National Bank of Canada

TSX:NA

Earnings Call Transcript 2021-Q2

[Operator]

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

[Linda Boulanger, Senior Vice President of Investor Relations]

Thank you, operator. Good morning, everyone, and welcome to our second quarter presentation. Presenting this morning are Louis Vachon, President and CEO; Bill Bonnell, Chief Risk Officer; and Ghislain Parent, Chief Financial Officer. Also joining us for the Q&A session are Laurent Ferreira, Chief Operating Officer; Stephane Achard and Lucie Blanchet, Co-Heads of P&C Banking; Martin Gagnon, Head of Wealth Management; Denis Girouard, 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 welcome, everyone, to our call today. This morning, the bank reported another quarter of strong results. The trends we saw in Q1 carried over into Q2. We are operating in an improving economic environment conducive to business growth. Q2 2021 pretax preprovision earnings were up 9% from last year, driven by continued momentum in all our businesses. We continue to generate strong organic growth and an industry-leading ROE while maintaining high capital levels and prudent reserves. Our performance once again speaks to the strategic choices we have made over the years, the sound diversification of our earnings streams and the resilience of our franchise. The economic recovery is well underway and occurring at an accelerated pace. From a macro level, consumer confidence is high with substantial savings in advanced economies, fueling global economic growth. Domestically, we have a resilient economy, coupled with strong growth in the rest of the world, driving up commodity prices, resulting in a stronger rebound to earnings than anticipated. In our home province of Quebec, the full-time employment rate is almost back to prepandemic levels. Construction is very strong. Manufacturing is doing well. Vaccination is progressing very well. And the economy is reopening faster than expected. So we expect to see a good rebound in the discretionary economy later in 2021 and in 2022. While the pandemic may still bring some negative surprises, we are constructive on the recovery and the economy. Our credit quality remains very strong. Given the improving economic and market indicators, our PCLs this quarter were almost 0, reflecting a small release of performing allowances and low impaired loan losses. Given the uncertainty with respect to the path of the economic recovery, we are maintaining a prudent approach. On our capital deployment strategy, our priorities are: first and foremost, to maintain strong capital ratios; second, to invest in our business to fuel organic growth; and finally, returning capital to shareholders remains a priority for the bank. Once we get the green light from the regulators, our intent is to increase our dividend to bring it back within our midterm payout range of 40% to 50%. Turning now to the performance of our segments in the second quarter. In P&C Banking, pretax preprovision earnings were up 9 -- 12% from last year, driven by strong volume growth on both sides of the balance sheet, partly offset by lower margins. The real estate market continues to be strong, which gives us good momentum in mortgage growth, with volumes up 9% year-over-year. More than half of our originations are still in Quebec, where fundamentals continue to be very strong. Housing remains affordable relative to other geographies. Families -- finances are more resilient with a high percentage of dual income households. And Quebecers continue to have less debt and more savings than the Canadian average. Furthermore, the Canadian government's reopening plan is now underway. We also -- also growing our commercial loan book. We are capturing opportunities across Canada and targeted sectors. This includes multi-residential rental development, the majority of which is insured. With low interest rates, high savings rates, limited supply and an anticipated return to higher immigration level, the residential property market, both on the personal and commercial side, should remain strong for the years to come. Wealth management delivered another strong quarter with pretax preprovision earnings up 16% from last year. This was driven by favorable markets, strong inflows and elevated transaction levels. Client satisfaction scores are an all-time high, supporting strong volume growth, particularly in full-service brokerage services and private banking. National Bank Direct Brokerage ranked first in the J.D. Power 2021 Canada Self-Directed Investor Satisfaction survey. Assuming current market conditions persist, we are well positioned to deliver double-digit earnings growth through the second half of the year. Financial markets reported revenues of $567 million, our third best quarter on record. Revenues were up 48% in corporate and investment banking, fueled by strong client activity across the franchise. Having invested steadily in our corporate and investment banking platform over the last several years, we now have the capacity to fully capitalize on elevated M&A and IPO volumes. Global markets also delivered a solid quarter against a record performance last year. In recent months, we have observed a normalization of market volatility across most asset classes. Our results in financial markets speak to the resilience and diversification of our earnings stream. Assuming the current environment persists, we are well positioned as we enter the second half of the year. Our International segment delivered another solid performance this quarter. Credigy's results reflected a strong underlying performance of existing portfolios and favorable impacts of an improving economic environment on provisions. ABA Bank continues to perform well with loans and deposits up 26% and 35%, respectively, from last year. We are very pleased with our international strategy, which remains well positioned to deliver double-digit earnings growth again this year. To wrap up, I am very pleased by the bank's performance through the first half of the year, and we see the same macro trends carrying over into the second half. As the economy recovers at an accelerated pace, we are well positioned to continue capturing growth opportunities. We will remain disciplined, and we will continue to be guided by our consistent and prudent risk management approach. Given our strong performance so far this year and the favorable environment, we are in a very good position to achieve mid- to high single-digit pretax preprovision growth over fiscal 2021. Based on what we are seeing today, and should current trends continue, we would be at the top end of that range. Today, we move forward with cautious optimism, focused on leveraging the strength of our franchise. As we gradually exit the pandemic, we are confident that we have the right team, strategies to continue generating solid revenue growth and delivering strong returns to our shareholders. I would like to recognize and sincerely thank all of our colleagues and customers who have shown incredible resilience in the last 15 months. I wish all of them and everyone on the call a safe and restful summer. On that, I will now turn the call over to Bill. Go ahead, Bill.

[William Bonnell]

[Foreign Language] Louis, and good morning, everyone. I'll begin my remarks on Slide 7. Credit performance continued to improve in Q2, reflecting the positive trends we've seen since the beginning of the year. Provisions on impaired loans were $67 million or 16 basis points in the second quarter, a 1 basis point improvement quarter-over-quarter and 13 basis points better than the same period last year. We saw strong performance across all sectors, and retail provisions remained at cyclical lows. Financial markets had 1 new provision in the utility sector this quarter. Absent this idiosyncratic provision, impaired PCLs would have been below 10 basis points. Performing loan provisions were negative $62 million in the quarter, driven by the update to our macroeconomic scenarios as well as improvements in credit quality. We maintained the same weights for the scenarios. However, improvements in both market and economic indicators were reflected. Each of our business sectors benefited from negative provisions, and the nonretail portfolios had the largest release, $35 million, due to both scenario updates and positive credit migration. Total provisions for credit losses were $5 million or 1 basis point. Given the strong performance we've seen in our loan portfolios year-to-date, and the improved economic outlook, we've adjusted our fiscal year 2021 target range to 15 to 25 basis points of provisions on impaired loans. I would note that this range is in line with our prepandemic run rate in impaired provisions, and we would expect to finish in the bottom part of that range. Turning to Slide 8. We continue to maintain prudent allowances for credit losses, which at $1.3 billion are 70% above our prepandemic level. Total allowances declined by 3% on a quarter-over-quarter basis, but remained higher than the same period last year. Allowances on performing loans declined by $74 million this quarter to $977 million. I'll point out that this is about the same level that we had at Q2 last year after our significant reserve build in the early stage of the pandemic. This level of performing allowance provides ample coverage of our portfolio's risks and reflects our desire to remain prudent at this stage of the recovery. Looking forward, the level of performing allowance will be driven by the path of economic recovery, credit migration and volume growth. Allowances on impaired loans increased by $25 million to $382 million, representing a healthy 52% coverage of gross impaired loans. To help investors assess the adequacy of our allowances, on Slide 9, we provide several relevant metrics. Performing allowance coverage of our impaired provisions increased to 3.3x. Total allowances now cover 6.4x our net charge-offs and represent 83 basis points of total loans. These strong metrics reinforce our belief that we are very well provisioned. Turning to Slide 10. Our gross impaired loans declined to $731 million or 42 basis points in the quarter. Formations remained low as the 1 new formation in Corporate Banking was offset by net repayments in the P&C sector. Details of our retail mortgage and HELOC portfolio are presented on Slide 11. The geographic and product mix remained stable, with borrowers in Quebec representing 55% of the portfolio and insured mortgages accounting for 35% of the total. Additional details of our credit portfolios and market risk are presented in the appendices. In summary, we're pleased with the performance last quarter. The positive trends we've seen since the start of the year have continued, supported by good progress in vaccinations and improved expectations for economic recovery. We are cautiously optimistic that these trends will continue through the second half and believe the resilience of our portfolios position us well going forward. I'll now turn the call over to Ghislain.

[Ghislain Parent, CFO & Executive VP of Finance]

Thank you, Bill, and good morning, everyone. Turning to Page 13. The bank delivered another strong performance in the second quarter, supported by our diversified business model and the differentiated positioning of our segments. With revenues up 8% year-over-year and a positive operating leverage of 1%, the bank delivered strong pretax preprovision growth of 9%. Higher expenses year-over-year were mostly driven by higher comp as a result of our strong performance. Excluding variable compensation, expenses were up 1% year-over-year and reflect continued investments in our business. Looking forward to the second half of the year. The year-over-year comparison of expenses will be impacted by the combined effect of higher variable compensation this year and the lower variable comp expense recorded in the second half of last year. As mentioned previously, we continue to work towards achieving positive operating leverage for fiscal 2021. As always, the team maintains a balanced approach between growth investments and rigorous cost management. Now turning to capital on Page 14. We ended the second quarter with a strong CET1 ratio of 12.2%, up 25 basis points from last quarter. We achieved strong net income generation of 54 basis points, reflecting the robust performance of our businesses and a very low provision for credit losses. Strong organic growth in commercial and corporate banking led to risk-weighted asset expansion, representing 30 basis points of CET1. Favorable credit migration in retail and nonretail portfolios freed up 4 basis points of CET1 this quarter. For the third quarter, we estimate that the unwinding of the regulatory market risk relief will subtract 15 basis points from our CET1 ratio. Now turning to Page 15. Our liquidity ratios are strong, with an LCR ratio of 150% and a net stable funding ratio of 125%. Our total capital ratio increased to 16.4%. In conclusion, the bank delivered another strong quarter, with solid organic growth, industry-leading ROE and high capital levels. With a strong balance sheet, significant reserves and diversified revenue levers, our franchise is well positioned to continue generating attractive growth through fiscal 2021. With that, I'll turn the call back to the operator for the Q&A.

[Operator]

[Operator Instructions] Our first question is from Gabriel Dechaine from National Bank Financial.

[Gabriel Dechaine, Analyst]

I wasn't prepared to be first, but here we go. Just want to ask about the trading commentary there. On Slide 20, it says securities financing and volatility was low. I'm just wondering, is that an in-quarter Q2 specific comment? Or is it part of a trend? Not the volatility part, but the securities financing, in particular, because that has been a pretty important driver in the past.

[Louis Vachon, President, CEO & Director]

Denis, you want to take that one?

[Denis Girouard, Executive Vice]

Yes. Yes. Gabriel, it's Denis. Yes, the -- if you remember, securities finance is really driven by, right now, the amount of liquidity that is in the system. All the central bank and the government are providing a lot of liquidity since the beginning of the pandemia. And it's still there. And as long as those 2 will persist and they'll be active in providing a lot of liquidity, we'll see the securities finance having lower number than what we used to have. But as soon as those 2 active things in the market will disappear, we'll see the activity moving up. It's very tough right now to put the balance sheet at work at level that we saw prepandemia. Then -- but despite of that, we have really good results somewhere else, and we're not that unpleased by the situation. We're still doing quite well, but we expect that maybe in 2022, we'll see things going back to where they were prepandemia, and you'll see better numbers on that for that sector.

[Gabriel Dechaine, Analyst]

Okay. And my next question is on inflation, macro question here. And Louis or Bill, would like to hear your thoughts on what you're thinking about in terms of opportunities that the higher inflation create for the bank. And in risks, I've heard about the -- I mean, it makes sense. The back book, LTVs go down, which is great, but more careful on new originations, specific to the mortgage book. But I wouldn't mind a bit more broader commentary on the lending activities and then elsewhere, really.

[Louis Vachon, President, CEO & Director]

Thanks, Gabriel. That's a big picture question. Now we're -- I believe I'm the last dinosaur around the table that did work in an inflationary environment. So we're having that discussion at the risk committees and even at the [ BDP ] of how we would adjust and we should adjust our risk policies in terms of market risk, liquidity risks, ALM and ultimately, credit risk, in a more inflationary environment. By and large, it would require a bit of a change in mindset, particularly with traders and risk managers that have seen rates drop continuously for the last 25 years. That would be an adjustment. But off the top of my head, when we look into this, and again, if we have a moderate increase in inflation, I think that's quite good for the Canadian economy. I think that would be quite good for the banking industry, generally. So that's how we would approach it. Now a large increase in inflation, which would bring a large increase in interest rates, would bring probably a different outcome. But right now, I think we still perceive that as a low probability event or scenario. So -- but a bit more inflation in the system as a lender. It's not about saying slightly higher nominal interest rates. It's not about saying higher inflationary expectations, at least initially, would bring a steeper yield curve. And again, as we say all the time, don't confuse genius and a steep yield curve. It's always easier to make money in a steep yield curve environment for a bank. So -- and that would bring probably a bit more volatility, and I think we're well equipped as an organization to deal with that volatility. So that's -- we could debate and discuss that for many long minutes, but I would stop my comments there, Gabriel.

[Gabriel Dechaine, Analyst]

Okay. Anything to add, Bill, on the underwriting side?

[William Bonnell]

I think Louis covered it well. But on the underwriting side, certainly, a tool that we use is stressing the resilience of balance sheets to higher rates. And certainly, as we're gaining inflationary scenarios, we increased the size of the interest rates that could happen to stress the resilience a little bit further. I think that's all I'd comment on now, Gabriel.

[Operator]

Our following question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

I don't know if I missed this, but looking at your trading and on the equity bucket, I noticed it was your lowest revenue quarter since Q2 '19 and a bit contrary to kind of other peers this quarter. Was there anything specific to National to point out this quarter?

[Denis Girouard, Executive Vice]

Thanks, Scott. Well, when you compare Q2 '21 versus, let's say, Q1 '21 and Q2 '20, there's 2 things that those 2 quarters are in common. First, a lot of volatility; and second, a lot of volume, for different reasons. But those 2 quarters were really, really outstanding compared to Q2 2021. But despite of that, we're kind of pleased with what we're seeing in term of activities in the trading side. And you're right, when you compare to Q2 '19, then we still produce $53 million more than Q2 '19 and Q2 '21. Then yes, there's kind of a normalization because Q1 '21 and Q2 '20 were outstanding and not really the norm that you can see over years. And we're not that concerned about Q2 '21. Q2, yes, '21 right now.

[Scott Chan]

Okay. And just on the international side, kind of clean results on Credigy and ABA. And when I look at the financial metrics, it's very similar in terms of revenue expenses going down to the bottom line. And I know you target double-digit earnings growth in fiscal 2021. But is there a view in-house of which of those international segments is expected to grow faster, let's say, over the next year?

[Louis Vachon, President, CEO & Director]

Maybe I'll start, and Ghislain, you can add. I think both of them were -- I think we're quite optimistic on both of them. ABA has a steadier growth profile than Credigy. Credigy can come and can have quarter-to-quarter volatility, moreover, a very positive long-term trend. So I think, Scott, we remain both -- positive on both business lines on an equal basis. I don't think we're more optimistic on one versus the other.

[Operator]

Our following question is from Meny Grauman from Scotiabank.

[Meny Grauman]

When I look at your published rate sensitivity, definitely, it looks like it's understating the actual upside, looks like it's not comparable to other banks. I'm just wondering, how would you help us think about the upside to rising rates for National Bank to supplement the published sensitivity that you provided?

[Louis Vachon, President, CEO & Director]

Yes. I'll start, Meny. Yes, thank you for that. It only shows some of the treasury position. So we are working. And I think by Q3, we'll have a more complete picture of our interest rate sensitivity, which, I think your assumptions are right, are higher than what is shown there. But my friend, Jean Dagenais, has a teaser for you. So what's the teaser, Mr. Dagenais?

[Jean Dagenais, Senior Vice]

First, as you know, the increase in interest rate will be positive for net interest income. And we are reviewing the assumption underlying disclosure. So we do expect that at least doubling the 60 basis point that is currently disclosed in the...

[Meny Grauman]

$50 million or $60 million?

[Jean Dagenais, Senior Vice]

$60 million, sorry. Yes. $60 million, which is disclosed in Q2 disclosure for -- when we have a more precise number on all the assets and liabilities that's always impacted.

[Operator]

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

[Sohrab Movahedi, Analyst]

Okay. Louis, I did notice that you were very pleased with the results this quarter. So that, I think, is a net difference from previous quarters. That got me distracted. So I think when you were talking about pretax preprovision outlook into 2021 at the total bank level, I thought you said you expect to be around the high single-digit growth. Did I hear you correctly?

[Louis Vachon, President, CEO & Director]

What I said verbally was -- so we reiterated our range of mid- to high single digit. And then I mentioned that we would expect to be at the very top end of that range.

[Sohrab Movahedi, Analyst]

And that was specific to pretax preprovision, just focus for clarity?

[Louis Vachon, President, CEO & Director]

That is correct. Yes. Thanks for [indiscernible]. Yes.

[Sohrab Movahedi, Analyst]

No. That's okay. And so then if I hear some of the commentary around financial markets, securities financing transactions and maybe equities normalizing, so this would suggest that you have a more favorable, I guess, bias to the nonfinancial markets mixes of the bank. Is that fair when you think about this pretax preprovision kind of outlook?

[Louis Vachon, President, CEO & Director]

Not necessarily because, as you know, Sohrab, the -- we don't know in this current environment where we have, frankly, somewhat experimental monetary policy, somewhat experimental fiscal policies, a lot of new technologies and a lot of things moving in -- on the geopolitical front and on the climate front. I would not underestimate the potential of volatility of coming back very quickly. It's just difficult to predict. But I think as a whole, as a general statement, I think volatility is going to be a present factor likely to be in the foreseeable future. So that's one thing. The second one is, if you look at our results, I think Denis was -- did explain it well. But I think it was a landmark result for us in capital markets in the sense that we had very strong results in M&A, and also in equity capital markets origination, the type of results that this franchise would not have had 3 or 5 years ago. So I think it was important for us to show that now I think our financial markets division is much more balanced than it would have been 5 years ago, for instance, Sohrab. So that's why I'm not giving a pass or a break to our -- to Denis and his team in terms of the results for the second half of the year because we don't know. It could easily change very quickly.

[Sohrab Movahedi, Analyst]

Okay. That's perfect. And so if I just -- if you think about that pretax preprovision, you think about your mix of businesses, do you think that outlook, and maybe even being closer to the top end of the curve, is that more of a revenue-driven kind of optimism? Or is that going to be more because you're focused on expenses?

[Louis Vachon, President, CEO & Director]

I would think it's always a bit of both. I think we've been pretty good at managing both. But in the current environment, I think as we've seen it, at least for the first 2 quarters, Sohrab, I think -- and I look around, and I think most people are -- everybody is nodding, I think the revenue patterns, the major trends that have been driving revenue growth still appear to be very present in Q3. So I think that's going to be the key factor. And frankly, I'm kind of old-fashioned. I think the way you measure the strength of a franchise is on its capacity to grow revenue line. And I think that's what we've demonstrated, and I think we're still in a good position to demonstrate that.

[Sohrab Movahedi, Analyst]

Okay. That's perfect, Louis. If I can just get one last question. You, as an organization, certainly U.S. representative of this organization over the last number of quarters, had said that you're being cautious. This is prepandemic. We are being careful. We are going to ensure that we don't make -- we've learned from the past mistakes and what have you, and we're ready to essentially be very front-footed once the cycle turns. And obviously, COVID did what it did. Has the stimulus programs has the ability for all the other banks to get a free pass, if you will, to, I don't know, put up reserves and what have you? Has that, in any way, eroded what you would have assumed to be a comparative advantage that you were preparing for when you were being careful prepandemic? Are you seeing the same business opportunities for your franchise? Or do you think competition is now stiffer because by hook or by crook, they were given a bit of a free pass over the last, let's say, 12 months?

[Louis Vachon, President, CEO & Director]

I think we are benefiting from our position. Now our positioning is hopefully -- our risk management culture is what's behind that more than just a balance sheet positioning. But you recall that I think we had a pretty conservative positioning in terms of commercial real estate. And we have seen some of our peers become much more conservative in the last 12 months. And we've seen more opportunities. So we did pivot. One area we did pivot from being a bit more conservative than our peers to being very present in the market is commercial real estate. But again, very specifically in areas that we feel make a lot of sense. And again, I think what we want to avoid generally is a boom-to-bust credit allocation culture where you go from having both feet on the accelerator to both feet on the brake pedal. And I think by being prudent throughout cycles, it allows us to avoid placing both feet on one of the 2 pedals, which brings about, I think, confusion in the business lines and confusion with customers. And I think we've -- I think we did benefit from that. And frankly, when you look at our commercial loan growth volumes in Canada, I think that reflects a little bit of that. Quite a bit of that, actually.

[Operator]

Our following question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, Research Analyst]

So my first question is for Bill. Like when I look at your Slide 9 in the deck, coverage ratios are moving materially out there here. And given your outlook for impaired PCLs over the next couple of quarters, it suggests that you were setting up for attractive releases in performing going forward. First, is that the message you're trying to convey here?

[William Bonnell]

Thanks, Lemar, for the question. The -- I think the message that you can take away from that chart is we're very, very comfortable with the level of provisions. We think that we're very well reserved. I think the mindset that we have is we would like to remain prudent at this stage of the recovery, like we were prudent in the early stages of the pandemic. So I think that, that slide demonstrates those points. Does that answer your question?

[Lemar Persaud, Research Analyst]

Yes. I'm just -- like I'm really trying to get a bit of a sense of, is there something that I'm missing that would preclude the bank from taking its performing ACLs down to something that we saw prepandemic? That's really the underlying question that I'm...

[William Bonnell]

Yes. Okay. Thanks, Lemar. The -- yes. I don't think so. The drivers of the ACLs are really going to be -- as I said in my script, it's 3 main drivers. One is the macro outlook. We've seen positive trends, and we expect that those could continue. But there can be surprises, and we'll review that every quarter. The credit quality, we've seen the beginning of the positive credit migration, and it looks like that could continue, but we'll see each quarter. And volume growth will be a factor as we continue to see good opportunities for growing the franchise. So the message is that we are -- we have good allowances, and those drivers will lead to release this in a smaller allowance in the future. But it's difficult to predict the timing of that. So I think the -- over time, if we go back to the same position with -- as we were prepandemic, with the same portfolio, the same macroeconomic outlook, you can expect that the -- those ratios would resemble what they were before the pandemic. But the timing of that is hard to predict.

[Lemar Persaud, Research Analyst]

Okay. And then my second question is just really on the commercial loan growth, very strong this quarter. So can you talk about some of the drivers of the strength this quarter? And what are the chances we could see that level of growth moving forward?

[Stephane Achard]

Yes, Lemar. So it's Stephane here. I would expect that growth to maintain over the third quarter and probably resume towards historical levels in Q4 and ongoing into 2022. And the drivers behind, Louis has well addressed, we built a real estate platform capable of addressing the needs in the market for affordable housing. And we've been capturing good market share, largely insured across the country, well diversified. That's the first element. The second element as well is the real estate market Louis mentioned is really affordable, remains affordable in Quebec here. And we're taking advantage as well as the second and third belts around Montreal. Our building and constructors are active. So we're supporting these clients that eventually move on to residential mortgages for us.

[Operator]

Our following question is from Nigel D'Souza from Veritas Investment Research.

[Nigel R. D'Souza, Investment Analyst]

So fairly strong quarter overall, but I wanted to touch on the increased provisions at ABA. So ABA has performed fairly well throughout the pandemic. So I was wondering if there's any stresses or anything specific at ABA that you could point to for higher provisions this quarter. Anything specifically or any color that you're seeing in regards to ABA.

[Louis Vachon, President, CEO & Director]

Bill, you want to take that or...

[William Bonnell]

Yes. I can start off. Yes. So the -- those provisions were performing provisions, I'll point out. And just as the remaining prudence, we saw the third wave of the pandemic hit Cambodia a little more than it had in the first 2 waves. So I thought we wanted to be prudent in terms of building more performing. And the situation -- maybe you can comment, Ghislain, the situation currently and handling the third wave in Cambodia.

[Ghislain Parent, CFO & Executive VP of Finance]

Yes, Will. This is Ghislain. So we had a confinement of 2 provinces, including the capital earlier -- well, during the month of April and May, but it's now over. So the commercial activities has resumed. So we think that there could be an impact eventually on loan losses. But we don't think that it's going to be high. And in terms of impact on growth, we saw some impact. But once again, it's very small. And we think that for the rest of the year and 2022, it would remain very solid.

[Nigel R. D'Souza, Investment Analyst]

Okay. That's helpful. And if I could pivot to your deposit side. And apologies if you already touched on this, but do you have any commentary on your outlook for retaining or the runoff of those excess deposits with liquidity elevated across the system at the moment? Do you expect those deposits to remain on balance sheet for, let's say, the next 3 to 6 months? Or do you see that [ gaining ] fairly at accelerated rate as the reopenings get underway?

[Louis Vachon, President, CEO & Director]

Really -- Nigel, it really depends on which business lines. And on the retail, I think we were discussing that earlier. I think we expect pretty elevated levels of deposits on the retail front and wealth management going forward, right? Lucie?

[Lucie Blanchet]

Yes. So the way we look at it is we expect our deposit level to remain high. We don't expect a drastic runoff of the deposits. Obviously, the growth rate will slow down. But on the consumer side, we think the consumer will remain prudent and slowly ramp down the deposits over time, much longer than we thought it would at the beginning.

[Louis Vachon, President, CEO & Director]

And Stephane, on the commercial side.

[Stephane Achard]

Same thing on the commercial. I think deposits are stickier than what we expected at the beginning of the pandemic, and they're likely to -- businesses have strong liquidity, and I don't think that we're spending all that cash. Businesses are operating at a profit, and that's the reality. So I think it will take more time than we expected originally for those deposits to run off.

[Nigel R. D'Souza, Investment Analyst]

Right. And could you perhaps touch on -- because of that excess liquidity, do you expect loan growth to lag a reopening a bit? Is that fair to say? Or how do you see [ interplay ] deposits and loan growth or loan demand playing out?

[Stephane Achard]

So certainly, on the commercial side, and I won't talk about our peers, but the reality is, is drawings on operating lines across the country are historical lows. I would expect those to remain low and gradually creep up over time, which is not to say there's not, as you've seen, opportunities for asset growth in segments, specific segments, like we've seen and we've done in real estate insurers, as I mentioned. And in our specialties, the tech market, the ag market, are somewhat more active. Other elements of private equities have not fled the market. So there's still opportunities on that side as well.

[Nigel R. D'Souza, Investment Analyst]

Anything on the retail side? Yes, go ahead.

[Lucie Blanchet]

Yes. So on the retail side, I think that the level of deposits and liquidity that we have is a contributing factor to keeping the demand in real estate high. So it's a positive on that front. And on the -- from a credit perspective, it's also a positive because we see -- we still continue to see decreases in any consumer unsecured loan, including credit cards.

[Operator]

Our following question is from Darko Mihelic from RBC Capital Markets.

[Darko Mihelic, MD & Equity Analyst]

My question is with respect to the personal and commercial. And what I'm looking at is the strength in the noninterest revenue. Can you guys point to the strength in sort of wealth revenues being generated there? Can you kind of remind me, is that purely from sales activity in the quarter? Or is there some sort of linkage to AUM or like -- I hate to use the word trailer commission. But is all purely based on how well sales are going at the branch of wealth product? Or is there something else driving that strength?

[Lucie Blanchet]

No. It's really the first element, Darko. We've had, for a couple of quarters now, good growth in mutual fund volumes coming out. So from the liquidity we see, consumers are saving more and investing more. And we've seen that over the past 4 quarters. So we have good increase in mutual fund volumes. That is driving also our mutual fund fees.

[Darko Mihelic, MD & Equity Analyst]

Okay. And so I guess the secondary sort of follow-up to that is, as you sell those funds, I should see a higher expense out of the wealth for paying commissions to the brand. Is that the way I should think of that?

[Jean Dagenais, Senior Vice]

No, no. It's netted from revenues. So it's...

[Darko Mihelic, MD & Equity Analyst]

So it's net of revenues.

[Jean Dagenais, Senior Vice]

Because it's intersector transfers. So it's netted from revenues in Wealth Management.

[Operator]

Our following question is from Paul Holden from CIBC.

[Paul David Holden]

I just want to ask another big picture-type question. So we heard you lay out a very positive outlook on the business this morning. We've heard similar from other banks, loan growth, starting to improve the prospect of higher interest rates. Financial markets, revenue still remaining elevated, excess capital, almost like a Goldilocks-type scenario. And that just -- and I'm there with you. I can agree with that outlook. But it kind of begs the question, are there any kind of risks maybe we're downplaying, we're not thinking enough about? So ex pandemic, as you're having those risk committee discussions, are there any big picture risks you could see to disrupt that positive outlook?

[Louis Vachon, President, CEO & Director]

Well, there's -- it's Louis. One is this -- there's -- the scenarios we look at is, one is a new complication with the pandemics, namely another variant, another mutation, which yet again, delays a "return to normal." None of us have the expertise to really put a probability around that. But I think it's not a 0. It's a lower probability. And as we -- as a higher percentage of population gets vaccinated, I think the probability around that particular scenario probably goes down significantly, but I don't think it goes down to 0. So that's one. The other one, I think, which is a more likely scenario that we need to monitor very carefully is the fact that Goldilock gets overheated. And that inflationary pressures start developing more in the economy. And that asset valuation, asset prices across different segments get to extreme levels. You may argue that we've seen some phenomena in some asset classes already. But if that -- if it's localized in things like cryptos that don't have clear link to the banking system, it's not a huge concern to us. But if it gets to a much wider spectrum of asset classes, some of which are connected to the banking -- our banking or more specifically our balance sheet, then I think we would be a lot more careful, and that would be a scenario that would be a greater concern. So I think Goldilock is with us for a period of time. I think even if -- and I don't know at what stage and what the probabilities would be around the overheating scenario. But I think Goldilock is probably with us for a period of time. And then we'll see how the economy and markets evolved over time. That's for sure.

[Paul David Holden]

Okay. Okay. And a more specific question for you with respect to that capital build. I know your preference has pretty consistently been no hold on to it for organic growth opportunities. As it continues to build, is there any more thought towards maybe returning some of it to shareholders through buybacks?

[Louis Vachon, President, CEO & Director]

So I think we've been pretty specific on our priorities. So organic growth, as I said, and then dividend, I think we are quite clear that -- but dividend, I don't want to get to the theoretical debate about dividends versus buybacks. But dividends are more, I think, a signal, are a long-term resilient level of earnings. That's where you should be basing your dividend on your capacity to pay them and to stay comfortably, in my view, in the low 40s in terms of payouts and have a nice cushion if there's a recession. So that's the dividend discussion. And I think we should be in a good position to increase dividends, probably even quite substantially once -- on a recurring basis, once we're -- we get the green light from the regulators. On the buybacks, it will depend. I think we're agnostic on this. It's not a theoretical debate for us. If we have excess capital on top of what we need to grow the balance sheet organically, then it will depend on what acquisitions or tuck-in acquisitions we have versus buybacks. And having that flexibility and that choice, I think, usually brings hopefully a better set of decisions in terms of capital allocation. Does that answer your question?

[Paul David Holden]

It does. It does. It does. Very clearly.

[Operator]

[Operator Instructions] Our following question is from Mike Rizvanovic from Credit Suisse.

[Mehmed Rizvanovic, Research Analyst]

A quick question for Bill. Wondering if you could touch on the write-offs just being -- or charge-offs just being so low. And I'm wondering, how much of a factor do you think there is with respect to the lockdowns? Probably more so on the consumer side, but I can imagine that getting somebody through an insolvency process, whether a bankruptcy or a proposal, would be probably very challenging when things are locked down. So do you feel like there's this maybe a bit of a backlog being created on insolvency just because of that and then it's just inevitable and just a matter of time before we see some normalization there?

[William Bonnell]

Thanks, Mike, for the question. I think early in the pandemic, the lockdown certainly had an impact and things, core processes and such, being stopped. I think the low write-offs to charge-offs that you're seeing, though, is really a reflection of excess liquidity in the retail segments. So the -- we're at historical cyclical lows in provisions, impaired provisions and write-offs for the retail. And we -- at the beginning of the year, at the end of last year, we would have predicted that those would have started increasing in the second half of this year. But the metrics that we're seeing in the portfolio continue to be very strong. So I think that we would expect some normalization from these very low levels, but it may take longer than we would have thought at the beginning. In fact, last quarter, I think I talked about seeing the delinquencies in credit cards increased off the bottom. This quarter, they went back down again. So how long it will take to normalize on the retail, I think, will be a longer period of time. And then on the wholesale, the stress has been very much in specific sectors, impacted by the virus, the COVID situation. And the support programs have worked. We've seen positive credit migration across the wholesale portfolio. Particularly, I think the highest migration is in some of those hard-hit sectors and retail distribution and wholesale distribution. So the -- looking forward to the -- what will happen in the rest of the year. And 2022, it looks like a continuation. I think that's why on the impaired -- on the guidance for provisions, we -- the range that we provided, the $15 million to $25 million is bang on where our historical prepandemic provisions have been for, I think, as many years as I've been in this chair. So I think that should give you an idea of what we see in the portfolio. So at some point, normalization on the retail. Wholesale, still specific in those sectors. And certainly, its performance has been better than we would have expected at the end of last year. Does that help you, Mike?

[Mehmed Rizvanovic, Research Analyst]

Yes. No, that's very helpful in terms of the color. So just -- would you have confidence that normalization maybe means -- and again, particularly on the consumer side, that perhaps insolvencies don't settle back to prepandemic levels? And like would you be of the view that maybe they settle at lower than prepandemic levels? So what we saw in 2018 and '19 as a baseline.

[William Bonnell]

It's hard to say, Mike. Very hard to say. My comment would be, we watch very closely the employment levels. And what we've seen have been, particularly in the higher wage sectors, employment levels are higher than they were prepandemic. We're certainly seeing some of the other segments waiting for the reopening, and we'll have to wait and see how that goes in the coming months and quarters across the country. So it's very difficult to try to predict whether we'll end up back at or below or a little bit above.

[Operator]

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

[Louis Vachon, President, CEO & Director]

Thank you. I'd just like to make just a little adjustment. I self-proclaimed myself the only dinosaur traded in inflationary environment around the table. But actually, my friend Denis Girouard joined the bond desk at the Caisse de dépôt in 1982. So he's got experience with trading inflation also. So on that, on setting the record straight, thank you again very much for your time. And we'll talk to you in August for the results of the third quarter. Thank you very much.

[Operator]

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