National Bank of Canada

TSX:NA

Earnings Call Analysis

National Bank Q2 2024: Strong Results, Dividend Hike, Optimistic Outlook

National Bank reported robust Q2 2024 results, with EPS rising 9% to $2.54 and ROE at 17%. The CET1 ratio stood strong at 13.2%, enabling a $0.04 dividend increase to $1.10 per share. Key segments showed solid growth: Personal & Commercial Banking revenues grew 6%, Wealth Management net income rose 15%, and Financial Markets' net income increased 20%. The bank maintains a resilient outlook amid economic uncertainty, expecting mid-single-digit mortgage growth and low-double-digit credit card gains by year-end. Future provisions for credit losses are anticipated to be around 20 basis points.

Strong Financial Performance

National Bank of Canada reported robust financial results for the second quarter of 2024, featuring an earnings per share (EPS) of $2.54, marking a 9% year-over-year increase. The bank achieved a return on equity (ROE) of 17%, indicating efficient capital utilization. A $0.04 dividend increase was also announced, raising the quarterly dividend to $1.10, effective from Q3 2024. These financial metrics underscore the bank’s solid performance and capacity to return value to shareholders.

Personal and Commercial Banking Growth

The Personal & Commercial Banking segment saw a 6% year-over-year revenue growth, driven by a concurrent increase in average loans and deposits. The personal banking loan book grew 3%, while the commercial banking loan portfolio surged by 12% year-over-year. This growth reflects the broad-based expansion across various sectors and the bank’s ability to capture more market share.

Wealth Management Success

The Wealth Management segment delivered a net income of $205 million, up 15% from the previous year, supported by double-digit revenue growth and positive operating leverage. Fee-based revenues increased by 13% and transaction revenues by 12%, benefitting from strong markets and a growing franchise. This segment's performance showcases the bank’s strength in managing client assets and generating consistent revenue streams.

Financial Markets Performance

In the Financial Markets segment, net income reached $322 million, a 20% year-over-year increase. Revenue growth was driven by momentum in securities finance and robust performance in the rates business. Corporate and Investment Banking revenues increased by 9% year-over-year, reflecting a strong performance across the franchise and solid debt underwriting. This highlights the bank’s diversified and disciplined approach to managing its financial markets business.

Capital Strength

National Bank of Canada’s capital position remains strong, with a Common Equity Tier 1 (CET1) ratio of 13.2%. This strong capital base allows the bank to invest in growth opportunities and support shareholder returns. The bank also maintained a healthy loan-to-deposit ratio of 98%, indicative of a balanced and diversified business model【4:0†source】.

Economic Outlook and Strategy

Despite signs of economic deceleration and rising unemployment in Canada, the bank remains resilient due to its diversified business mix and defensive posture. The bank expects some interest rate relief in the second half of the year as core inflation eases. The bank’s disciplined execution of its strategy and diversified earnings power positions it well to navigate economic uncertainties【4:0†source】.

Guidance and Future Prospects

Looking ahead, the bank maintains a cautious yet optimistic outlook. For the Wealth Management segment, the focus will be on leveraging its diversified business mix and client acquisition strategy to sustain performance. The Personal & Commercial Banking segment is expected to see mid-single-digit mortgage growth and low double-digit credit card growth. Overall, the bank remains committed to its disciplined approach to capital, credit, and cost management, aiming for long-term value creation for shareholders【4:0†source】.

Conclusion

In summary, National Bank of Canada has delivered a strong quarter marked by substantial revenue and income growth across multiple business segments. The bank’s solid capital position, strategic diversification, and prudent risk management provide a resilient foundation to weather economic uncertainties and continue generating value for shareholders in the upcoming quarters【4:0†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, and welcome to National Bank of Canada's Second Quarter Results Conference Call.

I would now like to turn the meeting over to Marianne Ratte, Vice President and Head of Investor Relations. Please go ahead, Marianne.

[Marianne Ratte, executive]

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

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

I will now turn the call over to Laurent.

[Laurent Ferreira, executive]

[Foreign Language] Marianne, and thank you, everyone, for joining us. This morning, National Bank reported strong financial results for the second quarter of 2024, with earnings per share of $2.54, up 9% year-over-year and a return on equity of 17%.

This performance reflects the disciplined execution of our strategy across business segments and the diversified earnings power of the bank. Our capital level is strong with a CET1 ratio of 13.2%. This allows us to invest in business growth and to return capital to shareholders through sustainable dividend increases. We've announced a $0.04 dividend increase this morning, bringing our quarterly dividend to $1.10 effective Q3 2024. Looking at the Canadian economy, it continues to show signs of deceleration. We are seeing further normalization in the credit environment and the unemployment rate has been on the rise since monetary tightening began and now stands above 6%.

Interest rates have been holding year-to-date, and housing and rental costs remain high. As core inflation has eased in recent months, we believe that Bank of Canada may now be in a position to offer some interest rate relief in the second half of the year.

With continued uncertainty as to the path of the economy, our disciplined, diversified business mix and defensive posture provides us with resiliency and flexibility. This is illustrated by our strong results across our business segments in Q2. Personal & Commercial Banking delivered solid revenue growth of 6% year-over-year, supported by concurrent growth in average loans and deposits.

Our Personal Banking loan book grew 3% over last year, and we are seeing better volumes within our internal mortgage origination channels. Our commercial banking loan portfolio grew 12% year-over-year, reflecting broad-based growth. Our Wealth segment generated net income of $205 million in the second quarter, up 15% over last year on the back of double-digit revenue growth and positive operating leverage. Net income grew 7% over the same period and 3% sequentially, reflecting a strong deposit base. Compared to last year, fee-based revenues were up 13%, and transaction revenues were up 12%, benefiting from strong markets and a growing franchise.

Our Financial Markets business delivered net income of $322 million for the quarter, up 20% year-over-year. Global Markets revenues were up 18% from last year, led by continued momentum in securities finance and a strong performance in our rates business. Corporate and Investment Banking revenues were up 9% year-over-year with a solid performance across the franchise and strong debt underwriting.

Our Financial Markets business continues to benefit from a well-diversified business mix and disciplined risk management. Credigy generated solid returns in Q2 with 5% average asset growth sequentially, driving higher revenues and strong returns. Net interest income was up 6% quarter-over-quarter. Underlying portfolio performance is in line with expectations and the team continues to focus on opportunities with attractive risk-reward profiles, primarily in the secured space.

Finally, ABA Bank generated net income growth of 16% year-over-year. Margins improved sequentially as a result of strong growth in demand deposits. Our customer base expansion translated into year-over-year growth in loans and deposits of 18% and 20%, respectively. These results reinforce the strength of ABA's financial ecosystem underpinned by its leading position in digital transactions, deposit gathering, payments and cash management.

Looking ahead, we remain committed to our disciplined approach to capital, credit and costs and to generating long-term value to our shareholders. Before I turn it over to Marie Chantal, a few weeks ago, we announced that Bill Bonnell will be retiring from his CRO role at the end of the fiscal year, and that Jean-Sebastien Grise will be appointed his successor effective November 1.

JS has been a key member of the Risk Management and Compliance team since he joined the bank in 2015. He quickly rose through the ranks since that time, thanks to both his technical expertise, but also his vision and leadership qualities. Having worked closely with him and Bill through those years, he brings deep experience and understanding of our risk landscape to the role. I look forward to welcoming him to the senior leadership team this fall.

As for Bill, it goes without saying that he has made an indelible mark on the bank as a steward of our risk culture over the last 12 years. I am very happy and fortunate to count on him for a little while longer as our CRO. And then as a strategic adviser before a well-deserved retirement. Marie Chantal, over to you.

[Marie Gingras, executive]

Thank you, Laurent, and good afternoon, everyone. My comments will begin on Slide 7. The bank delivered strong results in the second quarter. PTPP grew 12% year-over-year, driven by solid organic growth across all business segments and underpinned by diversified revenue stream. Our balanced approach to growth and cost management across the bank contributes to our performance.

Operating leverage was positive at 2%. Our highly efficient businesses generated an all-bank efficiency ratio below 52%. We remain disciplined around expense management. Revenue growth of 10% year-over-year generated higher variable compensation, particularly in financial markets and in wealth management. Excluding variable compensation, expenses rose 5% year-over-year as we dynamically balance business growth and investments to gain efficiency and improve the client experience.

Salaries and benefits increased 5% year-over-year, mainly due to the annual salary increase. We continue to prudently manage the FTE count in Canada, which remained relatively stable compared to last quarter. Our action towards simplifying and optimizing our products, processes and channels continue to pay off. Now in the other segment, total revenue from treasury activities was lower in the second quarter. This was primarily driven by the impact of interest rate volatility on asset and liability management and to a lesser extent from some pre-funding opportunities in the first half of the year, aligned with our prudent approach to liquidity and funding management.

Higher expenses from variable compensation and a temporarily overlap in occupancy costs as we transition to our new head office also lowered earnings for this segment in the second quarter. For the remainder of the year, we do not expect PTPP in the other segment to improve from Q2 levels. Looking at the results of the business segments and the bank as a whole, we are pleased with the performance in the first half of the year. Our balanced approach to growth and investments continues to serve us well, particularly in an economic environment that remains uncertain.

Now turning to Slide 8. Sequentially, non-trading NII was down approximately 1% and was up in wealth management, supported by its diversified deposit base; at Credigy, driven by robust asset growth year-to-date and at ABA, benefiting from balance sheet growth and a favorable deposit mix. The all bank nontrading NIM fell 4 basis points sequentially to 2.17%, largely reflecting lower NII from treasury. Our margin in P&C Banking remained stable again this quarter at 2.36%.

As a management team, our primary focus is to grow the franchise with the right balance between volume growth, margins and credit quality. We are pleased with our margin performance and expansion since the beginning of this rate cycle.

Moving to Slide 9. Loans were up 9% year-over-year and 2% quarter-over-quarter. In Commercial Banking, loans increased 3% sequentially, in part driven by continued opportunities in the residential insured segment. In Personal Banking, loans increased 1%, while corporate banking volumes were up 1% quarter-over-quarter following several quarters of strong drawing. At Credigy, the sale of the loan portfolio offset organic growth this quarter, but bear in mind that the overall asset growth has been strong year-to-date. At ABA, loans grew 3% sequentially, mainly driven by net client acquisition.

Deposits, excluding wholesale funding, grew 4% year-over-year and 2% quarter-over-quarter. Personal deposits rose 2% sequentially, with growth in term deposits across retail businesses and in demand deposits at ABA. In Personal Banking, demand deposits increased modestly over the quarter. Nonretail deposits were up $2 billion sequentially, primarily driven by Commercial Banking. We maintained a strong loan-to-deposit ratio of 98% as of Q2. Our ratio is aligned with our diversified business model.

And now turning to capital on Slide 10. We ended Q2 with a CET1 ratio of 13.2%. Second quarter earnings net of dividends contributed 38 basis points to our ratio, underscoring our internal capital generation capacity. Robust organic business growth contributed to an increase of 29 basis points of RWA, excluding FX. Credit risk RWA was up representing 30 basis points of CET1, mainly from strong balance sheet growth and to a lesser extent, from credit migration in nonretail portfolios.

To conclude, I am pleased that for the past few quarters, we have successfully been able to navigate a challenging backdrop and report solid financial performance. Our diversified business model, strong balance sheet and disciplined execution provide a firm foundation for the bank to generate profitable growth.

I will now turn the call over to Bill.

[William Bonnell, executive]

[Foreign Language] Marie Chantal, and good afternoon, everyone. I'll begin on Slide 12 with comments on the macro environment and our credit performance in the second quarter. While core inflation has eased in recent months, significant uncertainties remain in the forward path of interest rates, economic growth and unemployment. To echo Laurent's comments, the Canadian economy continues to show signs of deceleration. Against this macro backdrop, our credit portfolios have continued to demonstrate resilience in the second quarter, with total provisions for credit losses of $138 million or 24 basis points versus 21 basis points in Q1. Impaired provisions increased 3 basis points sequentially to 20 basis points or $114 million. Retail impaired provisions increased as normalization trends continued. Non-retail impaired provisions increased quarter-over-quarter due primarily to a couple of files in the wholesale trade sector.

At Credigy, continued seasoning of acquired portfolios generated stable impaired provisions. At ABA, impaired provisions declined quarter-over-quarter. However, as we discussed on prior calls, we think they could remain elevated for a few more quarters. Provisions on performing loans declined to $22 million or 4 basis points. The primary drivers this quarter were portfolio growth and migration. Looking ahead, we expect delinquencies and impaired provisions to continue their upward path. The retail portfolio should continue its normalization and the nonretail book is subject to periodic lumpiness as we saw this quarter.

With these factors in mind, we maintain our 15 to 25 basis points guidance for full year impaired provisions and still expect to end up around the middle of that range.

Turning to Slide 13. We continue to prudently build our total allowances for credit losses, which reached more than $1.4 billion, represents a strong coverage of 4.5x our last 12 months net charge-offs. Performing ACLs increased for the eighth consecutive quarter and now represents 2.9x the last 12 months impaired PCLs. In Appendix 10, additional metrics on our allowances are provided, which demonstrate our prudent coverage levels.

Turning to Slide 14. Our gross impaired loan ratio increased 6 basis points to 54 basis points. As we called out on the slide, the GIL ratio in our domestic loan portfolios was 36 basis points, still below pre-pandemic levels. Formations were higher quarter-over-quarter with the main drivers being the commercial and corporate portfolios. As I've mentioned on prior calls, formations and recoveries in wholesale portfolios can be lumpy from quarter-to-quarter and Q2 was unusually lumpy. The new formations were spread across a handful of regions and sectors, including wholesale trade, transportation and real estate. And I'll point out here that for a couple of those files, we took only a small or no specific provision reflecting the quality of the collateral and loan structure.

At ABA, formations were stable quarter-over-quarter in Canadian dollar terms due to currency impact, but in U.S. dollar terms declined to $28 million from $44 million last quarter.

On Slide 15, we present highlights from our Canadian RESL portfolio. The geographic and product mix remained stable with Quebec accounting for 54% and insured mortgages accounting for 29% of total RESL. Higher risk uninsured borrowers represent around 50 basis points of the total RESL portfolio, and 90-day delinquencies and uninsured mortgages and HELOCs remain low at 13 basis points and 10 basis points, respectively.

You can find additional details on our Canadian mortgages on Slide 16. I'll note that more than half of our mortgage portfolio has now been repriced at higher interest rates and 90-day delinquencies remain well below the pre-pandemic level. We've included additional insights on trends and 90-day delinquencies for the entire Canadian retail portfolio in Appendix 26 and I'll take a moment to share a few comments on the trends across different products and segments or regions.

First, delinquencies in credit cards, which is a relatively small portfolio for us, have increased the most since the 2022 lows, having exceeded pre-pandemic levels early this year. And diving deeper into that portfolio, we find that the segments most impacted are non-homeowners and clients outside Quebec. Second, variable rate mortgage delinquencies have also seen a significant increase over this period with the insured segment in the outside Quebec regions showing the largest relative increase. And finally, diving deeper into the uninsured variable rate mortgage portfolio, we see that delinquencies in the Quebec region still remain below their prepandemic levels.

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

[Operator]

[Operator Instructions]

Our first question is from Matthew Lee from Canaccord.

[Matthew Lee, analyst]

Maybe starting with ABA, PCLs in that business continue to be very low, and I think they actually saw impaired decline quarter-over-quarter. Can you maybe just talk us through what gives you confidence in the current level of build for that business? And maybe what you're seeing in terms of economic indicators in that market?

[William Bonnell, executive]

Yes, sure, Matthew. It's Bill. I'm happy to answer that. So in Cambodia, we have seen some recent strength. So far in the beginning of the year, exports have really picked up. We've seen foreign direct investment pickup with U.S. being now the third largest foreign direct investor after Singapore. And just recently, Moody's upgraded their outlook for the country from negative to stable. So it reflects kind of some good things happening. However, we feel that it will take some time for the benefits of those activities to really be felt through the economy, which is why we were calling out the fact that we expect elevated formations for the next 2 or 3 quarters. And does that answer your question? Or do you have another question?

[Matthew Lee, analyst]

No, that answers that question. And then maybe on the financial market side, another good quarter and specifically called out DCM, but can you maybe just talk about the visibility you have into C&IB pipeline going in the back half of the year?

[Unknown Executive]

Sure. Thanks, Matthew, for the question. And it's been a great quarter for us on the advisory side. So maybe if I comment on what the quarter was like, the star of the show was really DCM, where it was a great environment with Canadian borrowers being active on both sides of the border and Canadian investors actively deploying and that provided a broad support for new issues in the rallying Canadian credit market. And then you have the government side. Because of the increasing borrowing requirements, the pace of new issue has been robust as issuers took advantage of strong demand in the fixed income markets and we see that trend continuing in the next quarter.

It was also busier on the equity new issue market with significant activity, notably in the mining sector. So an encouraging trend there. And M&A was also a bit busier in Q2, although a bit slower than last year, and we're looking for an acceleration during the second half of the year. So that's really what we see. I mean, I touched on DCM. We see it getting quite busy on the equity side, especially in the last 2 weeks, and there was a lot of cash on the sidelines and a lot of pent-up demand. And I think that, that provides a pretty strong picture for the second half of the year on the advisory side.

[Operator]

Following question is from Meny Grauman from Scotiabank.

[Meny Grauman, analyst]

Just following up on that discussion of financial markets, if we can take it to the outlook for net income for the year. I think year-to-date, up 11%. So I think in the past, you talked about guidance being quite a bit lower, but obviously, you're highlighting some positives here, especially on the DCM side. Just wondering if you could update that guidance in terms of what to expect for the year as a whole in terms of earnings growth for Financial Markets segment?

[Unknown Executive]

Yes. Thanks, Meny, for the question. So we are really happy with the results so far, especially on the trading side. I think it's a combination of a good environment, strong client activity and really solid execution from the teams. So on the fixed side, you're seeing volatility remaining high and all segments being really busy.

So we're seeing a nice revenue progression in our liquidity providing activity, and we continue to rank #1 in total domestic bond trading for each month of the quarter. So really happy to see that. And rate structured products were also a nice tailwind this quarter with record issuance and revenues. And on the equity side, we continued to benefit from strong market conditions, whether it is structured products, financing trades and market making. The strong equity markets have resulted in increased product sales, increased client flow and structured funding trades and a pickup also on the securities lending side. If we look at the -- what we see, so we feel really good about the first half of the year and how balanced the performance has been, and we feel increasingly confident that the businesses are well positioned to deliver net income growth for fiscal 2024.

I think on the interest rate side, we will continue to see volatility as central banks will take diverging paths on their way to easing and that bodes well for activity on trading, should have a lot of cross-border activity, but also in the debt capital markets, as I mentioned, as government and corporate issuers will continue to take advantage of improving borrowing conditions. And the persistent strength of the equity markets, I feel, will continue to be a tailwind for our structured products franchise. So sales are strong and that will compensate, we feel, for low equity trading volumes and low implied volatilities. And on the securities finance side, it's really a good environment. Clients are deploying aggressively at good spreads and we also see strong demand on structured funding trades. And I think that, that will offset corporate lending where we see a possible slight slowdown in the pace due really to the opening of capital markets. But, like I said, we're looking for M&A to accelerate in the second half, so we have a really interesting pipeline there. So I think we'll be busy in the next few months.

Does that answer your question, Meny?

[Meny Grauman, analyst]

Well, does that mean that the guidance that you provided before is probably no longer valid, that you're probably looking at quite a bit more earnings growth than what you had suggested earlier in the year?

[Unknown Executive]

Well, like I said, we feel increasingly confident that we will achieve that guidance, but I don't think we want to update that guidance yet.

[Meny Grauman, analyst]

Okay. And then just a follow-up in terms of -- if I look at the TEB line across peers, on a year-over-year basis, down, call it, on average 90% year-over-year. And I think that is the dividend received deduction coming through as expected. If I look at your TEB line, down 34% year-over-year. So a significant outlier there. And I'm just trying to understand, is there still more downside here related to the DRD? And then if not, then what's going on here? There's other things offsetting an impact of the DRD or are you able to somehow offset the DRD itself? I'm trying to understand your performance here. It really stands out relative to peers.

[Unknown Executive]

Yes. So I think what you're referring to Meny is that it's the TEB adjustment and noninterest income. And that one is not related to dividends. It's related to income from our foreign trading operations, notably in Europe. And so that TEB in relation to noninterest income, that reflects the difference in tax rates in various jurisdictions where we carry on business. So that TEB will fluctuate with the balance sheet we've deployed there and changes in interest rates. And it will also fluctuate as our trading revenues and those markets go up and down.

[Meny Grauman, analyst]

So I mean, just to be clear in terms of -- the line that I'm looking at here in terms of the TEB on a -- like if I'm looking at trading activity, revenue and the TEB line of $84 million in Q2, the DRD impact is not going through that specific line. Is that what you're...

[Unknown Executive]

So you've seen the drop from previous TEB numbers. And so really, the drop in the dividend impact was in the interest income part of the TEB, where we went from something like [ 75 ] to [ 14 ] if I remember correctly. And that's aligned with the guidance of about $60 million per quarter that we gave in Q1.

[Operator]

Following question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, analyst]

Bill, you mentioned taking small to no provisions on some of these nonretail formations. Can you expand on what gives you the confidence here? I'm assuming that these are clients you've done specific work on each of these files, and that is what gives you the confidence in these sectors you called out, so I think there is transportation, wholesale trade and real estate. Just provide some thoughts there on what gives you the confidence to not provide...

[William Bonnell, executive]

Yes, sure, Lemar. I'm happy to. Certainly, it's not all of the formations that had low provision, some of them certainly did. And I said it was a lumpy quarter. Specifically, I was referring to, in the real estate sector, the new formation, the gross impaired loan increase was driven primarily by one file, and we always look very specifically at the file when it becomes impaired, and we make our best judgment of what we think the end realized loss would be. And in this case, it's one very well-located retail property that's in the process of redeveloping into multi-residential and retail mix. It had cash flow problems because of low occupancy in the retail portion and higher interest rates, of course, hitting the cash flow. So that led to the impairment.

But even at the refreshed valuation at the time of impairment, the current LTV is still in the 60s and provides ample coverage for the loan. So we don't expect to end up realizing a loss on that one. And in the transportation sector, although it's in the transportation sector, it's actually a few specific loans secured by properties that are multiuse or industrial and they are used by the owner who guarantees the loans that is in the transportation sector, but our exposure is directly secured by these properties. And again, well located. They were structured as real estate loans, Canadian style and it's going through a process. And if necessary, if through the process, there needs to be an adjustment evaluations, we'll make it. But currently, we don't expect to take any material loss there. So that's how we go about analyzing the specific provisions, and it really is case by case with all the factors considered. Does that help answer your question?

[Lemar Persaud, analyst]

Yes, that's perfect. And then just kind of moving on to my next question here. I just wanted to touch on the strength in commercial lending, so that's 3% sequential increase. Is this a Quebec specific strength, the specific sector and what do you kind of expect moving forward? Because that number stood out to me on the positive side?

[Michael Denham, executive]

So it's Michael Denham here. So the growth has been across the country. Quebec, but Ontario and Western Canada. So a lot of the growth coming from real estate, multiunit residential real estate, but it's also broad and across the board. National accounts teams out West are accounting for a lot of the growth as well. So it's well diversified across geographies and across sectors. And again, it is lumpy. We've been in the kind of high single digit, low double-digit range for the past few quarters. And just based on the kind of pipeline level of activity we're seeing right now, we expect to be kind of more or less in that range going forward.

[Operator]

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

[Nigel D'Souza, analyst]

I wanted to follow up on the delinquency rate data you had on Slide 26 and touch on the divergence we're seeing between the uninsured and insured variable rate mortgages. And what I'm trying to understand here is that both the uninsured and insured portfolios would be stress tested. They both have a similar product structure with adjustable payments. So also then lower equity in the insured portfolio, what's driving the divergence in delinquency rates in those categories?

[William Bonnell, executive]

Nigel, it's Bill. I think you've nailed it. The less equity in the loan typically means more leverage for the household. So when you think of insured mortgages opt in its first-time homebuyers that have perhaps less ability to withstand sudden changes in rates and market values or changes in circumstances and that's really the driver. We also see -- aligned with that, it's pretty correlated between the size of the mortgage and performance too, because the dollar impact of a 400-basis-point increase on a $300,000 mortgage in Quebec is different than on an $800,000 mortgage in a more expensive city. So same interest rate change just doesn't hit the household budget as much and is more easily offset by wage growth and other aspects. Does that help answer your question?

[Nigel D'Souza, analyst]

It does. Just to clarify a little bit finer on that. So it is just geographic mix and sort of tilted more outside of Quebec? And also, are you seeing any other factors like vintages, like are there more recent vintages in insured portfolios that are going to [indiscernible] any other differences there in the majority [indiscernible].

[William Bonnell, executive]

Yes. I'd say, Nigel, that the biggest correlation is less vintages, and maybe we can come back to you on that, but it really is the geography for those factors that I described. And I think in my prepared text, I called out that even after 400-plus basis points of increase in the variable rate mortgages than the uninsured variable rate mortgages, the Quebec borrower -- the delinquency rate is still below the pre-pandemic level. And that's a factor of what we've talked about, about the Quebec households being more resilient with more dual-income families and with the economy being more diversified, but primarily, it's the lower house price has a real impact on the size of the payment shock when interest rates go up. So does that help answer your question?

[Nigel D'Souza, analyst]

It does. That's really helpful. And then if I could switch to ABA Bank. I think there's an increase in the net interest margin for ABA this quarter. I just want to confirm if that's right. And if so, what drove that increase? And also, could you refresh me on what ROE is that business generating currently at ABA?

[Unknown Executive]

So with regard to the margin, just to tell you, the margin has indeed improved and it is a factor of 2 elements, if you want. The first one is our pricing strategy, and we've seen rate decreases on the term deposits. That's the first element. But the first and foremost element has been the deposit mix that has changed amongst the clientele at ABA. So last year, we saw more deposits going into term. And this year, it's the second quarter in a row we're seeing as the economy is taking a longer time to recover to its high levels of pre-pandemic, we've got a few lesser degree of investments in term deposits. We're actually at 71% of our deposits that are into current account and savings accounts. So that's the first element. As to the ROE of that subsidiary, we don't divulge our ROE volume specifically per subsidiary, but I'm sure you can make a guess that it's been a worthwhile investment for us.

[Nigel D'Souza, analyst]

And the reason why I asked that is, a strategic question here. But I'm sure that's a very healthy ROE. So is there any consideration that perhaps if that ROE is near the high end of its potential range too -- does that then reallocate that capital domestically or to grow financial markets or Wealth? How do you think about that business? Or is it something that is not on the table?

[Unknown Executive]

I'll answer, no, it's not on the table. And I'll answer with one element. It's still an extremely young market, population is very young. The second element is only 10% of Cambodians have loans right now. So we've got the opportunity of driving this balance sheet for many years to come, that the demographics are excellent. And the returns on the margins exceed undoubtedly, what we can see domestically. So I'll leave it to that.

[Operator]

The following question is from Mike Rizvanovic from KBW Research.

[Mehmed Rizvanovic, analyst]

I want to go back to Bill on the impaired loan formations on commercial. And what I'm a little bit confused about is, why such a substantial move during the quarter. I don't see anything on the macro side in terms of data that would have suggested anything like this move sequentially based on what we have for Feb, March and April. So in your view, what was the key driver that really drove this big jump sequentially?

[William Bonnell, executive]

Mike, it really goes to what I said. You can call it lumpiness, you can call it multiple idiosyncratic events that just happened at the same time. With a retail portfolio, it's definitely more trends. And even from quarter-to-quarter, you can be pretty confident on the direction and the size of the trend change because there's multiple, multiple small individual accounts. With wholesale, with corporate and commercial, it's just that files happen when they happen for multiple reasons. And as we pointed out, these were different geographies, these were different sectors. And from time to time, they happen within a 3-week or a 6-week period. And other times, they are more evenly spread out. So really just goes down to lumpiness. There's nothing else I'd call out here.

[Mehmed Rizvanovic, analyst]

Okay. So you're confident this is not something to be alarmed about in terms of the direct correlation to your PCL. But what would you say to the premise that some investors may have when they sort of look at these impairments rise so quickly. And some may believe that the PCL is just a matter of time. Like on the accounting side, is there much wiggle room, like is it factual that some banks may just be willing to put that PCL number up earlier than others? I'm not sure if you have a view on that, but, I'd love to hear your opinion on that.

[William Bonnell, executive]

Sure. I would start off with saying that the nature of the portfolio does need to be considered when you're looking at gross impaired loan levels. We talked a bit about retail. In retail, typically, trying to equate impaired loans and stage 3 provisions really depends on how much credit cards you have, because there aren't any impaired loans in credit cards that goes through write-off, and so you can have higher Stage 3 provisions but lower gross impaired loans.

So the nature of the portfolio and business mix is one thing. Second, in looking at the nature of the loan portfolio. The percentage of insured loans does matter. As we pointed out, the delinquencies in insured variable rates have been going up. So over time, I would expect to see more impaired loans that start as insured variable rates. It doesn't mean that the risk content leading into Stage 3 provisions is there, but it does impact an increase in gross impaired loans. And you'll note that in our mortgage portfolio, we've got the highest percentage of insured mortgages.

Second, in the commercial, we had a similar situation where a significant part of our growth coming out of '21 was in the insured multi-residential portfolio. If there is a deterioration and that becomes impaired, again, it will impact the gross impaired loans, but doesn't lead to risk content. And finally, for us, specifically, as we talked on, I think the last 2 or 3 calls, in ABA, with the secured nature, the low LTV nature of it, there has been a significant increase in gross impaired loans, but we do continue to expect the net charge-offs, so the realized loss at the end of the process -- that rate to remain relatively low.

So it's not a one-for-one gross impaired loans versus what will be the Stage 3 provisions or the write-offs even if you get to the very end. It needs to be a little more nuanced based on the portfolio. Does that help, Mehmed?

[Mehmed Rizvanovic, analyst]

Yes, that's super helpful. And just in case I missed it earlier, I believe you did reiterate the roughly 20-basis-point loss ratio, was that for the current year?

[William Bonnell, executive]

Yes. So my specific language, same as last couple of quarters, was for the fiscal year, impaired PCLs between 15% to 25%, and we still expect to end up around the middle of that range. And just on that, I don't want to give you the impression that even after 12 years in the seat, I can forecast precisely, within the second decimal point, what provisions will be. That's not the case. However, we do look -- so far this year, we're below 20. This quarter, it was a lumpy quarter, which I don't expect to happen every quarter or consecutive quarters. It can, but I don't expect it. And the trends that we talked about driving some of the Canadian provisions are coming from those normalization trends and where those normalization trends are the fastest are in areas that we are underweight and where there's the most resilience is areas that we're overweight. So I also need to balance in Credigy and ABA, which aren't perfectly correlated. But as we sit here today, my expectations for the full year should be pretty close to the middle of the range. We'll talk again in August, and I'll update it, but that's what I reaffirmed.

[Operator]

Following question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, analyst]

Okay. I just wanted to maybe just change channels here a little bit. It looks wealth -- if I'm not mistaken, a record earnings quarter, you've been around this $200 million a quarter for the first half of this year, every quarter. Just can I get a sense of how you see this business playing out over the next few quarters? And what you think will help sustain this sort of performance?

[Nancy Paquet, executive]

Yes. Thank you, Sohrab. So this is Nancy. You're right, this is our highest quarter in terms of revenue this quarter. And it's led mostly by fee-based on transactional revenues as you've seen. We also have a growth momentum in terms of clients and assets under management. So our unique positioning with our open architecture -- there's still tons of potential for us in there. We like our diversified business mix. We like our client acquisition. So I think those are the trends that we're going to continue to build on, to grow for the next quarters.

[Sohrab Movahedi, analyst]

So just to be clear, Nancy, it doesn't sound like you're saying I need equity markets to be cooperating with me necessarily.

[Nancy Paquet, executive]

Well, as you know, our business is influenced by the market as well. So definitely, markets are a growth contributor, but the fundamentals are good and the diversified mix of our business will bring us good results no matter where markets go in the long term.

[Sohrab Movahedi, analyst]

Okay. And if I can just ask, Lucie, to maybe talk a little bit about how she sees the second half of the year playing out, both in terms of lending volumes and net interest margin for the P&C segment, I would appreciate that.

[Lucie Blanchet, executive]

Yes. Thank you, Sohrab. When I look at the second half, I think we will have some more pickup in the mortgage business. And I believe we will end the year in the mid-single digit on the mortgage growth. I think our credit card growth will continue to be low double digits, which is a reflection also of the quality of our portfolio and the prudence that we see from consumers, and it's also helpful on the credit side. And we will continue to have also good momentum in personal loans.

[Sohrab Movahedi, analyst]

And do you expect the margins to be trending higher, lower or stable? How do you see that playing out?

[Lucie Blanchet, executive]

Yes. So the margin -- we look at it from the P&C overall business. And this quarter, we've seen more resiliency, the deposit spreads have continued to slightly benefit. And also the loan spreads have improved. So the margin environment on the loan side is positive. But for the next quarter, we may see some pressure on the deposit side as the portfolio renew. We have, let's say, mostly 2-year duration in the term deposit portfolio. And 2 years ago was probably the largest term deposit spread we've had. So it will have an impact and some pressure on the deposit. And also the business mix can play in also with a little more loan growth than deposit growth.

[Operator]

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

[Doug Young, analyst]

I just have a few hopefully quick ones. Bill, to you, on the guidance of mid part of that range implies compared PCLs in the low 20-basis-point range. And I get, I think, some of the comments you've made in the past discussions here. Is there a line of sight, and I know commercial can be lumpier. Is it more line of sight on some commercial stuff you see coming down the pipe? Is it more just a trend out of what you're seeing on the retail side that pushes you to expect the low 20 basis points in Q3, Q4? Is this converted, because I'm just trying to kind of get a sense.

[William Bonnell, executive]

Yes. I think it's the trend really that we've been talking about for, I think, at least 3 or 4 quarters, a normalization trend. As you know, the impact of monetary policy is delayed. So it should be no surprise of when the impact started being seen. We talked, I think, through last year, the second half of last year about what we were seeing in early delinquencies. And now we're seeing those play out in the late-stage delinquencies. And the trends are moving pretty close to what we expected. As I said, commercial and corporate can be lumpy, not wanting to call out any visibility on specific sectors or anything. Because generally, our watch list has been relatively stable in the last quarter or 2. So there's nothing really calling out. I would just say the trends have continued as we expected, albeit, as I said, lumpy quarter in Q2. And for those reasons, just confirming the same guidance I gave last quarter.

[Doug Young, analyst]

Okay. And then ABA, can you update us with the LTV on the portfolio and when the collateral was secured was last updated, I assume that's updated every quarter. But...

[Unknown Executive]

It is and hardly has changed. We're still in the 40s, and it's actually very stable because the underwriting practices have not changed. And when we assess even the GIL LTV, it's actually lower than the average portfolio. So we're very pleased with that.

[Doug Young, analyst]

Okay. And then lastly, you talked a bit about the TEB and some stuff in Europe, just curious of the impact where you can provide what you think the impact would be on GMT or if there's any impact on the GMT as we look forward?

[Marie Gingras, executive]

It's Marie Chantal here. Happy to take that question. So in terms of global minimal tax. As you know, these rules were included in the Bill C-69 that was just announced early May. And we are currently assessing our income tax exposure arising from these rules. We'll be in a better position to comment later in the year. We're expecting some impact, but as always, our intention is to provide more clarity as soon as we have finalized our interpretation of these rules.

[Operator]

[Operator Instructions] the following question is from Paul Holden from CIBC.

[Paul Holden, analyst]

Bill, maybe a quick question for you because I've heard a number of others ask on ABA and sort of the delinquency trends versus provisions. Maybe you can give us an update on collections to date given those low LTVs that have been highlighted on the portfolio?

[William Bonnell, executive]

Paul, thanks. I answered it in the first half. [indiscernible] add anything. The same trends as we talked about, I think, in the last call or the last couple of calls, but year-to-date for those files that have gone through and closed through the workout process, it's around 75% of them have had 0 loss. And as I'll call out as well, you can see in our SFI, I think it's on page 28 in the SFI, where you see write-offs by business segment and it's still under $500,000 a quarter, actually under $250,000 for the last 2 quarters. So the write-offs, the dollar amounts are still pretty small. So seeing that those facts continue as we expected is what gives us the confidence to say, we think that the net charge-off rate will remain relatively low. Does that help?

[Paul Holden, analyst]

That helps very much. Next question is with respect to financial markets see that the average loan balance is there, up 11% year-over-year. That's some pretty good growth. I've heard from others that use of existing lines are relatively low or trending lower. So just wondering how you're generating that 11% growth. Is that coming from existing clients? Or are you actually gaining new customers? And if you are gaining new corporate lending relationships, kind of give us the sense maybe where those are coming from, geographically or by sector?

[Unknown Executive]

Yes. Thanks for the question. It is 11% year-over-year, although it has trended lower sequentially. So it is a very well-diversified book, so very well diversified across sectors. And you're right that the utilization rate has been trending a bit lower, although it is still elevated historically. But because of the opening of capital markets, we're seeing that utilization rate now trending a bit lower in the low 40s and historically, it's in the high 30s. So a lot of new clients on the project finance side definitely, so a lot of new clients in the renewable sectors. But that's really the one major trend I would point out related to that. But otherwise, it is pretty stable across sectors and across geographies.

[Paul Holden, analyst]

Okay. And last one, similar question, I guess, around Credigy, also seeing quite good growth year-over-year and sequentially, are there any kind of common themes there in terms of the types of portfolios Credigy is acquiring, who the sellers of those portfolios are and then maybe that can give us some clues in terms of the outlook and if that strong growth can continue at Credigy?

[Unknown Executive]

Yes. Thanks, Paul. So you're right that Credigy has delivered strong growth, notably in the first quarter. It has been a more normal pace in the second quarter. But for the first half of the year, we've deployed about $1.8 billion, and that's really in high-quality, long-term secured assets. And that's mostly mortgage, solar loans and some life settlements also. When we continue to see -- looking forward opportunities, primarily in secured consumer assets. I mentioned mortgage, there's also home improvement loans, and I mentioned solar. And we like the insurance space also, because it is very uncorrelated with the overall economy. And so we see continued growth there across a balance of both in direct lending and direct portfolio acquisition. And when you look at Credigy, it's really a set of real solid client relationship, and that creates, I think, a solid foundation for growth. And this allows Credigy to really build a repeat customer business, and that means that we can remain competitive without being always highest on price. So does that answer your question, Paul?

[Operator]

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

[Laurent Ferreira, executive]

Well, thank you, operator, and thank you to all employees and shareholders on the call today for your support. Have a great summer.

[Operator]

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