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National Bank of Canada
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Good afternoon, ladies and gentlemen, and welcome to National Bank of Canada's third quarter results conference call. I would now like to turn the meeting over to Mrs. Linda Boulanger, Vice President of Investor Relations. Please go ahead, Mrs. Boulanger.
Thank you, operator. Good afternoon, everyone, and thank you for joining us for our third quarter investor presentation. Presenting to you this afternoon are Louis Vachon, President and CEO; Ghislain Parent, Chief Financial Officer; and Bill Bonnell, Chief Risk Officer. Following our presentation, we will open the call for questions. Also joining us for the Q&A session our Stéphane Achard and Lucie Blanche, Co-Heads of P&C Banking; Martin Gagnon, Head of Wealth Management; Laurent Ferreira and Denis Girouard, Co-Head of Financial Markets; and Jean Dagenais, Senior VP, Finance. Before we begin, I refer you to Slide 2 of our presentation providing National Bank's caution regarding forward-looking statements. With that, let me now turn the call over to Louis Vachon.
[Foreign Language] and thank you, everyone, for joining us. Today, we are pleased to report another quarter of solid results for National Bank. The Canadian economy, economic fundamentals remain strong, providing a favorable backdrop in our core markets. Again, this quarter, our performance was driven by positive momentum in all our businesses, disciplined cost management and strong credit quality. The execution of our transformation continues to translate into significant improvements of our efficiency ratio and positive operating leverage. For Q3, the bank posted a return on equity of 18.6%. We are maintaining strong capital levels with our CET1 ratio increasing to 11.7%, giving us the flexibility to invest in our businesses and return capital to shareholders. Credit quality remains strong across our portfolio, reflecting our prudent approach to lending. The Québec economy continues to be very resilient. GDP has been expanding for 8 months consecutive, the best performance in over 22 years. Year-to-date, job creation in the province of Québec has been -- has seen its best showing since 2007. In July, the employment-to-population ratio for people aged 15 to 64 stood at a record 76.5%, 2 points above the national average and more than 5 points above the U.S. Unemployment rates remain at historical lows, and we are sustaining growth in labor income. In addition, housing affordability remains better than the national average. Looking forward, the outlook in Québec remains favorable with a [ commendative ] monetary policy and fiscal stimulus supporting domestic economy and labor markets.Now let me share some highlights of our business segments. Our P&C segment delivered solid results again this quarter. Our retail and commercial businesses continued to have positive momentum on both sides of the balance sheet. We are managing our costs effectively while at the same time investing in our business to enhance our customer experience. In both Commercial and Personal Banking, we strive to achieve the right balance between volume growth, good margins and credit quality. Looking forward, we will maintain our overweight positions in the province of Québec as well as in secured lending, which we view as favorable in the current economic environment. During Q3, our Wealth Management segment benefited from a solid increase in our retail assets, owing to positive flows and favorable markets. As we execute our organic growth initiatives and remain disciplined on expense management, we are confident that our Wealth Management franchise can deliver double-digit earnings growth throughout the cycle. In Financial Markets, we saw a solid rebound in our global markets franchise from soft quarters in Q2 and a year ago. As mentioned on our last call, we saw activity picking up significantly, particularly in structured products and interest rate derivatives as well as in our securities finance business. We're also seeing the benefits from sustained investments in our platforms. Corporate and investment banking revenues are down this quarter, reflecting lower ECM activity industry-wide. Looking ahead, our pipeline is solid for the remainder of the year, and we are well positioned should primary markets normalize. I would now like to take a moment to provide an update on our international strategy. We have been invested in Credigy in the U.S. for 13 years and in emerging markets now for over 5 years. Looking back, we are very satisfied with the overall performance of our international strategy, which generated strong growth and superior returns. We are particularly proud of Credigy and ABA Bank. Both have greatly exceeded our expectations and we continue to see attractive growth potentials for each platform. As mentioned last quarter, looking forward, we will concentrate our efforts and capital on those 2 activities. At this point in time, our strategy for Credigy remains for disciplined growth as we are replacing assets coming to maturity. For 2020 and beyond, the outlook is very positive.Turning to emerging markets. Let me say a few words on our successes in Cambodia. Our retail bank continues to expand at a fast pace. In the last quarter alone, ABA Bank doubled its earnings from a prior year on the back of impressive loan and deposit growth. Since our initial investment in 2014, the number of employees has grown from 600 to 5,000. The number of branches has moved from 12 to 70. The number of clients went from 60,000 to 500,000. Our market share more than doubled, our profitability increased tenfold, and we generate a return of equity -- on equity of approximately 30%. With respect to other investments, you can expect gradual disposals over time. This quarter, we took a $27 million write-down in Africa primarily driven by the decrease in NSIA Banque's market value since its IPO in 2017. At this point in time, we are very pleased with our investments in Cambodia, and we're not seeking expansion in other countries. In that context, we are maintaining our moratorium on significant additional investments in emerging markets. Turning to capital deployment. Our strategy remains unchanged. Our #1 priority is to maintain strong capital ratios. In the current environment, we are comfortable in letting capital slowly trend upwards over time. Our second priority is to continue to invest in our business to fuel organic growth in our core markets, with the objective of enhancing client experience and generating positive operating leverage. Our third priority 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. As usual, we will also provide an update on our dividend policy next quarter. To conclude, I am pleased with our performance this quarter. Our credit quality is excellent. We have strong capital ratios allowing us to create value for clients and shareholders. Our transformation is progressing well and continues to translate into substantial improvements and efficiency ratios across the bank. In an environment of macroeconomic and geopolitical uncertainties, we are comfortable with our prudent risk positioning. Our objective remains to position the bank to perform well through the complete cycle, and I am pleased with our performance in that regard. In that context, I am confident that we will be in a position to deliver EPS growth within our midterm target range for the current fiscal year. On that, I will now turn the call over to Ghislain.
Thank you, Louis, and good afternoon, everyone. During the third quarter, the bank delivered a solid performance, driven by good business momentum, disciplined cost management and our strong credit quality. Before commenting on efficiency and capital, let me go over the various onetime items of the third quarter. As shown on Page 7, the bank recorded gains on the sale of Fiera shares and the sale of our head office in Montréal. The latter is a step towards the relocation to our new head office in 2023. These gains were mostly offset by: first, an adjustment to the fair value of one of our investments in Africa, as commented on by Louis earlier; second, the provision for lease cancellation of future vacant premises due to the relocation of our bank's head office in 2023; and third, the write-down of obsolete technology as we move forward in the transformation of the bank. These items resulted in a 25 basis point increase to our CET1 ratio, essentially driven by the gain on Fiera's shares. We expect savings of $0.03 to $0.04 per year over the next 2 years, as highlighted in our presentation.Turning to Page 8 on efficiency. Our transformation continues to deliver tangible results, translating into significant improvements to our efficiency ratio. Good momentum in our businesses resulted in solid positive operating leverage this quarter. Expenses were up 3.1% year-over-year and 1.6% quarter-over-quarter. Our consistent expense performance originates from our firm-wide disciplined approach to cost management and from our continued investments in efficiency initiatives. As we are progressing toward our transformation journey, maintaining the right balance between investing in people, customer's experience and technology, while managing our costs prudently, remains the key priority for the bank. Higher expenses for Financial Markets this quarter were mainly driven by increased investments in technology and various growth-related expenses. However, our Financial Market segment remains very performing, as evidenced by its low efficiency ratio of 41.5%. Year-to-date, our bank operating leverage is neutral. With current positive momentum to all segments, we remain focused on delivering positive operating leverage at the bank level for fiscal 2019.Now turning to the capital review on Page 9. Our CET1 ratio increased to 11.7% during the quarter, with strong earnings growth sustaining 41 basis points of internally generated capital over the quarter. Risk-weighted assets increased by $2 billion or 25 basis points primarily driven by solid growth in commercial and corporate loans. As mentioned previously, the sale of Fiera added 25 basis points to our CET1 ratio in Q3, partly offset by remeasurements of pension plan in the context of falling interest rates and the repurchase of 1.5 million common shares. At the end of the quarter, our total capital ratio stood at 16.3% and our ability -- and our liquidity coverage ratio at 154%. We are pleased with our capital and liquidity positions, which we view as prudent at this stage of the cycle. Regarding the accounting and regulatory changes expected for Q1 2020, we expect the implementation of IFRS 16 and the change to the securitization framework to have a combined CET1 impact between 15 and 20 basis points. On this, I'm turning the call over to Bill for the risk review.
[Foreign Language] Ghislain, and good afternoon, everyone. I'll start on Slide 11. Good economic conditions in Québec and the rest of Canada continued to support a fairly benign credit environment, as reflected in strong performance across our portfolio. Provisions on impaired loans totaled $75 million or 20 basis points in the quarter, lower by 3 basis points quarter-over-quarter and by 5 basis points year-over-year. Impaired loan provisions in our domestic businesses declined to 15 basis points or $53 million, which is close to cyclical lows. Our international segment had $22 million of impaired PCLs, mainly driven by Credigy, which continues to meet our performance expectations.In Q3, provisions on performing loans increased by $14 million. This quarter, we adjusted our forward-looking macro outlook to reflect greater uncertainty, and this, along with portfolio growth, were there key drivers of the performing PCL. Total PCLs were stable at 23 basis points or $86 million. And looking ahead, we maintain our fiscal 2019 total PCL target range and expect to be close to the middle of that 20 to 30 basis point range.Turning to Slide 12. Gross impaired loans totaled $674 million or 44 basis points, an increase of 2 basis points from last quarter and flat on a year-on-year basis. There was 1 new impaired formation in the corporate portfolio in the health care sector. In the P&C and Credigy portfolios, impaired formations declined on both a quarter-over-quarter and year-on-year basis.On Slide 13, you'll find details of our retail mortgage and HELOC portfolio. The portfolio remains largely weighted to Québec at 54%, has a modest proportion in GTA and GVA markets, and the proportion of insured mortgages was stable at 40%. I'll conclude now with a few comments. Being conscious of the uncertainties in the macro environment, we are being prudent in our risk/reward discipline and our loan growth targets. We remain very comfortable with the quality of our portfolios and with our geographic and product mix. And good economic conditions in Canada, particularly in Québec, are providing our strong credit performance in providing good opportunities for further prudent growth. With that, I'll turn the call over to the operator for the Q&A.
[Operator Instructions] Our first question is from Meny Grauman with Cormark Securities.
A question on the write-off of the obsolete technology. I'm just wondering if you could give us a little more details, is it a specific project and is it more recent technology investment that's being written down? And then finally, the potential for more of these kinds of write-downs? Or is it a pretty thorough examination of what you have?
Yes, Meny. This is Ghislain, so thank you for the question. As I said earlier with the transformation of the bank, we implement new technologies to replace existing applications and systems. So -- and those old applications are not necessarily fully amortized. So the last time we did such a write-down in IT investments, it was 3 years ago in 2016. So with the current transformation, we think it's normal to review the value of our IT assets every probably 2, 3 years. So we cannot say today if there will be more in the future, but it's likely that in 2, 3 years from now, we will probably review once again the portfolio. And if we have to do so of course, we will do it. But -- and to answer maybe the first part of your question, it's not related to 1 or 2 applications. It's -- I think it covers 15 to 20 applications.
Okay. And then in terms of that other amount, the severance, is it related to a specific area of the bank?
Well, it's -- I would say it's mostly IT people. And we have not done it -- it's important to mention that we have not done it to generate efficiency. Yes. It's essentially we need employees with different skill sets. So it's employees that we have to replace. So the transformation of the bank requires an adjustment in terms of talent, experience and skill set. So for your information, we have 440 -- 450 jobs currently posted internally and externally. So it's more to replace the skill set of some of our employees.
And then I just wanted to ask on the international strategy. The dispositions in Africa, is that a function of just the strength of ABA relative to what you have in Africa? Or is it something you saw on the ground there that makes you want to concentrate on ABA? And kind of just wondering, this focus on Cambodia now, is that something that you -- is that a long-term strategy here? Or do you still reserve the right to kind of look in other areas as you build out international plan?
Meny, it's Louis. I think we stated in my opening statement, we have a relatively small international team, and we don't want to be defocused by too many investments. So we have 2 winners with Credigy in the U.S. and Cambodia, clearly. So for us, given the performance of these assets, we want to focus our time and effort and capital, frankly, on those 2. We've known all along that one of the reasons we did 3 investments was that we weren't sure that we would have all winners but we figured that probably out of the 3, we could have something we could build on strategically, which ultimately that's what occurred in our emerging markets investments. So I think over time, it's normal that if we're not interested in taking majority control, that we would look to dispose and redeploy our time and capital and focus on what we're doing in Cambodia.
Our next question is from Steve Theriault with Eight Capital.
First, maybe starting with another question on international. I think you've got somewhere over $100 million remaining in terms of carrying value on a NSIA investment. Can you just remind us on what assets are there outside of the bank? Just I guess trying to reconcile the what I think looks like a 20% write-down of the stake versus the bank asset itself being down appreciably more than that?
Yes. Good question, Steve. I think either Ghislain or Jean could answer because we have both banking and insurance assets within NSIA. So I think, Ghislain, you have the answer.
Yes. Thank you, Louis. We have invested in what we call NSIA participation, so which is holding. So the holding is comprised of 2 main assets, 1 in insurance and the other 1 in banking. So essentially -- and NSIA Banque is listed on the Ivory Coast Stock Exchange. So essentially, we have written down the value of the bank, not the insurance. So for -- I think that we have $120 million left in that.
CAD 128 million.
CAD 128 million left on that asset in the books.
And the insurance business is private and it's intended to remain that way as far as you know?
Yes.
Yes.
Okay. And then secondly, your main competitor in Québec outside Montréal had a big security issue recently. So a bit sensitive and maybe it's a bit early, but I'm wondering sort of big picture if you expect that this is a large enough event where you might see some benefit on market share outside Montréal or inside Québec generally? Or are you seeing any of that already?
I think it's a bit early on that particular episode. But I think generally, Lucie has some insight as to what's going on in terms of generally client experience or client acquisition, which is not necessarily related to this particular episode.
Yes. So thank you for the question. So our focus is really on organic growth and we've implemented many initiatives since the beginning of this fiscal year to support that, and all these initiatives were implemented before the Desjardins event. So definitely, we've seen good customer acquisition momentum, but we can't really tie it to the recent event.
Our next question is from Mario Mendonca with TD Securities.
Just a follow-up to that question. Was there any need to spend more aggressively now in light of what you learned from the Desjardins episode as you call it? Or have you essentially put in place what you need to make you satisfied?
I think we're satisfied with what we've done. Every time there's an episode like that, globally or locally, we always do a lessons learned exercise, Mario, and see what can be learned from this. And so we move very quickly on that front. And I think we're satisfied with the level of security that we have in place regarding that particular incident.
Okay. Then just quickly to Ghislain, so there's $128 million in book value that's called now that you've written down that portion of NSIA. Would I be correct in suggesting that $40 million of that relates to the bank and the remainder to the insurance business? And I arrive at that just simply by taking the 24% of the market value of the bank.
Yes. Well, after the write-off, it would be $37 million. So 30% for the bank and 70% for the insurance company.
30% and -- okay, so that works out roughly to what I suggested.
Yes.
And then just finally real quickly here, are you seeing any issues with the insurance business that would cause you to revisit that valuation?
Not at this stage, no. I think the driver of the write-down was obviously the decline in market value of the listed shares in the bank subsidiary.
And was it unique to that bank? Or like I guess obviously I don't follow African banks, what happened there? Was it something specific to that bank or just all the African banks?
I think it was both there, Mario. I think the zone was a little bit more under pressure after 2017 and '18. And NSIA Banque had 1 loan issue, which I think impacted the value of the stock. They made 1 loan to a cacao producer that went sour. And I think that may have caused also the decline in the value of the shares.
Okay. And then just one final thing. I'm looking at National's liquidity ratio at 154%, and is the bank just different from your -- from the other peers because I looked around the others and I see numbers like 123%, 122%, 130%. Why would National's be 20 points-plus higher than everyone else? Is there just something different about your bank?
I don't think so. I think we've -- certainly strategically, and I think we've been very consistent on that, Mario. We've been putting a lot of effort and emphasis on growing both sides of the balance sheet. And as you know, that has some positive impact in terms of our -- certainly our perception of our credit agencies because a lot of them were historically comparing our gaps to -- in terms of funding gap compared to some of our peers. So we made a very conscientious effort in the last 3 or 4 years to close that funding gap obviously with our customers, so retail, commercial and corporate, and reduced our presence in the wholesale market. So that's that. Aside from that, we're not -- we've been prudent in terms of risk management. But that number fluctuates from one quarter to the other, and there's nothing particular about that.
But as it stands right now, you don't see yourself reducing your liquidity ratio back to where the group is? You're comfortable with where you are? Is that fair?
Yes. I think we'll probably stay a little bit above our peers. But will we stay at 150%? I don't know. We may decline a little bit. But that's where we're at, and I think we're quite comfortable with it. And as you can tell, it's not impacting our results too negatively.
No, everything's fine, everything's good. I just wanted to -- it just seemed it stood out, that's all.
Our next question is from Robert Sedran with CIBC Capital Markets.
Both Louis and Ghislain talked about investments in the Financial Markets segment, but I noticed the FTEs is up some 11%, both quarter-over-quarter and year-over-year. I'm just wondering if there's some seasonal element to it or if there's something unusual going on or if this is just part of that growth and we should see the noninterest expenses start to grow a little faster as well?
I think Laurent will give some visibility on that.
Sure. Absolutely. So there is seasonality, there's all the students that we hired during the summer that are included in those numbers. So it's going to come down next quarter.
By the way, it's up on a year-over-year basis the same amount, which is why I didn't think it was seasonality. Was just a particularly active year this year is that?
Yes. Absolutely. We made a conscious effort to hire more students this year.
And so when the discussion about investments in the financial market side is had, it's literally talking about technology spend and things that are sort of embedded now in the run rate expenses for the segment. Is that correct?
There's a bit of both. So there are some onetime and some that are going to be -- are included in the run rate. Absolutely. And they're all in line with our growth plans.
Our next question is from Sumit Malhotra with Scotia Capital.
Just start with international. You had given us -- so it's probably for Ghislain on the numbers. You'd given us some disclosure a couple of years ago that summarized the investment and capital that you had put into these businesses. And so just so we're clear, the divestitures that we're talking about obviously we have NSIA that you've mentioned today, you also had Mauritius and Mongolia, are those the 3 businesses that we're talking about? And if I was to say aggregate equity investment in the neighborhood remaining of $200 million, is that the range we should be thinking about?
Yes. Yes, Sumit. This is a good range.
And -- so there's the change in market value that you mentioned for NSIA. What about the other 2? Is there any indications you can give us as to how those have performed? I mean we get the net income number for the aggregate businesses, but are you anticipating a loss on divestiture of these? Or is it too early to tell?
I think we'll take our time in terms of disposing the assets, Sumit. But I think it looks as though market value appears to be slightly above book value for Mongolia, and market value appears to be significantly above book value -- our book value for Mauritius.
Okay. So you're giving us this disclosure today, and frankly, you've mentioned in the past that we were centering around ABA and Credigy, so this is just more efficiently signaling to the divestiture stage.
Yes. That is correct. And we've signaled obviously. I think it's been mentioned, we signaled to our partners there that our intent was to dispose. Now we will be patient in terms of disposing obviously those and other illiquid assets, and there's no rush here. But I think that the intent is quite clear over the midterm. And as we said, I think, we -- if we don't get a gain, some gain in Mongolia and a larger gain in Mauritius, I think we'll be disappointed given what we see right now in terms of performance and valuations.
And then if we move to the buy side of the trade, if I can call it that, when we spoke about -- or we had an update in the fall, you had mentioned that by this summer, you may have the opportunity to acquire the balance of ABA. I was hoping you could give us an update on how and if that is proceeding?
That is fine. We have purchased and we're still waiting for the last part of the story is getting regulatory approval from the Central Bank of Cambodia, which we expect in the next coming weeks.
Okay. So that has -- have you announced that or?
I don't know. I think we were waiting for regulatory approval. I think we need to get the letters before we say anything.
Okay. Just making sure I'm not sleeping on the job here and didn't miss that. Okay. So we'll look for that. Different topic, bringing it back to Canada. And I wanted to talk about your commercial loan growth. It's obviously been an area of strength for the industry as a whole. When I look at National's numbers, and we'll focus on this quarter, but I think it's been a change, it's in the base for a while. Your commercial balances in Canada are up about 7% year-over-year. Very good number but still a number that is below all of your peers that we've heard from so far this quarter. And I wanted to ask, given the fact that you've historically been a bank that's been overly commercial, you're operating in the part of the country that for a few years now has had the strongest economy. Is there something deliberate about your commercial loan growth being below some of the peers in the industry? Or is this just a reflection of the opportunities you're seeing in the market?
There is something -- Sumit, it's Stéphane. There is something deliberate in the sense that we have said over time that we do not want to grow the real estate book faster than we develop the rest of the market. So it's very easy to grow the overall assets to our real estate operations. And as you'll see this quarter again at 8.3% growth of the real estate book, very much in line with the rest of our assets. We strive to develop both sides of the balance sheet. So we don't mind being lower than our peers in the overall asset growth.
Last question is for Louis on your comments on growth rates. And you mentioned that you're comfortable that you'll be in to the targeted range for 2019. Obviously, we're getting closer to 2020 now, and I wanted to see if we could get a head start on how you feel the targets are shaping up for next year's into your business plan, particularly with some of the changes we've seen in the macro backdrop?
Well, given the macro and geopolitical backdrop, I'd rather take the fifth for this quarter. It's a great question for next quarter. I mean there's a lot of moving parts. We're looking at different scenarios. I think I'll hopefully be able to give you a more complete and certainly more intelligent answer at Q4.
I might draw you in a different forum next week. So we'll see if we can expedite that.
You may want to cancel my appearance.
Our next question is from Gabriel Dechaine with National Bank Financial.
I do want to revisit that expense question that Rob was asking earlier, but more on the P&C side of the business. It's been running quite low for a year or more, and I'm just wondering because we've seen some banks talk about stepping up initiative spending and others, most banks actually, pulling back after an extended period of elevated cost inflation. Just wondering where National's outlook is -- or what National's outlook is for expenses growth in that business in the next year?
Yes. Thank you, Gabriel, it's Lucie. We've been quite consistent in managing our expenses and P&C growing in the range of 2% to 3%. So we expect to continue with the same trends over the coming year.
Okay. So steady as she goes. And I assume the transformation plan is underlying that type of outlook? Is that a safe assumption?
Yes, it is. We are going very well in our transformation journey. We're making great progress on the digital front and improving the customer journey. So it's all embedded in the outlook that I just gave.
Great. Then moving over to the wealth business, Martin. I just want to connect some dots here. The rate environment was a tailwind for your business in '17 and '18. Obviously, the story has changed. And this quarter, the NII was flat for the first time in a long time. I'm just wondering, can you maintain positive growth in this business if we see several bank account or rate cuts over the next year or simply rates are -- market rates are subdued?
Thank you, Gabriel. So yes, we're maintaining the same guidance as we've given in the past. Our objective is to do double-digit earnings growth through the cycle. So keep in mind, the last 2 years we've compounded at 22%. So it's a little softer right now because of market conditions that you're well aware of. But the long-term plan is still the same. If the market gives us 4% to 5%, organic growth initiatives of 2% to 3% and positive operating leverage is the long-term recipe for us. The last couple of years we've benefited from interest rate increases and it represents 26% of our revenues. So we did all kinds of initiatives to benefit from that. Right now, we're not -- even though cash is increasing, especially in the cash performer, rates have gone down, they're compensating, and we're flat in net interest income. But we have other ways of achieving the objective, and I'll point you to 13% and 11% growth in AUA and AUM, which points to very solid underlying trends.
Our next question is from Doug Young with Desjardins Capital.
Just going to Slide 17 of your presentation package. Just looking at the expected pretax savings. I just wanted to confirm, is this incremental in that $0.02, $0.04, $0.03? Or if it's not incremental, why would it be going down in fiscal '21? Just wanted some clarification on that.
It's per year. So each year we have -- in this year, it's $0.02. Next year is $0.04. The third year is $0.03.
Okay. So it is incremental. Okay.
Exactly.
I'm a little slow today. Second is just you talked about updating your macro assumptions in what goes into getting your PCLs or allowances for performing loans. And I just noticed on Page 64 in your MD&A in one of the exhibits that goes through the Stage 1, Stage 2, Stage 3 that there is a change in model. And I just -- and it's out of your credit card component. And I just wanted to understand, was there actually change in inputs that go into deriving that? Or is this just part of the change of forward-looking indicators?
Doug, it's Bill. I'll answer your question, and thanks for it. For the slides that you're talking about in the MD&A, I think the -- you will see quarter-to-quarter noise in some of those numbers, some of which are regular updates on IFRS 9 models. I think the one you called out, there were some changes in the credit card models, but I wouldn't read too much into that. The performing PCLs were really driven this quarter by us. There's 2 sides of the view in the economy. Current economy is very, very strong, as you've seen, and I think we quoted during our written remarks, the strong economy is coming through showing up in our impaired loan losses and delinquencies, which are stable or even improving. However, when you look outside, you look at the signals from the bond market and you look at uncertainties in geopolitics, there's a real divergence. And so when we looked at our forward-looking macro assumptions, we thought it prudent to adjust those a little this quarter. And the time is prudent to continue to build allowances for -- now that the times are good and continue the allowances for the eventual change in the cycle. Does that answer your question?
It does. It's just I was -- so the change in models is in -- like you're not putting new inputs into the models. That's not what that is indicating it sounds like?
I see. The chart you're referring to, I think, is on the capital?
No. It's on the PCL. Anyways, we can take it offline. I just wanted to know if there was -- it doesn't sound like there's new input being put into your model...
No new inputs but there would be regular IFRS 9 models, like the capital models have regular updates on the various different aspects of them, and those can generate some noise and probably even more during -- the IFRS 9 models are relatively new. So I would say that there's some noise that you can't really take signals from in some of those charts. But overall, looking at the size of the performing loan allowances, I think that's the real number at the end of the production stream. That's the number that counts.
Our next question is from Nigel D' Souza with Veritas.
If I could refer you to Slide 11 of your investor presentation. I wanted to clarify first, just a point of guidance here, the PCL, total PCL target range of 20 to 30 basis points for F '20, just want to confirm that's your full year PCL target range guidance? Is that right?
That's correct.
Okay. So the question I have as a follow-up to that is I'm wondering why -- or is there a reason why that range hasn't come down maybe to 20 to 25 basis points? And the reason I ask that is because you're running below 25 basis points on that ratio for the first 3 quarters. So to even exceed the 25 basis points for the full year, you probably need fourth quarter PCL ratio to be close to or above 30 basis points, which should be a pretty substantial sequential increase. So are you expecting PCLs to move -- the ratio to move higher in the fourth quarter or maybe through the performing loan losses? Or is there another reason why that range of guidance hasn't come down?
Yes, Nigel. And you might have missed my written remarks. But it's been consistent that we expect to be close to the middle of that range. And that's been the consistent message for the last few quarters as well. So the answer is no, we don't expect the fourth quarter to be significantly higher. I think we're quite comfortable talking about arriving for the fiscal year close to the middle of that range. We're fairly close to it now.
Okay. So that would imply incrementally higher PCLs in the fourth quarter to bring you up to the middle. Would that be fair?
I would say, if we're going back between 23, 24, I'd consider all of those close to the middle of the range as well, Nigel.
Our next question is from Darko Mihelic with RBC Capital Markets.
Just the first question, how many employees do you have in Québec?
[ Christian ]? 11 -- 10,000, 11,000.
There's 25,000 employees all banks, so...
Like 5,000 in Cambodia now.
It must be like 12,000, 13,000.
Yes. 12,000.
Okay. The reason why I asked is -- I mean I'm just trying to get back to the whole expense discussion. And if I look at the compensation expense year-to-date, it's only up 60 basis points, and that's all bank. And that would include -- and I realize that there's a few -- there's fewer employees in P&C. But Louis, in your opening remarks, you talked about the strength of the Québec economy and the unemployment number -- sorry, the employment figures. And I'm just thinking to myself, as I think forward, looking forward, why should we not think about wage inflation hitting -- especially when you will be fighting for talent predominantly in Québec, it's hard for us to get our heads wrapped around why there wouldn't be a bigger expense bump going into 2020. Can you help me understand that mechanic?
Yes. That's a good question. I think we are certainly seeing in some segments, in some specialties, which as you would see, too. So those are the specialties like cybersecurity and digital marketing, which in any markets in any geographies right now are pretty hot. So we see some inflation there. And -- but generally, we're managing that and we're monitoring that very carefully and we're monitoring also our turnover, employee turnover very carefully. So far, Darko, I think we've seen no indication that that is a major problem. You have to remember, we're one of the few private employer left that has a defined benefit plan. And we have -- I think we're very, very attractive as an employer. Remember, our head office is in Montréal. So anybody working in Québec, if you want to gravitate and go up in ranks and do different things, and we're by definition also a very attractive employer. So all these reasons, I think, help us, I think, keep a lid on compensation. But at the same time, are we seeing some wage inflation in some specialties? Absolutely. But net-net, I think, we're being -- continue to be very disciplined on this. But at the same time, I think I want to be very clear, I think we are investing appropriately in our staff and our personnel. We are increasing the budget for training and better expertise and so forth. And so I think we have the right balance between investing for the future and just making sure we're staying disciplined. And remember, Darko, I think you're probably getting fed up to hear us -- the bank say this, but there's a -- a good cost control also means good risk controls. The 2 are equally very, very important, particularly in the late stage of a cycle. If you don't keep a good control of your cost, you run the risk of losing control on the risk side. So I think we're very disciplined on that front, too.
Okay. Fair enough. That's helpful. And I just have 1 weird question for you as well. It requires going to the regulatory supplemental and looking at -- I'm specifically looking at Page 23.
The capital?
Yes. In the capital -- supplemental capital disclosures.
Okay.
And what I'm specifically looking at is the exposure to the U.K. has jumped quite a bit. And in total, it's $30 billion. Most of that is repo. I'm just curious what's happening there because, I mean it's typically sort of gone between $21 billion to $19 billion. It's really jumped a lot in the quarter. Just curious. I mean we're going into Brexit for, let's say, October. So just curious what's going on there? If that's just a market opportunity or is there anything that I should be alerted to there?
I think Laurent has the answer to that.
Sure. We saw opportunities specifically in the repo, securities lending market in our Dublin operations. So a lot of that comes from there.
And that's something that will continue going forward or is that something that's just...
Will continue going forward. We're very flexible when it comes to capital allocation, so when we see opportunity, we move it quickly. When we see the time to retrench, we do the same thing. So if the opportunities are in North America, you might see an increase in North America, followed by a decrease in Europe. So when we allocate capital, specifically in securities business, we do it in a way where we go and optimize the balance sheet.
And this is in no way related to the high liquidity ratio you're running at the bank or is it?
No, no, no.
No. This is our securities finance business. It's not related to liquidity management, Darko. And it's only repos, right?
There's nothing else.
I figure it. I realize it's mostly repo, just very curious in that development.
Our next question is from Sohrab Movahedi with BMO Capital Markets.
I just wanted to maybe a couple of few quickies. Bill, your IFRS 9 model, is it -- does it have any outsized exposure to the Québec economy? Or is it -- sorry, outsized weight to the Québec economy?
I think the impact on the ACLs is driven by the performance in our Québec portfolio given that makes up most of the credit exposures. So I wouldn't say that the models themselves have outsized weight, but our Québec exposure is very, very relevant to the size of the output.
So I just found that -- so then given the favorable outlook for the Québec economy, the addition to the performing loans, how should I think about that? Is that more because of the growth outside of Québec then?
I think, in my comments, I mentioned 2 points. One is the natural impact of portfolio growth, which does generate performing loan PCL. But in this quarter end specifically, we adjusted our forward-looking macro outlook that would impact the entire portfolio to make a -- take into account -- a little more pessimistic to take into account the uncertainties that we see going forward.
But uncertainties that would be specific to Québec?
No, no, no. I'm talking about the uncertainties there -- where you see -- I think, during the last quarter, you had a significant drop in the yield for 30 years the signal, you see increased uncertainty about what the outcome would be from some of the international trade negotiations. Those, although they're not -- might not see the direct tie to Québec, they do certainly impact global financial markets, global economic growth, and that will impact Canadian economy as well.
Okay. And then maybe just on some of the adjusting items that Ghislain kind of had highlighted. Ghislain, would the timing of some of these remeasurements and, call it, headwind, was that just fortuitous that it was around the same quarter that you had the Fiera gain? And was there some control over that? Is that -- was this timed on your part so to speak?
It was a happy coincidence, Sohrab. But in fact, what clearly was related was the fact that we sold our old building and we took the write-downs on all leasings because that's clearly related one to the other. And for the others, I think, clearly, we used the gain to do things that we felt we needed to do eventually, and the fact that we had gains allowed us to do that.
Okay. So just the issue of technology obsolescence, this wasn't an accounting-driven, something outside of your control. This was a degree of management judgment on it. Is that fair?
Yes. To some extent, and we knew we had gains. And as you know, we're well positioned on capital and so we figured that -- and we wouldn't be rewarded anyways for onetime gain, so we decided to make sure, in the spirit of being very conservative, as we are also in credit and everything else, just to do what we had to do right away when we had gains.
Understood. And then just 2 more quick ones. Trading was particularly strong from a trading revenue perspective. I mean we have some data going back at least maybe 10 years. Probably the best quarter in equities and overall going back 10 years. Is this -- do you view this as sustainable?
Sorry. This is Laurent. The growth, yes. So structured products is strong. We've been investing on our platform. And if you go back 10 years, we used to sell locally, Québec, Ontario. Now we sell globally. And so we are selling structured products to all of Canada, U.S. and also Europe, part of Europe. So where we feel comfortable in terms of expertise and managing risk, we feel comfortable with expanding this business. So in terms of growth, obviously it's market related. It's investor sentiment-dependent. So we have good markets. We were very comfortable and with the sustainability of the growth of that business. We also did really well in terms of overall managing balance sheet through securities lending and deploying capital through that. So that's clearly another area that, depending on the opportunities, we feel very good with the growth prospects.
So a little bit related to Darko's question, I guess, the U.K. was part of the opportunity or the Dublin operations would have been part of the opportunity?
100%.
Right. And then I guess lastly, Louis, I mean first quarter, probably in about 3 or 4 that the ROE had got back to that 18% level, you're talking about obviously well-managed capital levels but allowing that to drift higher. Do you have an eye on that ROE or medium-term target range? It's comfortably within that but do you think that's going to trend lower from here?
Listen, we're very happy with the ROE. ROE is obviously way above global standards and above our peers. Now I think you and I have discussed that many times. We don't run the bank on one single number. We're run the bank on the balance of the stakeholders. And so I think it will depend a little bit on a couple of things. One, I told you that we're looking to let the capital drift up a little bit in line with the macroeconomic uncertainties. And also as you know, I think we've disclosed that we're going to have -- we'll make more contribution to the IFRS accounting reality in Q1. So that has to be taken care of also. For the rest, I think it will depend on what happens and in terms of the economy in 2020 and 2021 and see how we go from there. But I think we definitely want to continue to keep a right balance between our stakeholders, with the shareholders, clients and employees. And I think that's been what we've tried to do in the last 12 years, at least. And I think it's working out fine.
Our next question is from Scott Chan with Canaccord.
I just want to go back to Wealth Management and think about the double-digit earnings targets for the cycle. You kind of talked about the fee-based on the revenue side and the net interest income. But what about the transaction and others, Martin. Is there -- I mean it was flat, basically flat quarter-for-quarter and year-over-year. I was wondering if you could just kind of offer some color on that particular revenue item and perhaps an outlook there?
Well, it now represents about 16% of our revenues. It's gone down. And it's hard to say. But even though we did a lot of switch in full-service brokerage from transactional to fee-based, I wouldn't be surprised if it keeps going down. It's I think the nature of where the business is going. This specific quarter, new issues was very quiet industry-wide. So it represents about, I think, under 20% of our transactional revenues at full-service. So it impacted this quarter. But I think we're on a longer downward trend.
That's helpful. And just lastly, just going back on the P&C side. Some of your peers have offered kind of margin guidance in the face of probably a couple of Bank of Canada rate cuts over the next year. Your NIM has been pretty stable over the past year. Is there any guidance you can offer heading into 2020, or things that we should think about?
2020 maybe is slightly [indiscernible] uncertain at this point. So I can talk about Q4 where we expect neutral margin on a sequential basis.
Neutral in Q4 but nothing for 2020 yet?
No.
[Operator Instructions] Our next question is from Mike Rizvanovic from Crédit Suisse.
Just a quick one for me on your residential real estate secured loans. Just noticed that your growth rate looks like it decelerated a little bit in the quarter from where it was last quarter on a year-over-year basis. And that's in contrast to most of your peers. And when I look at your regions, it looks like only Québec accelerated for your portfolio. So I'm just wondering if you could give us a bit of context on why you may have lost a little bit of market share in the quarter and sort of what your outlook is going forward?
Yes. Thank you for the question. It's Lucie. So I would say first that we're quite pleased with our mortgage growth. Through the last 4 quarters, we're very strong. So I'm not worried about the slight decrease that we have in Q3. The market remains good and healthy in Québec, as you know. And compared with peers, we're still well positioned in terms of [indiscernible] growth. So that's for one thing. In terms of region, true, Québec is performing very well. And the important thing is that outside Québec, it's operating in line with the market conditions in Ontario and BC. And what happened is that our internal channels are performing relatively flat compared to last year, which is quite good in the circumstances. I would say that the originations coming from Paradigm Quest are the ones that took a hit in those market. And that's what you see in the numbers.
There are no further questions registered at this time. I would like to turn your meeting back over to you, Mr. Vachon.
Thank you, everyone, and we'll talk to you next quarter. Thank you very much.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.