National Bank of Canada

TSX:NA

Earnings Call Transcript 2022-Q2

[Operator]

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

[Linda Boulanger, executive]

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

[Laurent Ferreira, executive]

Merci, Linda, and thank you, everyone, for joining us. This morning, we released strong quarterly results with earnings per share of $2.55. Adjusted pretax pre-provision earnings were up 11% from last year, supported by contributions from all of our segments. We delivered an industry-leading return on equity above 20%, reflecting our continued focus on profitable growth, our disciplined approach to capital deployment and strong credit quality. The environment in which we operate during this -- we operated during the second quarter was marked by an increase in uncertainty and market volatility. The Bank's consistent performance in this environment underscores the resilience of our franchise and the diversification of our earnings streams.

Over the past few weeks, the macroeconomic and geopolitical environment has continued to evolve and new uncertainties have been introduced. Interest rates are now expected to increase more rapidly than anticipated, and market consensus is relative to the possibility of an economic slowdown has increased. While this is not our base case scenario, these risks are more present and are being taken into account in our decision-making process.

That being said, in the current context, we take comfort in our overall strategic position. First, our domestic focus. Canada's underlying fundamentals are strong. Our economy is well positioned on a relative basis due to several factors, including the importance of natural resources, high commodity prices and unemployment rates at historical lows; second, our unique business mix, underpinning our strong and resilient earnings power; and third, our discipline when it comes to capital, risks, and cost management.

The Bank is in a solid position. We generated positive operating leverage in Q2. Our capital levels are strong, and we continue to carry significant credit reserves which, along with our proven positioning, gives us comfort in the current environment. We ended the second quarter with a robust CET1 ratio of 12.9%, providing ample flexibility to invest in our businesses and to actively return capital to shareholders through sustainable dividend increases and share buybacks. This morning, we announced a $0.05 or 6% increase to our common share dividend, bringing it to $0.92.

We are committed to delivering sustainable dividend increases to our shareholders, demonstrating the earnings power we see in our business model. During the second quarter, we repurchased 2 million shares. National Bank has a strong record of delivering superior value to its shareholders over the long term, and this remains a priority going forward.

Turning now to our business segments. Personal and Commercial Banking performed well with pretax pre-provision earnings up 10% over last year, supported by strong balance sheet growth and client activity. On the retail side, mortgage loans were up 9% year-over-year. With monetary policy continuing to tighten, we expect our exposure to the Quebec market to be favorable, both from a growth and credit perspective. This is based on the relatively strong economic fundamentals of the province, housing affordability and successful social measures put in place over the years. On the Commercial side, lending activity remained strong with Commercial loans up 18% year-over-year. As we look ahead, the outlook is favorable. We will, nonetheless, remain very disciplined in balancing growth, margin and credit quality, especially in the context of rising interest rates and evolving macroeconomic trends.

Our wealth business generated a solid performance with revenues up 7% against record transaction revenues in the same quarter last year. We saw particularly strong growth in full service brokerage as well as higher net interest income on the back of volume growth and interest rate hikes. Expenses are up 10% from Q2 last year, reflecting a significant shift in revenue mix and continued investment in the business. Financial Markets delivered very strong results again this quarter with revenues of $632 million.

The performance of global markets was strong with continued momentum in structured products. Corporate and investment Banking generated good results, again -- against a quarter -- a record performance last year and in the context of a slowdown in equity underwriting and M&A activity in the market. Over the last few years, we've demonstrated the strength and resiliency of our Financial Markets business. Over time, we have diversified and expanded its earnings power by investing in our people and technology and by developing new targeted revenue sources. We are confident that the expertise of our team and our disciplined, strategic focus positions us well to consistently deliver growth through market cycles.

Turning now to our International segment. This quarter, once again, ABA Bank delivered strong results. The economy in Cambodia is progressing well towards pre-COVID levels. Healthy GDP growth is anticipated this year and next, while longer-term projections are among the highest in the region. The country remains underbanked and also benefits from strong demographics. All these factors will continue to support growth for ABA.

Turning now to our specialty finance business in the U.S. Credigy delivered a solid performance this quarter, with revenues of $120 million, reflecting strong underlying portfolio performance across asset classes. This was partly offset by the impact of rising interest rates on asset at fair value. Total assets declined from last quarter, reflecting maturity of certain loans and reduced client activity in the context of heightened uncertainty and interest rate volatility. In the current environment, the team continues to exercise strict discipline where opportunities do not meet our risk-reward objectives. Credigy remains highly selective and will not compromise on risk, returns and ROE over asset growth.

As such, investment level should moderate over the next few months which may impact revenues in the second half of the year. We remain confident that this environment will, nonetheless, create opportunities for Credigy. The business is well positioned to deploy capital and grow assets once attractive opportunities materialize. In conclusion, while we are mindful of the uncertainties ahead, the bank's strategic positioning and performance track record through market cycles gives us comfort. Our balance sheet is in great shape with strong capital level and substantial credit reserves. Our franchise is strong with attractive growth opportunities across our business segments.

With that, I will now hand it over to Marie Chantal, who is joining us on the call for the first time and who has been CFO since April 1. Marie Chantal has over 20 years of experience with the bank, where she held leadership positions across the organization. Marie Chantal, welcome, and over to you.

[Marie Gingras, executive]

Thank you, Laurent. I'm very excited to be here, and I look forward to maintaining and building strong relationships with the investment community. Now turning to our results on Slide 7. The bank delivered strong quarter once again supported by the resilience and diversification of our businesses. Revenues increased by 9% year-over-year, with all segments performing well. Pretax pre-provision earnings grew 11% year-over-year, and we achieved positive operating leverage of 1.4%. The waterfall chart on this slide outlines our expense growth category.

Let me provide some color on the main items. First, the increase in operational cost is tied to our business growth. Specifically, since the beginning of the fiscal year, we have invested in people in line with the growth of all segments. The pace of hiring has moderated significantly entering the second quarter, and we estimate that we are now close to ceiling level. In addition, over the past few quarters, we have increased salaries and repositioned certain roles in order to retain and attract the best talent in a highly competitive environment.

Second, our spend with regards to strategic technology investments has increased. We have been successful in expanding transversal capacity in the execution and delivery of projects aimed at growing and protecting the bank. Let's now take a look at our main investment areas. In Personal Banking, investments are directed towards enhancing and personalizing the client experience to accelerate its acquisition as well as increasing our overall client engagement and satisfaction. In Commercial Banking, we are modernizing our payment engine and investing in our cash management platform.

In Wealth Management, we grew our investment envelope significantly over the past 2 years, driven by foundational projects to increase end-to-end process efficiency and scalability as well as projects to enhance client experience. In Financial Markets, we continue to expand activities in areas of expertise and diversify our revenue stream. Other areas of significant investment pertain to the evolution and automation of our operations to cybersecurity and to addressing an evolving regulatory landscape. As we look forward, we are excited by the top line growth and efficiency gains made possible by these investments.

National Bank has a strong track record of delivering superior PTPP growth, and our investments position us well to continue delivering strong performance. As illustrated on Slide 8, expense management remains a priority. Our teams are very disciplined and some of our segments achieved best-in-class efficiency ratios again this quarter. In addition, the team constantly works on identifying and realizing efficiencies in our expense base, especially in an inflationary context. We have been successful at balancing revenue and expense growth over the year. We maintain our positive operating leverage target for fiscal 2022.

Now turning to capital on Slide 9. We ended the quarter with a robust CET1 ratio of 12.9%, up 14 basis points sequentially, reflecting strong internal capital generation. Our solid capital level provides us with flexibility to support business growth and return capital to shareholders, especially in the context of macroeconomic uncertainty.

Looking now at our second quarter results in more detail. Net of dividends, the bank generated 54 basis points of capital. We repurchased 2 million common shares under our NCIB program, which reduced our CET1 ratio by 18 basis points. Strong organic RWA growth, representing 33 basis points, was partly offset by the following 2 items: first, we recognized favorable rating migration, representing 17 basis points, primarily following the review of nonretail portfolios; and from derivative exposures in our counterparty credit risk; second, model updates added 3 basis points to our CET1 ratio on a net basis.

In conclusion, the bank delivered a strong quarter with solid organic growth, industry-leading ROE and high capital level. The bank is also well positioned to navigate an uncertain macro environment and to support continued growth. With that, I will now turn the call over to Bill.

[William Bonnell, executive]

Merci, Marie Chantal, and good morning all. I will begin on Slide 11 to review our provisions for credit losses. The exceptional credit performance that began in the latter half of last year continued in the second quarter. PCLs on impaired loans were just $28 million, a $4 million increase from last quarter. At 6 basis points, this level remains well below our normal pre-pandemic impaired PCLs and just 2 basis points above the cyclical low in the fourth quarter last year. The strong credit performance was evident across all our domestic retail and nonretail portfolios.

In the international sector, impaired provisions remained stable at Credigy and increased by $4 million quarter-over-quarter at ABA Bank as the end of pandemic-related deferrals led to some migration to Stage 3. In the second quarter, PCLs on performing loans were a net release of $27 million. The primary drivers were positive performance trends and credit migration, which were partially offset by an increase in our management overlay to account for increased uncertainties in the macro environment.

Looking ahead, our outlook for impaired PCLs for the full year has improved. This is supported by both the excellent performance year-to-date and by strong underlying trends that are generating low delinquencies and positive credit migration. Accordingly, we revised our target for full fiscal year impaired PCLs to below 15 basis points. At the same time, our outlook for performing PCLs has become more cloudy as uncertainties in the economy's future path have increased in recent weeks. Inflationary pressures, supply chain challenges, geopolitical risks and the speed of interest rate increases have all contributed to greater uncertainty. In these uncertain times, we remain very confident with our defensive geographic and business mix as well as our prudent level of allowances.

Turning to Slide 12. Our total allowances for credit losses declined by 3% to just over $1 billion in the second quarter. Performing ACLs of $821 million remain elevated and represent nearly 8x the last 12 months impaired PCLs and 2.6x our pre-pandemic level of impaired PCLs. The small release of performing ACLs this quarter takes our cumulative release of pandemic build to 50%. We continue to believe it's appropriate to carry these significant credit allowances in the current macro environment.

Turning to Slide 13. Gross impaired loans were stable last quarter at $611 million or 31 basis points. Lower formations in our domestic portfolios were offset by higher formations at ABA. We mentioned on the Q1 call that the expiry of pandemic-related deferrals in Cambodia began to generate higher formations and that performance was matching our expectations. That has continued in the second quarter with ABA formations increasing to $37 million. Since it's been quite a few quarters that we discussed our Canadian pandemic-related deferrals expiring, I think it would be helpful to provide a little color on ABA's deferrals.

ABA loans under deferrals peaked in the third quarter of 2020 at about 17% of total loans, similar to the peak we saw in mortgage deferrals in Canada. In Q2, the percentage of loans still under deferral was down to 7.4%. The vast majority of deferrals were on principal payments only, meaning that clients continue to pay interest during the deferral period. And of those deferrals that have already expired, about 90% have returned to current status or have been fully repaid. All remaining deferrals will expire before the end of 2022. As they expire, we expect formations to increase and should peak in the second half of this year, then decline going into 2023. These loans are well collateralized, well provisioned. And so far, the performance has been right on our expectations.

On Slide 14, details of our RESL portfolio are provided. The portfolio remains overweight Quebec, which benefits from resilient characteristics such as relatively affordable housing, lower consumer debt levels and a high percentage of dual income households. Employment and demographic trends remain supportive of continued good performance across the portfolio.

In summary, we are very pleased with the performance of our portfolios in the second quarter. While uncertainties in the path forward for the economy have increased, employment conditions and economic growth remain supportive of continued good credit performance. We remain very comfortable with our portfolio's resilience, the diversification of our earnings streams and our prudent approach to provisioning. With that, I will turn it back to the operator for the Q&A.

[Operator]

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

[Meny Grauman, analyst]

A question on commercial loans, very strong year-over-year growth. But if I look sequentially, it does look like it's decelerating and compared to the peer group on a sequential basis, more towards the lower end of the peer group in terms of growth. And I'm just wondering is that in any way a deliberate move, any way driven by some risk considerations that you may have in terms of the outlook for the commercial lending business.

[Stéphane Achard, executive]

Meny, it's Stephane. Good question. Actually, it's not related to that entirely, and I'll go back to the risk side, but it's purely because our commercial numbers, as you know, include our governmental business. And there's been changes in some of the government funding strategies in many areas. So we've seen a large decline in volumes largely because also governments are receiving much more tax revenues than anticipated. So if you exclude governmental banking, the sequential Q-over-Q in commercial business is actually 3.5% growth, which is very robust. This being said, in the environment and the uncertainty, we remain very prudent from a risk perspective and very selective. So being middle of the pack is what we like.

[Meny Grauman, analyst]

That sounds good. And then if I could just ask around a capital question because why not? And the CET1 at 12.9% on a pro forma basis is at the top end of the peer group. And so it really begs the question just to revisit your outlook for M&A. Specifically, I'm wondering if the current environment is an environment where you would rather not do M&A where you feel that keeping the powder dry is the prudent thing to do. And then I have a follow-up.

[Laurent Ferreira, executive]

To your question -- thank you for the question. But to your question on M&A, we haven't changed our approach. So I'll repeat what we constantly say, we like our businesses. We like the strategic choices we've made. So we're really focused on organic growth and then obviously, returning capital to shareholders. But yes, we always keep an eye on the market in terms of M&A. And the market could potentially be more interesting in the future, but we are -- there's also a lot of uncertainty in the market. So prudence is the guiding principle here. So -- but -- so I don't know if that answers your question, but...

[Meny Grauman, analyst]

In terms of your outlook for a floor where you'd be comfortable taking the CET1 down too, does the current environment change that thinking? Is there a specific level -- is 11% too low in your mind to theoretically take down your CET1 ratio? What's the right floor for the comfort level in this environment?

[Laurent Ferreira, executive]

Well, I think -- yes. No, so thank you again. So given the current uncertainties in the market, we obviously were very happy and comfortable with our current capital level. So yes, I think 11% as a handle would -- it's not a level that we're thinking about or striving for.

[Meny Grauman, analyst]

Okay. And then just -- I know you have -- you still have the moratorium on the international M&A. But what's the justification for that? I mean just given how strong your capital levels are? And then also, given the fact that the ABA business, in particular, has gone through this big test, and it looks like it's passed with flying colors. What's the consideration there to keep that moratorium?

[Laurent Ferreira, executive]

It's a question of focus, Meny. We really like our businesses right now. And we're going to keep focusing on them. We see obviously growth ahead with our -- with both ABA and Credigy. So we're not going to change that strategy for now. So we're going to keep our moratorium.

[Operator]

Next question, Paul Holden, CIBC.

[Paul Holden, analyst]

So throughout your commentary, you've referenced the uncertain economic outlook, which I think we can all agree on. And then, Laurent, you said it's impacting your decision-making and actions right now. And I think Credigy is an obvious example of that, maybe your answer on commercial loan growth, also an example of that. Are there other examples of where you're pulling back a bit on risk?

[Laurent Ferreira, executive]

Thank you for your question. No, I think the risk appetite is the same. Our strategy is the same. As you can tell, there's good momentum in the market. It's a bit -- it's a strange world, right? You have a strong economic backdrop in the business and tons of pessimism about a potential recession. So I think what's important is remaining prudent in how we deploy capital. And I think the reserves that -- our credit reserves where they're at, at this point in time, I think, is the right thing to do. So I think the overall strategy doesn't change. Do we keep an eye on interest rate-sensitive areas? Obviously. Do we keep an eye on leverage in the system? Obviously. So those are maybe -- some color I could add.

[Paul Holden, analyst]

Okay. Second question is with respect to Financial Markets, another strong quarter there and better than most of your peers. You talked about strategic investments and why you should grow through the cycle. But wondering if you can point to what factors drove the strength -- particular strength in this past quarter?

[Denis Girouard, executive]

Thank you, Paul. It's Denis. Thank you for the question. Diversification is all about diversification and how we manage the risk and how we develop the business through the course of the cycle. Then this time around, once again, we were good in terms of how we manage the volatility of the market for the last 2 quarters. We are about the same revenue in equity if you compare Q1 to Q2. But at the same time, there are some other businesses that slowed down a bit because of the volatility. But that -- those business, we believe that they may come back down the road. And we keep investing in some niches here and there to be sure that we have that equilibrium that over the years, pay off for National Bank then -- not a big change in strategy. It's just one step at a time, and we continue to invest in our business through any cycle.

[Paul Holden, analyst]

Okay. Last question from me and it relates to Slide 12, which provides a good perspective on where you're performing ACLs have been and where they sit today. When you run your stress test, let's say, for a mild-type recession, how much were those performing allowances need to increase roughly between that $821 million today and a little over $1 billion as of Q1 '21? I imagine they don't need to go all the way back to Q1 '21, but can you give us a sense of how much they might have to increase between now and what that prior number was?

[William Bonnell, executive]

Thanks, it's Bill. Thanks for the question, Paul. I'll try to approach that. I think if I understood the question right, one was in terms of if there was a mild recession, what the impact would be on performing ACLs, is that one [indiscernible]

[Paul Holden, analyst]

Correct.

[William Bonnell, executive]

Okay. Yes. So I think the -- you can see a description in the MD&A notes about our pessimistic scenario. And I think there's some sensitivity numbers shown there where if our pessimistic scenario became 100% weight, then it's around $300 million, I think, in the sensitivity. So that's a ballpark, and that would be expected to happen over time.

Now when I think about the size of the allowances and the prudency, I often think about it, and we talk -- you see it in the slides, and we talked about it about in relation to impaired PCLs and run rate. So just for a little history on our IFRS 9 performing allowance build, if you remember, we started off in IFRS 9 in 2018 from already a pretty good position. We had our sector allowance in 2016 that wasn't fully used. So we started off at a pretty good point. And I think the ratio of our performing allowances to run rate PCLs in 2019 before the pandemic was around 1.8, 1.9x.

That -- in translating that, that meant we had allowances that would cover 2 years -- almost 2 years of impaired PCLs. At the end of 2020, after the significant build, we had that brought up to about 3x of impaired PCLs in the last 12 months. And that ratio included the impact on the denominator because we had some of the pandemic-impaired PCLs are elevated.

And now here in 2022, if you look at that ratio over the last 12 months, impaired PCLs is really high, but that's because the denominator is really low. So we referred to it in the slides, and we think about it more in terms of our run rate pre-pandemic. And you'll see on the slide, we're running about 2.6x that rate. So that feels like a pretty comfortable level. It gives some room to absorb potential negative events in the future if the outlook changes.

And we also think about one difference from pre-pandemic to now is in terms of business mix. So if we look at our portfolio now, we have less consumer unsecured because of the prepayments, high paydowns on the credit cards. And we had more growth in the mortgages, which is lower consumers. So it gives even a little more comfort with that number being high. So I hope that helps. But in the potential paths ahead, our base case is still for lower, but good growth. And we have a pessimistic that as you can see, is for a downturn. And we think that if the -- our outlook shifts in terms of a greater proportion of a downturn or even worse than the downturn, we'll be happy that we've started with the good allowance levels that we have now.

[Operator]

Next question is from Sohrab Movahedi, BMO Capital Markets.

[Sohrab Movahedi, analyst]

Maybe one question first for the team. Maybe, Laurent, you can answer that. Once upon a time, I think you had said that this U.S. international banking -- the U.S. Specialty Finance and the International Banking segment had, a few years ago, I think there was a target of maybe 10% or so of the total bank earnings. It obviously has had pretty good growth. I'm not digging up ABA from Credigy, I'm just looking at it in totality. Maybe it's closer to 16%, 17%. Is there any revised or renewed guidance worth sharing as to what sort of overall proportion of the bank you're comfortable letting these 2 businesses get to?

[Laurent Ferreira, executive]

It's Laurent. Sohrab, thank you for your question. And if we said in the past, a certain percentage, often it's an initial target of where we want to end up. But maybe we don't manage our businesses by setting targets or percentages. If you look at the performance of our business mix, and that's really the way we look at it, the balance between our wholesale business, retail, commercial, wealth, and the strategic choices that we make in them, it's really about the overall performance. And that's the way you should look at it as well.

So where we see growth momentum, we invest. And right now, we like all of our businesses, as you can see, I think all of our businesses are contributing. And that's it. So no, we don't have a set target. As you know -- and we've talked about our strategy, we have our focus of growing our Canadian banking franchise. We think that there are tons of opportunity in Canada, and the team is focused on that. And then a lot of the investments in technology and people are towards growing our business in Canada as well. So without setting targets, we're really -- we really like all of our businesses, and we want to grow all of them.

[Sohrab Movahedi, analyst]

So maybe target was the wrong word, but you're comfortable, I suppose, as a team, if this segment continued to provide above-average growth and continue to drift higher as a proportion of the overall bank earnings?

[Laurent Ferreira, executive]

Absolutely.

[Sohrab Movahedi, analyst]

Okay. And maybe it's for you, Laurent, maybe it's for Bill, maybe it's for the -- again, for the team, I'm not sure. But prior to the pandemic, I think the bank would talk about how you're making some really risk decisions and not pursuing growth -- loan growth, in particular, I think you would have talked about because whether it was a competitive pricing or maybe because of the structures or the terms of some of these available opportunities that showed quite a bit of discipline. As you sit here today, I think you answered this partly to one of the earlier questions. But is there any need to show restraint here right now? Or are you just not seeing the types of, I'll call it, kind of factors you had seen back pre-pandemic that would have necessitated moderating loan growth?

[William Bonnell, executive]

Sohrab, it's Bill. Maybe I can start off on that one. The -- you're right about what we -- our approach pre-pandemic as we were getting late in the cycle that we talked about holding the reins. And -- but just generally on the approach, and I think you've heard it often this week, it's not to change specific underwriting criteria. We try to be very stable and disciplined in those through the cycle. But there are a couple of levers that can be pulled. One of them more longer term, but I think it's an important one. And those are the decisions on business mix.

So what businesses we're in and not in and what we're overweight and not overweight. And those are very, very impactful decisions, and those are more aligned with long-term risks and opportunities. And then the other one I'll point out in terms of near-term impacts is how we allocate balance sheet and capital and limits as an important lever. And pre-pandemic when we talked about holding back the reigns, that means that we didn't necessarily say no growth, but we gave room for a little bit of growth and keeping the growth may be less than what the opportunities were that were out there.

And as you pointed out, our discussion about Credigy, that's with discipline and that approach is happening now. And the other important comment I'll make, Sohrab, is that what gives one the ability and makes it easier to use those levers is the diversification of the franchise so that there are always different earnings streams that can continue to grow the customer base and franchise even if you're holding back on certain areas. Does that answer your question, Sohrab?

[Sohrab Movahedi, analyst]

It does. Can I just -- I don't want to chew up the time too much, if I can just quickly follow up on that, Bill. Like sometimes limits are set like you say, short term and the like. Are there instances where as a collective team, you're seeing -- you're guiding the businesses to create room without increasing limits for them? Or are you comfortable increasing limits for them in the current environment?

[William Bonnell, executive]

Yes. Well, I think, again, given the benefit of our broad or diversified earning streams, there are certainly areas that are continually growing very, very nicely. You've seen that performance here. I'd flip it around a little bit and say when we're -- when the uncertainty in the future is greater, what we really try to do is, as a team, think hard about what -- we can't predict exactly what will happen, but we can be very rigorous in understanding what the potential impacts are if those happen. Some of those thoughts and discussions will lead to maybe holding the reigns tight. Others will be getting insight into opportunities that we think we would like some dry powder to seize later. So it's a mix, Sohrab.

[Operator]

Next question is from Nigel D'Souza, Veritas Investment.

[Nigel D'Souza, analyst]

I had a quick clarification question first for you on your LTV disclosure on Slide 14. When I look at the HELOC component to having an LTV of -- that's below your uninsured LTV. And based on the footnote there, an LTV is calculated on the authorized limit, not the outstanding balance of the HELOC. So I just wanted to clarify, am I interpreting that correctly includes the mortgage balance and the LTVs are lower than the uninsured portfolio?

[William Bonnell, executive]

Yes, absolutely. And I think that's been consistent from the beginning. The HELOC is typically a higher-end profile, higher FICOs, higher net worth, and that's by design as well. The criteria for the HELOC are a little tighter. So the -- certainly, the LTV has consistently been below the uninsured. And those are the LTVs based on the authorized. If we were to look at it over the outstandings with utilization rate, probably below 30%.

[Nigel D'Souza, analyst]

Okay. And I'm going to assume that those are probably older vintages with shorter amortization, so maybe benefited from greater home price appreciation as well. Is that fair?

[William Bonnell, executive]

Yes, that's part of it. But also just the need that the HELOC serves for some clients is not necessarily immediate needs. Sometimes they -- the high end -- the high-income earners and will want the flexibility to their planning for renovation or their -- have things in mind and they don't want to use it now.

Conversely also, it -- on the nonamortizing piece, they can pay it down substantially when they have higher income than expected coming in. And that's been an important factor, I think, through the pandemic. All of our rotating credit, including the HELOC piece, we've seen higher prepayments on that as the savings balances of the clients is higher. So...

[Nigel D'Souza, analyst]

Yes, that makes sense. And if I could switch to net interest income. When I look at your sensitivity disclosure, from 100 basis point increase in interest rates, it looks like you have about $130 million benefit to net income, and that implies a low- to mid-single-digit increase in net income. And when I modeled it out, I get a higher expected increase. So is that lower benefit driven by hedging activity? Have you initiated hedges that limit the asset yield accretion that you could get in a rising rate environment?

[William Bonnell, executive]

Maybe I'll start off. I don't have the table in front of me, Nigel, but I believe that there was a small increase in sensitivity quarter-over-quarter. And part of that is from growth in good retail core operating accounts. So the growth in deposits certainly has an impact on that. Yes, there's -- as we've talked about in the past, there is always activity in treasury to try to risk manage and stabilize and protect NII through the cycle. But does that answer your question, Nigel? Or should we take some...

[Nigel D'Souza, analyst]

No, it does partially. I mean when I look at your maturity profile, you have a lot of loans maturing in the next 12 months, and your weighted average maturity is lower. So I would have just expected a greater benefit, but I'll assume that's really on hedging. It doesn't sound like there's anything else that's driving it?

[William Bonnell, executive]

Yes, nothing else to call out.

[Operator]

[Operator Instructions] Next question, Joo Ho Kim, Credit Suisse.

[Joo Ho Kim, analyst]

A couple of quick questions. First on capital, wondering how you view buyback as an option to deploy capital from here? Could we see the bank continue to buy back shares? Just wondering in the context of the elevated level of uncertainty and perhaps being more prudent on the capital front.

[Laurent Ferreira, executive]

Thank you for your question. It's Laurent. So buybacks are always part of our yearly capital management, but they're really a complement. Our #1 focus is always organic growth and investing in our businesses. We see still a lot of ROE-accretive opportunity for the bank. So that's where we are, the mindset of the team is and the mindset of the bank. So providing also our shareholders with sustainable dividend growth is also part of our strategy. So buybacks are really a complement. And in terms of our capital level, with the current market uncertainty and the macroeconomic uncertainty, we like the level of capital that we have at this point in time.

[Joo Ho Kim, analyst]

Okay. And just lastly, quickly on ABA. Another quarter of very strong growth there. Wondering if you could give a bit more color on what drove the loans and deposit growth this quarter and it just stands out. I'm wondering how sustainable that level of growth is going forward.

[Ghislain Parent, executive]

Yes. Thank you for the questions. This is Ghislain here. So essentially, a couple of things, first of all, the borders are completely reopened, so there is an economic recovery right now, so the inflation is also under control. You have to keep in mind also that this is a dollarized economy. So this is why I think it helps to control inflation and maintain purchasing power. The population is still very young. So -- and the fundamentals of the banking sector are still there. Bank penetration rates are still very low. So we think that -- so all this contributed to the good results in Q2, and they will continue to contribute for the rest of 2022 and 2023.

[Operator]

There are no further questions register at this time. I would now like to turn the meeting over to Mr. Ferreira.

[Laurent Ferreira, executive]

Well, thank you very much, and we'll speak to you next quarter.

[Operator]

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