarter-over-quarter was due to higher formations in Commercial Banking following a couple of quarters of net repayments, partially offset by lower formations in retail banking and at Credigy. On Slide 12, you will find details of our retail mortgage and HELOC portfolio. The product and geographic mix remained stable with 40% of the portfolio being insured mortgages and Québec accounting for 54% of the portfolio. Uninsured mortgages and HELOCs in the GTA and GVA remains modest at 10% and 2% of the portfolio. In conclusion, we're pleased with the performance across our portfolios and feel well positioned for continued prudent growth. Looking forward, we maintain our total PCL target range of between 20 to 30 basis points for 2019 and expect to be close to the middle of that range. With that, I'll turn the call back to the operator for the Q&A.

[Operator]

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

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

A question on the Fiera disposition, really 2 parts. Why now? And why not just sell the entire stake? What's the advantage of keeping the small stake that you have in Fiera Capital?

[Louis Vachon, President, CEO & Director]

So look, as we said repeatedly in the past, the Fiera is a great partner for us in managing assets. They manage more than $20 billion of assets for us. But as you saw with the impact on CET1 and earnings, holding shares of a minority like this is not optimal from a balance sheet point of view. So that's why we did it. And they remain a great important partner. We have a commercial agreement with them till the end of 2022. And the -- holding shares was not strategic at this point.

[Ghislain Parent, CFO & Executive VP of Finance]

Yes. I think my view is that the timing and the size of the transaction was driven by the buyer of the assets, namely Natixis, who approached us. So in terms of timing and amount, that was driven by the buyer, not by us necessarily. We just reacted to an approach by a buyer, and Martin has already explained our strategic background to this.

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

Just a follow-up to the strategy. Is there any advantage you see in holding the stake that you have now? Or is it just more an investment rather than something that really is important for your Wealth Management business as a whole?

[Louis Vachon, President, CEO & Director]

No. The equity ownership, as I said, is not strategic. And as we've said in the press release, we currently have no plans, but we may reduce that from time-to-time going forward.

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

Okay. And then if I could just ask -- I noticed you mentioned a CRA reassessment for 2014 and just hoping to get a little bit more color in terms of, do you have any sense of when you'll have more clarity on this? And I think you've also been reassessed for the years 2012 and 2013. But are there any other years that can potentially -- that the CRA can potentially come back to you with?

[Jean Dagenais, Senior Vice]

This is Jean. Yes, we have this assessment. It's really early in the process. We have no visibilty on how long it will take before this is being cleared with the CRA. And it is possible that other years may be also reassessed. It's all the same issue that the CRA is looking with all the Canadian banks.

[Operator]

The next question is from Steve Theriault of Eight Capital.

[Stephen Gordon Theriault, Principal & Co]

A couple for me. Louis, last quarter, it sounded to me at least like you were -- you had pulled back on the buyback because of the volatility that was going on during Q4. And it sounded -- I kind of came away thinking you'd be more aggressive or get back to a higher level of activity in Q2. But it looks like you sort of kept pace with Q1. So was -- has there been any change in your thinking in terms of the use of the buyback?

[Louis Vachon, President, CEO & Director]

Not really, Steve. I think we -- I think if you look at our buyback activity, we've been running at roughly 2% of outstanding. So in and of itself, I think that's pretty much our speed of buyback in a sense that, I think, you and I have discussed this in the past, buybacks are good complement to growth. They're not a substitute to growth. So my sense is, in the context of a midterm target of growing your EPS by 5% to 10%, if the buyback component is more than 2% of that, you don't get the credit anyway. So -- and the second thing is, we're not, as you know, in looking at much in terms of acquisition, but we may need to react in case of increases in the organic growth in terms of changes in RWA, in terms of potential growth in activity. And so on that sense, we want to keep ourselves some flexibility. Thirdly, on that point, I think over time when we model what could be the volatility of IFRS 9 on our capital, I think you should expect over time that our capital ratio will slowly keep creeping up over the next few quarters. And as said many times, I'm not -- we're not forecasting a recession. We're not thinking we are able to forecast a recession. But that being said, I think we get the sense that we're later as opposed to sooner in the business cycle. And we just don't know how IFRS is going to impact our capital in terms of volatility. So I think you should expect our capital to slowly creep up over the next few quarters.

[Stephen Gordon Theriault, Principal & Co]

Would that translate into -- you've talked in the past about 10.75% as a CET level, where -- above which you're active with the buyback. Would what you just said there translate into a slightly higher number?

[Louis Vachon, President, CEO & Director]

Conceptually, yes. I think you've seen that we've been a little bit more conservative, by that sense. You never know what may happen if there's an acquisition. But again, no acquisition, as I just said, is a low probability event for us for the next 2 quarters certainly, with the exception of the 10% of ABA Bank that's available. And as we, I think, already disclosed, it's a 2%, 3% -- 2, 3 basis point impact on our CET1. So it's just that we're -- it's a late cycle. And I think generally, either in our capital management, on our liquidity management, we're not getting ready for a recession. We're just being a little bit more prudent, and that includes also a level of capital and buybacks.

[Stephen Gordon Theriault, Principal & Co]

My -- one more thing for me was turning to Credigy. It's down about 6% in the first half with the Lending Club running down. Can you just spend a few minutes or a minute or so to refresh us on how competition and pricing is looking, where your focus is? And within your plan, would we see Credigy growing this year?

[Louis Vachon, President, CEO & Director]

I think Ghislain will pick it up and may add anything to that.

[Ghislain Parent, CFO & Executive VP of Finance]

Yes. Steve, this is Ghislain. So the plan has not changed for Credigy. So it's prudent growth that we're looking at. It's not the right time to be too aggressive. So we saw more activities, I would say, in the last 2 months of the year, and the team is very active on different opportunities. So we remain confident in our ability to grow the balance sheet over the next 12 to 18 months. But in the current liquidity conditions, we think that it's better to stay prudent.

[Stephen Gordon Theriault, Principal & Co]

And so that likely translates into a flat to maybe slightly down for this year as you hit the pause button a little bit.

[Ghislain Parent, CFO & Executive VP of Finance]

Yes. I would say flat and maybe up a little bit. So I would say flat or a little bit positive.

[Louis Vachon, President, CEO & Director]

Slightly up for this year. And I think it looks to the -- as Ghislain mentioned, given the volume that we've been closing the last few weeks and last few months, it looks a bit better for 2020 than it did last quarter, I would say, though, Steve.

[Operator]

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

[Robert Sedran, MD & Head of Research]

Louis, I actually want to follow up on both of Steve's questions, I guess. The first one on the capital. Are you thinking on a relative basis or an absolute basis when you think about your capital position? Because pro forma, the Fiera, you're at 11.75%, and it sounds like you want to see that continue to drift higher. I'm wondering if you get concerned at a point that you're sort of setting a floor on the capital ratio that might be higher than you'd like it through the cycle.

[Louis Vachon, President, CEO & Director]

Good question, Rob. No, I think we're looking more not so much on a relative basis but on an absolute basis. But again, that's very subjective, as I said. But for the reason that I just explained, I think we're very comfortable at 11.5%. But over time, over the next few quarters, I think slowly -- and it's not going to be a big increase, but slowly, I think we'll continue to let it go up a little bit. And that's not going to prevent us from doing anything we want either in terms of organic growth or dividend increases or buybacks. So that's why we're quite comfortable given where we are, and we think it's the prudent thing to do over the next few quarters.

[Robert Sedran, MD & Head of Research]

Okay. And just for Bill on the Credigy, the impact on the Stage 1 and 2, the provisions on performing, of the Lending Club running down. I'm -- can you just refresh us a little bit? Is this -- I know that IFRS 9 adds volatility to the loan loss line period. But does the nature of your Credigy business -- should we be prepared to accept a little more volatility in your provision line because of Credigy? Or is that Lending Club issue more of a specific to Lending Club and other business that may come on or off won't be quite as impactful?

[William Bonnell, Executive Vice]

Thanks, Robert. I think it's the latter, the -- your second answer. The PCL that you've seen through 2018 and '19 are really mainly related to the Lending Club portfolio. And if you remember, the size of that portfolio peaked in late '17 at around $1.3 million and has been amortizing down. And I think on previous calls, we've talked about the impact of that in impaired losses and the losses on performing Stage 1, Stage 2 declining. We are very pleased with the performance. It's been right on our expectations. This quarter is actually a little bit better than expectations. But I would say that you could expect for the rest of '19 to continue to see a slower decline in the PCLs there. Looking forward, it will be -- it will depend on the type of assets, how the portfolio grows. We are seeing more focus on secured rather than unsecured. So I think in 2020, probably less volatility in PCLs is what we would expect.

[Operator]

The next question is from Sumit Malhotra of Scotia Capital.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Louis, just to go back to some of your comments on capital. Obviously, the bank is in very good shape, especially on a pro forma basis in relative and absolute terms. But one of the themes that we've heard across the sector this quarter is that the greater RWA density is leading to a less robust pace of organic capital growth, if I can call it that. And specifically with National, I think because your numbers have been higher, it hasn't been as much of an issue. But just kind of looking back at the trend over the last nearly 2 years now, you had a number of quarters in which the organic build sequentially has been kind of more in the range of 5 to 10 basis points than the 15-ish we were used to. In your view, and maybe this is for Bill or you, Ghislain, as well, is this specifically relating to that RWA density with some of the changes that have happened in the shift in loan mix? Or is there something more specific to National that's led to a less robust organic build of late?

[Ghislain Parent, CFO & Executive VP of Finance]

I'll start and then I'll pass the -- do you want to...

[William Bonnell, Executive Vice]

Yes. Maybe I could start, Sumit, just on the density aspect. The -- I think on -- in terms of RWA density, in an environment where in the past you had higher growth in retail than commercial, you would expect less RWA density, particularly given that our growth had been more focused on secured, on mortgages and HELOCs. And if commercial and corporate has higher growth than retail, then maybe that accounts for some of the RWA density. In terms of the net capital generation, I will pass that to Ghislain.

[Ghislain Parent, CFO & Executive VP of Finance]

Well, of course, Sumit, I think that we still have the potential to grow our capital or to generate 15 bps of capital -- of organic net income and RWA. So I think that this is the right number. If you look at the last 3 quarters and a couple of quarters in the last 2 or 3 years, the 24 basis points impact of risk-weighted assets in the CET1 this quarter is not different than what we have seen before. So I would say that the 15 basis points a quarter, of course, it's probably a good number that you should keep in mind.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And then -- so Bill, I think your answer kind of speaks to it and your view is just -- and then this is another quarter that's an example of it. Your business loan growth was very strong and your consumer was pretty flat. So it's really the loan mix that's affecting that more than anything else, in your view?

[William Bonnell, Executive Vice]

I would think so. And remember, we had a number of years where the growth in mortgages was higher than the growth in commercial. So I think you would have expected to have lower RWA density there.

[Ghislain Parent, CFO & Executive VP of Finance]

And Sumit, this is Ghislain again. So of course, if you look at this quarter, it's essentially based on commercial and corporate book. There's -- we grew our books and the RWA impact came essentially from this. Of course, from time-to-time, quarter-to-quarter, you may have some impact from the pension funds or model changes. But this is why I told you that to me, organic CET1 growth of 15 basis points a quarter is the right number.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Okay. One quick one. This is maybe for Jean Dagenais or Ghislain. There was a question on taxes before. One, I don't ask about a lot the other segment. The tax -- we'll call it the cost tax recovery that you book in there or the tax benefit that you book in that segment has been very consistent, around $80 million, for the last couple of years. It did increase this quarter. Sorry if I missed it, but was there anything -- was there a specific item that resulted in a -- that number moving up to $100 million in Q2?

[Jean Dagenais, Senior Vice]

Yes, of course. This is Jean. If you look at it, the last 8 quarters, the tax equivalent basis adjustment was around $60 million, and now it's $80 million in the third -- in the second quarter of 2019. So the $20 million variance comes from the reversal of the tax equivalent basis adjustment.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And is that -- I usually think of that one as tied in somewhat to the Capital Markets or the trading business where I was going to go next. Is that the right tie-in that it was related to some of the activity in the quarter that drove this?

[Ghislain Parent, CFO & Executive VP of Finance]

It closed up for nontaxable revenues in the Financial Markets, which closed up in the Financial Markets and reversed back into the Other segment. And this quarter was a good quarter for tax-exempt revenues.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

All right. And last question is going to be Financial Markets. And I'll preface this by saying, I think you guys put it in your presentation, it's true, your efficiency ratio in this business has been at the low end of the group for a while. So I'll start with that and then ask the question. Usually, you've done a better job in having expenses flex, if you will, with the level of revenue. We look year-over-year for this business. Revenues are down $30 million, but expenses were actually up a little bit. Is there anything in terms of -- we've heard some of your counterparts talk about investment in capital markets, particularly outside of Canada. I don't think that's a National issue. So just wanted to ask specifically why did that tie-in of expense and revenue dynamic not flow as well as it usually does for National in Q2?

[Laurent Ferreira, Executive VP & Co]

Sure, this is Laurent. I think our expenses are pretty much under control. You're right, we don't have any expenses or any growth initiatives right now outside of Canada. I think there are specific items in our expenses, and maybe I'll pass it on to Jean, I think.

[Jean Dagenais, Senior Vice]

Yes. Well, the variable compensation has been adjusted. However, we had some costs from support services that has increased and some other onetime expenses for professional fees and other services provided by external partners that went into the quarter.

[Ghislain Parent, CFO & Executive VP of Finance]

Does that answer your question?

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Well, based on your operating leverage comments, it would sound like those are unlikely to repeat in the back half of the year.

[Laurent Ferreira, Executive VP & Co]

That's correct. They're small. But since it's very stable, it shows. But Sumit, keep in mind that the efficiency ratio for the quarter was 44%, so -- which is very low.

[Operator]

[Operator Instructions] The next question is from Nigel D'Souza of Veritas Investment.

[Nigel R. D'Souza, Investment Analyst]

I had 2 questions. First was more broad-based, and I wanted to circle back on a comment that was made earlier in terms of expectations for a lower revenue growth environment. I was hoping if you could provide just some more -- I guess some goalposts around that. And a point of reference, were you referring to just a general environment or do you expect lower revenue growth in the back of this year versus what you did in the first half or versus last year? Any color would be appreciated.

[Unknown Executive]

Ghislain will answer that one.

[Ghislain Parent, CFO & Executive VP of Finance]

Yes, this is Ghislain. So I mentioned it in my comments at the beginning. Essentially, it was related to Financial Market in the first half of the year. So -- and what we're -- as I mentioned, what we're looking for or what we are expecting for the second half of the year is better revenue growth, higher revenue growth than what we had in the first part of the -- in the first half of the year. So my comments referred essentially to Financial Market for the first half of the year.

[Nigel R. D'Souza, Investment Analyst]

Appreciate that clarification. And the second question I had, if I might, I'd just refer you to -- this is your gross impaired loans disclosure in your supplement, and that's Page 18 if you want the reference. And I noticed that there's 2 sectors really driving higher formations, that's wholesale and agriculture. And I just wanted to get some color on you if any of that might be related to what we're seeing on the trade front. Is there anything more, I guess, macro driving that? Or is that purely driven by just some counterparty risks that you had in those portfolios?

[William Bonnell, Executive Vice]

It's Bill. Thanks for the question. No, it's not really related to trade. And our agriculture portfolio is an important one for us. As you know, it's an important sector in Québec. An important part of that portfolio is government insured. And sometimes you'll see more volatility in the gross impaired loans in that sector quarter-to-quarter than in others. If you notice, we didn't take provisions for those new impairs. We do not expect to take any losses. So that's one sector that typically has got volatility in gross impaired loans, but very, very low loan losses. And then wholesale, no, it's just -- is a file in commercial, normal course business, nothing related to trade.

[Operator]

The next question is from Sohrab Movahedi of BMO Capital Markets.

[Sohrab Movahedi, Analyst]

I just wanted to go back to the capital question again. Bill -- or Louis, when you had kind of talked about a 10.75%, I guess that would have been a different -- I know it wasn't that longer or -- but it would have been a different type of environment. You are talking about something a little bit higher. I mean since you probably put that 10.75% yardstick in there, OSFI has increased the domestic stability, buffer requirements, the semi-annual reviews coming up. Like is this in anticipation of probably just higher capital -- regulatory capital requirements coming at the industry?

[Louis Vachon, President, CEO & Director]

It's -- not really because we don't have at this stage all the visibility on what the impact of Basel 3.5, 4 will be. So I would say it's more related simply to the fact that: A, I think we've seen more uncertainty in terms of the global macroeconomic environment, particularly as related to trade; and also to the simple fact -- so every year, we're longer into the economic expansion. And I would think that somehow, somewhere, there's probably an increased probability of a downcycle. And the last one, as I mentioned earlier, is when you start modeling some IFRS 9 volatility and what the impact could be on your capital, I think you want to have a little bit more capital as opposed to that. But fundamentally, as I said, it's not changing our speed in terms of the buyback. It's not changing our speed in terms of the dividend. And it's not changing our plans in terms of organic growth, in terms of being opportunistic and just growing the business. And as you know, it's easier for us in the context that we don't have an aggressive acquisition agenda right now aside from acquiring the last 10% of ABA. It's not that we're not looking, but we frankly don't find much of anything that's interesting at this stage of the cycle and with the valuation that we are seeing. So we'd rather be prudent, work on investing in our brand and our franchise and grow organic growth. And just deploy capital for the sake of deploying capital is not a good idea, so we'd rather let it creep up a little bit. But we're not -- I want to reassure everybody here. We're not going to 13% or anything like that. I mean it's -- some of our peers are already a little bit higher than us. I think we're going to keep slowly going up towards 11.5%. I just don't want people to think that because we got automatically an extra 25 bps from the Fiera sale that we're automatically on a buyback that extra capital. It's not going to be that simple.

[Sohrab Movahedi, Analyst]

Okay. Fair enough. So Louis, just to be crystal clear, though, like I think the way I'm picking up the commentary, you expect more -- collectively, you expect more of the growth to come probably out of the corporate commercial as opposed to the consumer end of the portfolio. I think Bill has already highlighted that, that tends to be a little bit more capital-intensive. So I suppose what you're saying is part of this buildup is in anticipation of just more capital-intensive growth. Although I would ask you, is this good growth given the commentary you've provided around being -- every quarter being a quarter closer to the end of the cycle?

[Louis Vachon, President, CEO & Director]

Yes. It's a good question, Sohrab. But keep in mind, I think we have -- I think as you can see from our numbers, we've been quite disciplined in terms of growing the balance sheet. I think we've had -- I think as a team, we're very happy with the balance we have between volume growth, margins and good risk management. And I think you should expect us to continue to do that. That being said, we do have 2 businesses, one being Capital Markets and other one being Credigy, which is somewhat opportunistic and tends to perform very well in environments of greater volatility. So I also want to be in a position where we can deploy capital in these businesses if opportunities do occur.

[Operator]

The next question is from Darko Mihelic of RBC Capital Markets.

[Darko Mihelic, Financials Analyst]

Just 2 questions. First, the tax changes are around exchange-traded ETFs having an impact. Wondering if it's going to impact your business at all?

[Louis Vachon, President, CEO & Director]

We're looking at -- this is for -- obviously, the impact will be on client and not on us, but it could determine how we will have to do business. So we have -- we are looking at how we will do business and to take into consideration those facts, issue.

[Darko Mihelic, Financials Analyst]

So it's too early to determine if there's going to be an impact?

[Louis Vachon, President, CEO & Director]

Of course. It's fairly complex. Laurent, any other views on this?

[Laurent Ferreira, Executive VP & Co]

No. No. Too early to determine at this point.

[Louis Vachon, President, CEO & Director]

Too early. Yes.

[Darko Mihelic, Financials Analyst]

Second question, it sounds like you're backing away from 2% operating leverage and -- for the year.

[Louis Vachon, President, CEO & Director]

Yes.

[Darko Mihelic, Financials Analyst]

So the way I'm trying to reconcile this, though, is that you sounded optimistic that revenues are bouncing back in your financial -- in the wholesale business. You had very strong operating leverage out of the retail business. So I would have thought that operating leverage could be very strong in the back half of the year. So is your commentary that overall we should not think about 2% anymore? Is it also somewhat driven by the Personal and Commercial Banking business not generating a strong operating leverage in the back half of the year?

[Jean Dagenais, Senior Vice]

No. I don't think you should look at that as a forward-looking vision for our performance in P&C. I think Darko, for the 2 percentage clearly for 2019, given the fact that we've had year-on-year reduction in revenues, and on a business that represents 35% of our revenues, the simple math is it makes it a lot harder for us to achieve 2% operating leverage. So that being said, we are more confident for the second half of the year. That's why I think we still are very much in the running for positive operating leverage for 2019. But realistically, 2% is not in the cards. And even 1% will be, I think, not impossible but probably difficult to achieve. So I think given the fact that we had negative growth in revenues for the first 2 quarters of the year in Capital Markets, I think we are focusing on this. And generally, I think some of the comments we've made, we're very satisfied the way we've managed expenses. I think that's -- the issue is not there. It's really related -- as Ghislain mentioned in the opening statement, it's really more making sure that we have the revenue growth on Capital Markets. The rest of the business, we're quite satisfied with. So we need the Capital Markets business to renew with year-over-year growth for Q3 and for Q4.

[Operator]

The next question is from Steve Theriault of Eight Capital.

[Stephen Gordon Theriault, Principal & Co]

I want to follow up on Sumit's question, if I could, on the equity trading line and TEB. It throws me off a little bit that equity trading was weaker or lower and the TEB adjustment was significantly higher. So is there anything you can tell us about the interplay or the lack of interplay of those 2 things this quarter?

[Ghislain Parent, CFO & Executive VP of Finance]

The TEB adjustment -- this is Ghislain. The TEB is only related to tax-exempt revenue. It doesn't create those [ DL ] and the profitability is dependent on many other elements.

[Stephen Gordon Theriault, Principal & Co]

But does a fair bit of that TEB line not manifest in the equity trading line?

[Ghislain Parent, CFO & Executive VP of Finance]

Yes. It does. But there is other things also that do, cost of funding and many other elements.

[Louis Vachon, President, CEO & Director]

Very simplistically, Steve, I think in the context where our revenues were down in Canada and they were flat to up in Ireland, where we have a lower tax rate, that's basically what occurred there.

[Ghislain Parent, CFO & Executive VP of Finance]

Not the TEB adjustment.

[Louis Vachon, President, CEO & Director]

Not TEB. But I think there were some of that, too. I think it was some fact that Canada was slower than previous years and Ireland has been a little bit stronger. And that ended up with a tax rate that was effectively lower.

[Stephen Gordon Theriault, Principal & Co]

And I was going to say in the ETF hedging business, is that relatively stable through the revenue line or is there -- are things that drive -- it's obviously been a growing business and an important business for National Bank. But is there anything that drives volatility or is that kind of a smooth contribution in aggregate?

[Laurent Ferreira, Executive VP & Co]

I could talk about it. This is Laurent. Look, you've all seen the numbers. The equity trading business was weak across the industry. So in terms of ETF hedging, that was pretty stable. But what we've experienced in the case of our equity business is lower Canadian equity volume in the areas of focus, which resulted in lower revenues for us. Our structured product sales were down, especially at the end of Q1 and the beginning of Q2. And we also saw lower pricing levels and less opportunity in equity finance. And given the markets, we really took a defensive approach towards the end of Q1 and beginning of Q2 at deploying balance sheet and taking risks. So I don't know if that answers your question.

[Stephen Gordon Theriault, Principal & Co]

That's helpful. And while I have you, I can't remember who made the comment about the last couple of months giving you a little more confidence. Is that the last couple of months of Q2, so March, April, or more April, May? [ Is that ] April, May?

[Laurent Ferreira, Executive VP & Co]

It's the second half of Q2. And definitely, we're seeing that also continuing at the beginning of Q3.

[Ghislain Parent, CFO & Executive VP of Finance]

Yes. April, May is the answer.

[Operator]

There are no further question registered at this time. I would now like to return the meeting back over to Mr. Louis Vachon. Please proceed, sir.

[Louis Vachon, President, CEO & Director]

Thank you, everyone, and have a good quarter. And we'll talk to you at the end of Q3. Thanks again.

[Operator]

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