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National Bank of Canada
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Good afternoon, ladies and gentlemen, and welcome to the National Bank of Canada Third Quarter 2018 Results Conference Call. I would now like to turn the meeting over to Linda Boulanger, please go ahead.
Good afternoon, and welcome to National Bank's Third Quarter 2018 Results Presentation. My name is Linda Boulanger, Vice President Investor Relations. Presenting to you this afternoon are Louis Vachon, President and CEO; Ghislain Parent, Chief Financial Officer; and Bill Bonnell, Chief Risk Officer. Following our presentation, we will open the call for questions. Joining us in the room for the first time are Stéphane Achard and Lucie Blanchet, Co-Heads Personal and Commercial Banking. Also, joining us for the Q&A session are Martin Gagnon, EVP Wealth Management; Denis Girouard, EVP 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.
Thanks, Linda. Good afternoon, everyone, and thank you for joining us today. Earlier today, we reported another very good quarter with adjusted net income of $573 million and earnings per share of $1.53, up 10% from last year. As in the past several quarters, our performance was driven by continued growth in all business segments, effective cost management and strong credit quality. For Q3, the bank delivered robust return on equity of 18.5%. We are carefully managing our capital to maintain strong capital levels. Our CET1 ratio was 11.6% at the end of the quarter, providing us with flexibility to invest in our business and return capital to shareholders. Credit quality remained strong in our overall portfolio, reflecting a sound economy and a prudent approach to lending. We continue to benefit from strong economic conditions in Central Canada, especially in our home products. The unemployment rate remains at historical lows in Québec, and economic growth is at levels that support consumer spending, the building and housing market, and healthy public finances. Now let me share some highlights of our business segments. Our P&C segment delivered strong results this quarter with net income up 6% year-over-year and 10% -- up 10% on a pre-provision, pretax basis. On a sequential basis, P&C earnings are up 16%, demonstrating strong momentum in the business. Our performance was driven by solid volume growth across all our main products, increased margins and continued efficiency improvement. In Personal Banking, the transition of our distribution model is progressing well and we are seeing the tangible benefits of teamwork between advisers and specialists working together to meet and exceed client expectations. In Commercial Banking, we have strong momentum with revenue up double digits. With a vigorous Québec economy, we have invested in our team by adding capacity in our core markets. We are seeing the results with higher growth in loans and deposits. Even with the uncertainty surrounding NAFTA, business confidence in Québec remains high and we are well-positioned to benefit as entrepreneurs invest in growth. In both Personal and Commercial, we strive to achieve the right balance between volume growth, healthy margins and credit quality. Our objective is to position the bank to perform well through the complete economic cycle. Looking forward, we will maintain our overweight position in the province of Québec as well as in secured loans, which we view as favorable in the current economic environment. In parallel, we continue to progress in our transformation with numerous initiatives completed or underway. Among them, we are currently deploying our new online secure portal that will become the single point of entry for our retail clients. The portal offers many new features, such as security enhanced sign-on capabilities, enhanced transaction characterization and a full mobile responsive experience. There is also a unique account aggregation feature that enables clients to have a complete view of their finances across all financial institutions in Canada and the U.S., if they so choose. We're also introducing new digital tools in Commercial Banking, including a mobile point-of-sale solution called Easy Pay, launched during the quarter. We are the first Canadian financial institution to offer merchants the ability to accept contactless payments from smartphones without the need to add a peripheral device or a POS terminal, if you prefer. Turning to Wealth Management, our strong momentum was sustained again in third quarter with record earnings of $130 million, up 19% from last year. Our performance was driven by the positive impact of higher rates on our margins, continued sales momentum and favorable market conditions. Our focus on distribution, our positioning as Canada's largest manager of managers and the diversification on our business model allow us to be very confident in our future growth. Our Financial Markets segment had another strong quarter with earnings up 8% from last year. Our performance was driven by a good growth in all business lines. Corporate Banking perform particularly well as we reap the benefits of focused investments over the past few years. Our consistent performance in Financial Markets reflects our diversified revenue mix, our focus on client-driven activities as well as leading franchises in selected niche. It also reflects our flexible approach to capital allocation, providing us the ability to seize opportunities as markets evolve. Our fourth business segment, U.S. Specialty Finance and International, continues to perform well and remains on track to surpass its annual earnings target. Where Credigy has communicated last quarter, we continue to see a good growth trajectory over time. In the shorter term, we expect a slower pace of growth based on current market conditions. Looking forward, our strategy is for discipline growth at Credigy with deals that meet our objectives, return and our risk parameters. Meanwhile, ABA Bank continues to deliver strong growth with revenues up close to 50%. ABA is increasing its market penetration through both physical branches and efficient mobile sales banking, resulting in rapid growth in both loans and deposits. We are proud to report that our subsidiary was recently named for the fifth conservative year best bank in Cambodia by Euromoney Magazine. Turning now to capital deployment. Our strategy remains the same. Our first priority is to maintain strong capital ratios. Our second is to invest in business growth in our core markets. Our focus continues to be on organic growth initiatives with the objective to enhance our customer experience. Our third priority is to invest, to capture significant efficiencies and generating operating leverage close to 2%. And our fourth is to return capital to our shareholders through sustainable dividend increases and share buybacks. During the third quarter, we repurchased 1.5 million common shares under our new NCIB program. As usual, we will provide an update on our dividend policy next quarter. To wrap up, I'm very pleased with our third quarter results. We delivered strong growth, continued efficiency improvement and ended the period with a very strong capital levels. While being very focused on business growth and building a resilient high-performance bank, we continue to exercise caution and discipline to protect margins and maintain strong credit quality. Before I conclude, I am pleased to announce the appointment of Laurent Ferreira to the position of Executive Vice President and Co-Head Financial Markets, a responsibility that we will share with friend our Denis Girouard, effective November 1 of this year. Laurent is currently Executive Vice President and Managing Director, Derivatives and Equities within Financial Markets. Since joining National Bank nearly 20 years ago, Laurent stood out for his vision, his leadership and his commitment to philanthropic and business initiatives. Laurent will be joining the team on our next quarterly call in December. On that, I'll turn things over to Ghislain. Yes, Ghislain?
Thank you, Louis, and good afternoon, everyone. Sorry. My comments today will focus on efficiency and capital, beginning with Page 7 on the slide deck. Once again, this quarter, we reported strong results underpinned by a very good performance across all segments. During the quarter, we generated solid top line growth while maintaining strict discipline in managing our cost. This resulted in an all-bank operating leverage of 2%, with positive leverage across the business. P&C Banking, Wealth Management and Financial Markets all improved their efficiency ratio year-to-date and delivered strong operating leverage of 3%, 5% and 3%, respectively, during the quarter. Our efficiency ratio stood at 54.4% for the quarter, an improvement of 100 basis points year-over-year.After 9 months, our operating leverage stood at 3.3%, and we are on track to exceed our target of close to 2% for fiscal 2018. Year-to-date, our efficiency ratio is 54.4%, an improvement of 180 basis points year-over-year. These results are the continuation of our strong performance over the past several quarters and reflect the tangible results of efficiency efforts we accelerated 2 years ago, part of our transformation journey. Over that period, we achieved meaningful cost savings and cost transformation, and we continue to invest massively in our bank-wide transformation. We fully expect our new digital solutions and process simplification initiatives to drive customer acquisition, revenue growth and efficiency gain. In the last 2 years, we showed consistency in the ability of all segments to generate positive operating leverage and better efficiency. Looking ahead, we remain confident in our capacity to deliver positive operating leverage, while continuing to invest in the business to enhance customer's experience. Turning to Slide 8 for the capital review. We ended the quarter with a strong CET1 ratio of 11.6%, an improvement of 0.3% over the previous quarter. This was driven largely by strong internal capital generation, which added 42 basis points, partly offset by the buyback of 1.5 million common shares during the quarter and a slight increase in risk-weighted assets. Our total capital ratio stood at 16.7%. On that, I'm turning the call over to Bill for the risk review.
[ Foreign Language ] Ghislain, and good afternoon. Strong underlying economic factors continue to support benign credit conditions during the third quarter and allowed our credit portfolios to deliver solid results. Beginning on Slide 10. Total provisions for credit losses declined to 21 basis points or $76 million due primarily to lower provisions at Credigy. As we've discussed on previous calls, the seasoning and amortization of Credigy's unsecured loan portfolio was expected to lead to lower provisions in the second half of this year and this performance continues to meet these expectations. Loan balances from the Lending Club agreement peaked at the end of last year and declined to about $700 million last quarter. These lower balances combined with portfolio seasoning lead to lower provisions on performing loans and stabilized provisions on nonperforming loans. I would note that Credigy's total PCLs also benefited from a recovery in POCI of $9 million in the quarter due to better-than-expected collections. Provisions on impaired loans, referred to as Stage 3 were $90 million or 25 basis points in the quarter. Provisions in retail lending declined by $2 million quarter-over-quarter, supported by continued low unemployment. Provisions in the commercial sector increased by $11 million quarter-over-quarter, due primarily to 1 loan in the manufacturing segment that became impaired in Q3. The factors that led to a deterioration in this specific loan were not related to any change in trends, in the sector or the region, which remain positive. Provisions on impaired loans at Credigy increased by $3 million and at ABA were stable at $1 million. Wealth Management and Financial Markets had no provisions on impaired loans during the quarter. Excluding Credigy, PCLs on impaired loans remain close to cyclical lows at 17 basis points. Looking forward, we maintain our target range for total PCLs in 2018 at 20 to 30 basis points and expect to be close to the middle of that range. Turning to Slide 11. Gross impaired loans increased to $630 million or 44 basis points in the quarter primarily due to higher formations in Commercial Banking. While commercial informations can be lumpy from quarter-to-quarter, our outlook on commercial credit performance remains positive. Formations also rose at Credigy due to seasoning other unsecured loan portfolio. Formations in retail banking and the other business sectors were in line with previous quarters. On Slide 12, details of our retail mortgage and HELOC portfolio are provided. PCLs of 1 basis point were stable quarter-over-quarter. Insured mortgages accounted for the larger share of the portfolio at 42%, followed by HELOC and uninsured mortgages at 33% and 25%, respectively. The distribution across provinces remain stable with Québec representing 55% of the total. Uninsured mortgages and HELOCs in GTA and GVA represent 9% and 2% of the total portfolio, and had LTVs of 51% and 45%, respectively. And with that, I'll turn the call back to the operator for the Q&A.
[Operator Instructions] The first question is from Steve Theriault from Eight Capital.
Maybe starting with the question on capital driver of the higher CET1 in the quarter. Certainly looks like an absence of RWA growth. Can we just get it little detailed there? It's not clear to me just given that commercial loans are up, market risk is up, what drove the net-net sort of unchanged level of RWAs this quarter?
Yes, Steve, this is Jean Dagenais. The fact is that financial market activities were a bit slower in the end of the quarter in July. So it reduced the usage of capital for securities financing transaction. In addition, the loan growth was also strong in financial market and usually a portion of that is already committed as undrawn. And so it takes less capital even if it goes from undrawn to drawn. So mostly those are the 2 activities.
Okay. So a bit of timing there, it sounds like at least. And then Louis...
Yes, it was 7 bps. Sorry, Steve, there was 7 bps of pension fund, I think, right?
That was favorable. So the amount that you saw on the slide is only 2 basis points, but in fact it's 9 for the growth in risk-weighted assets.
Yes, it was a decline for pension for 7 bps, Steve.
Okay, that make sense. And Louis, while I have you there, are you considering being a little more aggressive with the buyback now you've got the -- you're in sort of the mid-11 range or status quo on that?
Yes. I think that's why we increased -- the answer is yes, Steve. I think, we did 1.5 million because I think we started a bit later in the last quarter. So I think we -- so [ sort of ] this quarter more likely to move toward the 2 million shares per quarter pace, and then we'll take it quarter-per-quarter, but we'll probably going to accelerate this quarter.
Okay, great. Last thing from me, for Denis. Fixed income trading, the lightest we've seen in a couple of years. Can we get a little color on what's driving that? And I'm wondering when I was looking through capital, I wonder if there's any linkage there? I saw something with higher interest rates, specific risk within market risk. So if there is any linkage there I'd love to hear about, too.
Steve, there is no linkage at all with the interest rate level. It's more the activity that is slowing down at the fixed Income. I think, we're a bit lagging what we saw from other peers in the State and in Canada, we were very strong for a few quarters. And right now we just see the client activity is slowing down on that front. But it's nothing -- not unusual for us, especially in the third quarter, we see a bit of seasonality and this is what's happening. But when you look at the overall trading activity year-to-date, we're still a good strong 8.7% growth in the -- it's quite good and there is nothing really that we can read in it right now. It's just that business as usual and we're very pleased with what we're doing at the fixed Income right now.
Was it -- would you disproportionately say, is it provis that were slower? But I think if you guys having a higher concentration there and -- because we're not seeing the same level of decline at some of your peers.
Well, I didn't look at the number that [ good ], but I can say about 38,000 feet level right now. For sure, we saw a blackout in Ontario for a long period of time, for about 2 months with the election and after the election. That slow down quite a lot the issuance and provincial. We may see the same thing right now, Ontario is back in issuance, and we may see province of Québec doing the same in September. Then -- but it's just that business will come back sooner or later. It's just a timing right now, that's it. But, obviously, Ontario was not in the issuance game for at least 2 months. That slow down quite a lot from that front for the last quarter, for sure. And all the activity around also the new issuance because every time that they're coming to the market, there's a lot of secondary trading and client activity, then it's all related.
The next question is from Gabriel Dechaine from National Bank Financial.
First one is actually on the Wealth segment, for Martin. We talked a lot about rate sensitivity in the P&C business. But if I look at the NII line in Wealth, it's up 21% year-to-date, to you they're up only 6%. And you see the margin expansion there has been quite punchy. Just wondering if you can kind of tell -- give us some of the moving pieces there and what you've been doing to yield that result?
Yes, I think, we have all kinds of sources of net interest income in Wealth Management, it's well diversified. I would say that 80% of the increase comes from rates, 20% from volume. So without getting too specifics, we are fully benefiting from the 4 interest rate hikes and that's pretty much the end of the story.
All right. Then Credigy, and -- I guess, we've been anticipating a slowdown as we move further and further away from that lending deal a couple of years ago. And we finally thought this quarter with sequential loans declining and earnings down year-over-year. Just wondering how you're balancing the growth appetite versus the risk management of that business? And what kind of opportunities you're seeing ahead for Credigy to maybe turn this around?
I'll start and then maybe Ghislain can add if there is anything. So I think, we're -- as you said, we're -- as I said in my introducing remarks, Gabriel, we're very happy with the evolution of Credigy, not just in the last 3 years, but over the last 12 years. Credigy in the last 12 years has never generated a negative IRR on any of the portfolios that they've purchased, which is a quite remarkable track record. So in the current environment, we're -- they're out there looking for deals. But we're staying very, very discipline. And the last thing we're going to do -- I'm going to do with any of the business lines, including Credigy, is put undue pressure for them to deploy capital, especially 10 years into an economic expansion. So that will depend on what the opportunities are over the next few quarters. That's why we're being a little bit more prudent and conservative for the next few quarters. That being said, if we take a medium term view of 2, 3 years, we're still highly, highly confident we can continue to grow that franchise and grow the revenue and the bottom line of that business. But in the short term, we just want to be discipline and just want to be very careful where we deploy the capital. As you know, risk premiums are pretty tight across a whole segment of financial assets right now. So you don't want to be forcing anyone to be pushing on a string here from a risk perspective. So that's why we're being a little bit more. Now we are looking at opportunities. I don't know I just don't think, there is a lot of portfolios right now, but we don't know whether they're going to close or not.
If I understand you, you could put on growth if you really wanted to. But it maybe not the market environment that you like right now?
That's essentially it. I think, the team at Credigy is -- we've been looking at portfolios and we won some, we're doing some. And we have as I said to you earlier, I think we're looking -- there is a lot of stuff in the pipeline. But we have very strict hurdles in terms of IRR and risk-adjusted returns. And we're not going to compromise those.
How do you see the loan balance evolving over the next 12 months or so?
Well, that will depend on how successful we are at replacing the -- predominantly the assets of Lending Club, which are maturing. And they're out there. As I said, there is traffic, there's a lot of discussions going on. It will depend whether we can close the deals that -- at the levels we feel make sense or not.
And then the last one for Ghislain or Jean. Quick one here on capital. I believe there is some revisions coming to RWAs for securitization and counterparty credit risk, either Q1 or Q2 next year. Can you give me a sense of how important that's going to be?
Yes, Gabriel. It will be in the Q1 of 2019. And our best estimate for the moment is 25 basis points.
The next question is from Sumit Malhotra from Scotia Capital.
I want to stay in the U.S. International segment and ask about ABA. So you've had earnings flat now for the past 4 quarters at $14 million. This is despite the fact that your loan growth has remained pretty healthy. If I just do accrued revenue margin calculation here and take a look at your total revenue in this business relative to your loans. You do seem to be seeing some pretty significant compression. So just asking for a little bit of helping hand here as to whether this is interest rate driven, competition driven or speaks to maybe high grading of your portfolio and perhaps that's having an impact on loan yields?
I think the main factor, Mario, and again, I'll start, and if -- Sumit, sorry. I think the -- basically what's been going on, as I said, we are very happy with the loan growth, very happy with the deposit growth. No major issues. And I'm looking at -- there's a saying here, I don't think we see any major issues on the margin side. What we have done, though, is that we've -- the team there is open, is in the process of opening 15 new branches over the last 12 months. So what you're seeing on the expense front is the cost, which is very front-loaded, as you know, when you do that of opening 15 new branches. So that's why -- and despite that, I think they're still managing to generate very good returns. And that's why, I think once we were up to 65 branches, I don't expect next year we'll open another 15. We may grow still, but probably at a lower pace. That's why we remain very optimistic about '19 and '20 in terms of the earnings for EVA. Ghislain, anything on special to add on that?
No, I think it's important to mention that year-over-year, our revenues have grown 51% and net income 40%. So those are big numbers. And just as Louis have mentioned, we incurred the expenses at the beginning. And of course, we will get the benefits of the new branches over time.
Yes, and I think to get to the point here, sorry, go ahead.
Sumit, thanks for the -- but also as a reminder, we're having -- we'll have a -- I think the team at ABA will be town in Toronto. So -- in sometime this fall, so Linda will send out invitation, by the way.
Okay. And just to kind of put these 2 together with Credigy and ABA. Since you made this segment for us to see quarterly starting in 2017, obviously the growth rates have been very good. I think, we hear you loud and clear on what's happening with Credigy and maybe that's a comment on where we are in the cycle. But the growth has been outsized, obviously, as you've gotten this segment going. When you put these 2 pieces together now, the branch buildout with ABA, let's call it, the repositioning with the Credigy loan book. Do you think the growth rate in the interim and maybe looking specifically out to 2019, it's going to be more in line with the all-bank level that you target for National, more in that 5 to 10 range? Or is this in your mind still an outsized growth vehicle for the bank?
Our reserve for '19, we'll have to see because that's pretty short time horizon, given -- as I said, I'm very confident and we're very confident on ABA. Credigy, it will depend on market conditions and so forth. That being said, Sumit, you raised a very good point. Fundamentally, we do expect that segment to grow at rates clearly above where we feel the Canadian franchise can grow at. And that's been the case now for ever since we've created the segment and we certainly expect, and that's our expectation and our desire to see that segment grow at a speed that's, obviously, faster than the core franchise in Canada. And that's -- it should be because we're dealing with -- particularly with Cambodia jurisdiction, which is obviously outside of our core jurisdiction. So if we're not generating higher growth and high returns in that jurisdiction, we should not be present in that jurisdiction. So fundamentally that segment over time should grow faster than the core franchise in Canada.
All right. Well, let's maybe talk more about '19 as we -- I know you usually give us some outlook in the Q4 call. So we'll revisit that. Last one for me, and Louis it's probably going to be for you, again, is on the Personal and Commercial operations. I think it's fair to say we certainly as an industry talk a lot more about the operating leverage trends, not only on a full year basis, but from quarter-to-quarter. And your numbers in this segment have been very good over the past year. This is maybe a little bit more philosophical. But I wanted to ask you, when I look at your expense growth in this business, I think the highest number we've seen over the past 4, 5 quarters have been something like 3%. What are the circumstances and under what scenario would you expect expense growth in this segment to be materially higher? I think the largest bank in the group has been consistently growing expenses in this business more like 5%, 6%. And I guess what this question comes to, what is the trade-off in your mind between the investments the bank has to make in areas like security and bringing new customers in relative to that quarter-to-quarter operating leverage trend?
Yes. And another very good question. I think, the -- I think it's -- I think, we are making the investments we feel are necessary. The question will be for '19 and '20 and '21. I think what we have done, that number of 3% I don't think reflects underinvestment in technology, because I said, I think we're making -- I think it reflects the fact that we've been making the investment in technology. But at the same time, rightsizing the physical network and the staff within the physical network. And we've certainly did that, I think, very proactively. And I think it is -- industry trends are very clearly showing that, I think, we were very right to do that. And I think that will -- that trend will continue. So the question is, for us, I think, we've been and we continued to be very focused on cost discipline. We remain very focused and Ricardo and Lucie and Stéphane are very focused on delivering everything we're doing on technology. What could get this -- I don't think we'll move to 6% in terms of growth in terms of the expense on that line. If we move to -- hypothetically to 4% or something like that, that would be for acceleration of some growth initiatives, most likely to be greenfield, new growth -- organic growth initiatives. As you know, there is very little, in our view, acquisition possibilities in Canada in P&C. So I think it's -- we'll be trying new ideas, trying new business models, greenfields, partnering with people, something we've done very well historically. We're expanding existing relationships. So that could be the environment in which we see an increase. But we feel that at that time, we should be in a position to increase even more the revenue growth line and maintain positive operating leverage in that segment. But all things are -- which are -- all stuff we're discussion right now, Sumit, and maybe either in Q1 or Q4 will have a little bit more to talk about on that front.
The next question is from Doug Young from Desjardins Capital Markets.
Just wanted to go back to Wealth Management and think about the earnings growth that you've been generating there. It's up 19% this quarter. If I go back the last 8 quarters, on average it's grown 22%, and I don't know if any other Wealth Management operation that's putting that level of growth up. So it sounds like more recently its interest rate driven. But when we kind of start to think about fiscal '19, is this level of growth sustainable? And what are some of the key drivers going forward, absent rate increases, that are going to give you the type of growth that we're seeing here?
Well, thank you for the question. I think it's a good one. We've enjoyed good market conditions like everybody else. But I think the performance we've had underlines the fact we have a very differentiated business model, we're not vertically integrated like the others where we run an open architecture, we depend on different distribution channels. We have large unique business -- businesses. And for this quarter, for example, where we have a large cash performer business, which benefited from the interest rate increases. So when you look at our Wealth Management business on different angles, it is different in certain -- to a certain extent, it is unique, a bit unique, and it's also very well diversified. So yes, and we're betting on more than 1 horse this quarter, for example, the best performing our National Bank Investments, Private Wealth 1859, and Direct Brokerage, and it was totally different 6 or 12 months ago. So that's in essence where we are, 30% of our revenues are from net interest income. That's probably high in the industry, and it explains the very recent trend. Now, obviously, I don't think that we're planning on delivering this for years to come. The plan -- the long-term plan is more in the double digits, 10%, that's what we want to deliver in the long term. And we plan this always in the same way. If we look at what the market is going to give us and then how much organic growth we need to get on top of this to attain our double-digit earnings growth forecast. And we don't have an efficiency target, ratio target in mind. We manage the operating leverage very closely and that's it .
Helpful. And then just wanted to go back on a few regulatory capital items. If I went to -- if I look at your capital supplement, looks like the defined benefit or the pension plan remeasurement was $93 million. And by my math, that's 13 points. But I just want to clarify the impact in the CET1 because I think it was mentioned to be 7 points. Maybe I'm missing something, and I can go off-line if it's easier on that one, but...
No, it was 7 points. There is a few moving parts when you just don't just take this portion. At one point, it doesn't add anything when you are in a surplus -- you're maintaining a surplus, it doesn't add anything to capital. So when you go from a deficit, then you go back to a surplus, then you have some benefit. But at one point, it doesn't add to capital. So it was 7 point in the quarter.
Okay. So that's net of other kind of items?
Yes.
And then your liquidity coverage ratio, 147%, I mean, was up from, I think, 137% last quarter. I mean, a significant jump. I mean, it's significantly above where you would need to be. And I would imagine there's a trade-off there in terms of the impact somewhere else, such as NIMs or whatnot. But is there a rationale? Is this more of the conservative stance, Louis, that you're talking about? Or is there just some other onetime items or just -- if you can flush out why the increase?
Yes, go ahead, Ghislain.
Yes. Well, good question. This is Ghislain. Our -- of course, our position is very high this quarter. It's unusual. And we essentially pre-funded because of good market conditions, especially, in Europe. So we have decided to pre-fund it. But this ratio should go back around the 130% mark in the coming quarters. So it's really unusual, but it was to take benefit of some market opportunity.
The next question is from Scott Chan from Canaccord Genuity.
I just want to go back to Wealth Management. And it sounds like you're a lot less equity market dependent than peers. Is that a fair statement? If we had a significant decline in equity markets or pull back, will your Wealth Management operations get impacted?
So I don't know what's the exposure of others to equity. What we look at is a balanced portfolio. And we are obviously exposed to a balance portfolio. 59% of our revenues are fee based. So directly tied to the performance of this balanced portfolio, which probably for national bank is less exposed to equities than others, because in Québec, where there is more fixed income than in Western Canada, typically in retail portfolio. So my hunch is you're probably right, but I don't have any data to prove it. And I can tell you that roughly speaking, if the market goes down by 1%, if this balance portfolio goes down by 1%, it would affect our revenues by about 0.5%.
Okay. That's helpful. And maybe just on Credigy. I appreciate the guidance on the declining credit in the back half of this year. But looking into perhaps '19 or early '19, how do we think about what's your current portfolio and potentially the impacts on credit?
The impact on credit quite clearly, I think, what we've seen is a continuing decline. And I think we've been forecasting that now for a number of quarters. A continuing decline of the unsecured portfolio of Lending Club. And so that line should probably continue to decline slowly. We've been approached by other FinTech to do deals. We may do some, but they're unlikely to be at the same size as a Lending Club. So that line of unsecured debt should probably continue to decline. At what speed is, I think, is the question, we'll be in a better position to answer next quarter, if you want. But as I said earlier, we're -- there is a lot of discussions. They're looking at a lot of portfolios. It'll depend on -- and they are having a lot of discussions -- strategic discussions with many parties. It'll depend ultimately on how many deals they can close this quarter and in Q1. So we'll update you as we move forward on the next 2 quarters.
The next question is from Sohrab Movahedi from BMO Capital Markets.
Louis, you had mentioned, I think, at the Investor Day, that ABA may require some additional investments, capital deployment. Is some of this branch building? And what have you -- requiring you to put some more money into Cambodia?
No, it's funded from operations. The growing balance sheet is requiring some additional capital, because although they generate very good ROE, their rate of growth is a bit higher than our ROE. But there's not a lot for us to put in additional. I don't know -- sorry, I'm looking at Jean here.
No, we haven't put that much more money.
No, it's not a drag on capital, right now, Sohrab.
But do you expect it will be? Like, it's just to kind of get a mark-to-market, so to speak, on what you had said previously about maybe needing to put some more money to support the growth?
No, the only thing that -- not for growth. I think, as you know, we own 90%. So there is one of the founding shareholders still there for 10%. They may decide to sell it back to us. But if that occurs, I think that's going to be still a relatively small hit on capital. So nothing that's going to change. Sohrab, nothing that's going to really impact our capital policy for '19, for instance, or '19 -- 2020.
Understood. And then as the assets there grow, I just forget, is that on -- does that come on at a much higher RWA to asset density?
It is mostly on a standardized approach. So it will...
So it is mostly on a standardized approach?
Yes. It is a lot of retail, though, but it's standardized.
It's mostly retail.
Okay. And then really, Louis, one last thing. I mean, you have talked about this before. I -- it's always good to kind of get an update, you've talked about being late cycle, the bank being disciplined and selective in where the growth is coming, the types of margins and underwriting standards that you're sticking to. Obviously, a quarter has gone by, a couple of quarters have gone by since we started talking about this. How much longer do you think the cycle can go without you participating?
I have no idea.
I mean, like, will there be a point in time, like -- I guess, what I'm trying to figure out is, how much growth are you forgoing right now?
Yes, I think we're just being disciplined. So let me just be clear, we're being -- we're not in a risk avoidance mode. We're in a risk management mode. So we're still taking risk. We're just being selective about it. And we haven't stopped taking risk, as you can see. That being said, as I said earlier, I -- we're very, very careful not pushing business lines to deploy capital at all cost, because that's the type of behavior that either through organic or through acquisitions. And that's the type of environment right now that -- and as I said, we're not forecasting a recession. We have no -- we're not under any illusion that we'll be able to forecast the recession. All we know is that, at this stage, we just want to be a bit more prudent. And so when we do grow, we want to make sure we get the right margins. And we feel that we're within our risk box from a risk standpoint. So we have not changed. We haven't shrunk our risk appetite or anything like that. We're just being a little bit extra careful. And we just want to make sure that our thresholds and our risk procedures are respected as we deploy capital, again, across all business lines, whether it be P&C, Credigy, ABA or capital markets.
And in P&C, in particular, in Québec, I mean, I think the competition is talking about or has been delivering double-digit commercial loan growth. From my conversation, some have talked about kind of Québec being a bit of a fertile ground for that kind of growth. Are you seeing irrational behavior from others?
On commercial, no. I think, we -- if you have microscopic market share, it's pretty easy to show them double-digit growth. And some of our competitors have ignored Québec for the last 40 years. So when you have very small market share, it's easy to show double-digit growth. But I think the market is competitive. But Stéphane, anything else to add on that?
Yes, what we're seeing a bit as people are trying to land deals is a bit on the pricing side where it's getting a bit more competitive. And that's why, we will at times pass on decent opportunities that the margins are not there. So you'll see the loan growth has not been done at the expense of the margins.
[Operator Instructions] The next question is from Nigel D'Souza from Veritas.
I had a follow-up question on your Credigy book. And I wanted to point you to Page 26 in your supplement. I want to discuss your Stage 1 and 2 and 3 provisions. So you mentioned earlier that the seasoning of the portfolio coupled with lower balances should lead to improved credit performance in the second half of this year. And what I wanted to get a better grasp on is, we're seeing in the Stage 3 side, PCLs are rising or they were higher in Q3 along with formations for gross impaired loans. But we're seeing reversals on the performing side for Stage 1 and 2. So could you kind of just give us color on what's driving the benefit on the performing side? And why we're not seeing that benefit also occur on the impaired side?
Great questions for Bill. Mr. Bonnell, over to you.
Sure, Nigel. Thanks for the question. And I'll walk you through a little bit about the portfolio, how the portfolio passes through time in an IFRS 9 world. So early on as the unsecured loan portfolio was growing, you should expect to see an increase in Stage 1 and Stage 2 provisions, little in Stage 3. As you -- as seasoning occurs -- time passes and seasoning occurs you would expect to see Stage 3 and impairs moving up. And then later, as in the sector and the part of the phase that we're in now, with seasoning and paydown of loans, you would see lower Stage 1 and 2 provisions and more of a stability and stabilization of the Stage 3 and impaired. So Stage 3 won't decline as early or as quickly as the Stage 1 and 2. And it's following the expectations that -- these expectations that we communicated from the beginning of the year and it's happening as we have forecasted. A couple of points though, this quarter, as I mentioned in my notes, there was a benefit on the total provisions from $9 million POCI. And when you look quarter-over-quarter between Q2 and Q3, you'll see, I think, in that same slide on the sub pack, there was $15 million disposal of the loan portfolio unrelated to the Lending Club portfolio, which did reduce the Stage 3 impairments. So quarter-over-quarter, it looks like a little bit higher increase than it would be in reality. Does that answer your question, Nigel?
It does. And just so I have understanding of going forward. Does that mean that we should expect the reversals on the Stage 1 and 2 side to also kind of, I guess, tempora and would be lower going forward, while Stage 3 PCLs remain roughly flat, is that fair?
I think in the very short term, you could see a continuation of the trend. I think, looking out into 2019, we'll wait until Q4 to give you some guidance.
It'll depend on what kind of new portfolios we put on there, Nigel. So if we don't put any new portfolios, I think, that trend will continue. If we put on new portfolios, then it may change the trends.
There are no further questions registered at this time. I will now return the meeting back over to you, Mr. Vachon.
Thank you, everyone. So thanks for your time and we'll talk to you for the Q4 conference call. Thank you very much.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.