National Bank of Canada

TSX:NA

Earnings Call Transcript 2021-Q3

[Operator]

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

[Linda Boulanger, Senior Vice President of Investor Relations]

Thank you, operator. Good afternoon, everyone, and welcome to our third quarter presentation. Presenting this afternoon are Louis Vachon, President and CEO; Bill Bonnell, Chief Risk Officer; and Ghislain Parent, Chief Financial Officer. Also joining us for the Q&A session are Laurent Ferreira, Chief Operating Officer; Stephane Achard and Lucie Blanchet, Co-Head of P&C Banking; Martin Gagnon, Head of Wealth Management; Denis Girouard, Head of Financial Markets; and Jean Dagenais, Senior VP, Finance. Before we begin, I refer you to Slide 2 of our presentation providing National Bank's caution regarding forward-looking statements. With that, let me now turn the call over to Louis Vachon.

[Louis Vachon, President, CEO & Director]

[Foreign Language] Linda, and good afternoon, everyone. Before we dive into our quarterly presentation, I'd like to say a few words about my upcoming retirement from the bank as this is my last quarterly conference call. It's been an incredible ride. And after 29 years with the bank and nearly 15 as CEO, the time has come for me to move on. I want to express my sincere thanks and appreciation to all my colleagues. Our 26,000 employees have all contributed to building a strong and agile bank. I also wish to thank our stakeholders for their support throughout my tenure, namely our customers, community partners, shareholders and the broader financial community. I am moving on with a lot of optimism for the bank, knowing that it is in very good hands. I have great confidence in the bank's future under the leadership of Laurent Ferreira, supported by a stellar executive team and a strong culture of adaptability and collaboration. With that, let's take a look at our results. So the bank saw the momentum through the first half of 2021 is carrying over in the second half. For the third quarter, the bank's pretax pre-provision earnings were up 15% year-over-year, and EPS came in at $2.36. We generated strong organic growth and an industry-leading ROE, while maintaining high capital levels and prudent reserves. I am proud of our performance, which speaks to the strength of our franchise. Our constructive view on the economy -- on the economic recovery remains intact. The positive macro trends from the first half of the year continue to prevail, and long-term fundamentals in Canada are strong. We have one of the highest vaccination rate in the world right now. And as vaccination increase, restrictions ease. The same goes for our home province. Quebec is well positioned given the diversification of its economy, the government's fiscal flexibility and the resilience of its households. The overall situation remains nonetheless complex. The impact of variants among other factors, continues to make its path difficult to predict. In this context, we remain optimistic but also prudent. Our credit quality is strong and our portfolios have performed well since the beginning of the pandemic. Given the continued improvement in economic and market indicators, we have released $43 million in reserves this quarter. In terms of capital deployment, we are staying the course. Our priority is to maintain strong capital ratios, allowing us to support clients and generate asset growth. Once regulation restrictions are lifted, we will look to accelerate capital returns to shareholders. Our priority is increasing our dividend as our payout ratio has fallen below our target range of 40% to 50%. Turning now to our business segments. In P&C, pretax pre-provision earnings were up 18% from last year, driven by strong volume growth on both sides of the balance sheet, partly offset by lower margins. Our mortgage business remained strong with volume up 11% year-over-year. On the commercial side, loan growth was strong at 14%. We continue to be active in targeted segments in commercial real estate. We're also seeing a broad-based pickup across other commercial lending segments. Solid momentum in client activity across the franchise also led to growth in other income of 12% year-over-year. Wealth Management delivered an excellent quarter, with pretax pre-provision earnings up 29% from last year. Year-over-year, assets under administration were up 26% and assets under management were up 30%, with the stronger growth in mutual fund assets among Canadian banks. Our performance in Wealth Management was driven by favorable market conditions and strong organic growth across our distribution channels. We're also seeing tangible results from the collaborative model deployed a few quarters ago between our retail and wealth networks. Earlier this week, National Bank Direct Brokerage announced the launch of the most competitive online brokerage fee structure in the Canadian market. NBDB will be the only direct brokerage firm affiliated with the Canadian Bank with $0 commission on online trades on Canadian and U.S. stocks and ETFs. The self-directed investing sector is constantly evolving, and this is a great example of our ability to adapt and innovate for the benefit of clients and investors across the country. Our Financial Markets franchise reported solid results this quarter. Corporate and Investment Banking performed well with revenues up 20% year-over-year in the context of favorable markets. This is a good testimony of the breadth and strength of our pan-Canadian commercial -- sorry, Corporate and Investment Banking franchise today. Looking at global markets, we continue to benefit from favorable market conditions in niche sectors like structured products, while trading activity is continuing to normalize. Year-over-year -- year-to-date, sorry, financial markets have delivered a 7% revenue growth compared to last year. Given the exceptional results achieved in 2020, this year's performance truly demonstrates the benefit of our diversified model and the resilience of our franchise. ABA Bank had a strong quarter with revenues up 25% year-over-year. Loans and deposits were up 29% and 34%, respectively. ABA was once again named the Best Retail Bank in Cambodia by Asian Banking & Finance. While Cambodia has been in the first wave of COVID since April, community transmission is slowing down and close to 80% of adults have been vaccinated. As a result, some sectors of the economy are still suffering, namely tourism, while others are benefiting from strong export growth. The outlook for ABA remains very favorable in the context of an evolving sanitary situation. Credigy delivered another strong quarter, driven by portfolio performance, balance sheet growth and an improving economic environment. Excluding the impact of FX, average assets were up and investment volumes were strong. The business has a robust pipeline and sees a healthy mix of opportunities ahead to provide liquidity through financing and to acquire newly originated consumer loans. In July, we entered into an agreement to increase our equity position in Flinks Technology from 26% to 80%. Flinks is a leading fintech specialized in financial data aggregation and distribution. We initially invested in Flinks upon its founding in 2018 through our fintech venture capital arm, NAventures. Since then, we've gotten to know the business and its founders, and we really like what they bring to the table. This investment allows us to tap into the North American fintech ecosystem. It strategically positions us in a growth market to continue to enhance customer experience and benefit from future technology-driven developments. In closing, our strong performance in the quarter and fiscal year-to-date, once again speaks to the strategic choices we have made over the years, our earnings diversification and the strength and adaptability of our franchise. As the economy rebounds, the bank is well positioned to continue to grow and deliver solid returns. We have an incredible team of over 26,000 employees, who are all contributing to building a diversified, resilient and agile bank that puts people first. I have great confidence in the bank's future and long-term success. With that, I will now turn the call over to Mr. Bonnell.

[William Bonnell]

[Foreign Language] Louis, and good afternoon, everyone. I'll begin on Slide 7. Total provisions for credit losses were negative $43 million in the quarter. The net release was driven by 3 factors: First, impaired provisions declined to just $34 million or 8 basis points, which is almost 50% lower than last quarter. Impaired provisions in financial markets were partially offset by repayments in Commercial Banking. Retail portfolios continue to benefit from low insolvency rates and high levels of liquidity. And impaired provisions remained at low levels in our international portfolios. The second factor was a $36 million benefit from write-ups of several POCI portfolios held by Credigy. The actual collections performance in those portfolios was significantly better than what had been forecast, and this was reflected as a net benefit through PCL during the quarter. The third factor was the release of $41 million or 9 basis points from our allowance on performing loans. This compares to a $62 million or 15 basis point performing release in the second quarter. The drivers this quarter were positive credit migration, improvements in economic and market indicators, partially offset by loan growth. Given the very strong credit performance again this quarter, we've revised our target for full year impaired provisions to below 15 basis points. On Slide 8, we highlight the movements in our allowances for credit losses. Total allowances declined by 5% in the quarter. At more than $1.2 billion, they remain more than 60% higher than our pre-pandemic level. We believe it remains prudent to keep these strong reserve levels given continued uncertainties in the future path of the recovery. Our performing allowance declined by 4% this quarter to $938 million. Even after this small release, our performing allowance remains just 11% below its peak and provides prudent coverage of our credit portfolios. Slide 9 provides several coverage metrics that demonstrate the adequacy of our allowances with our performing ACLs now representing 3.8x coverage of impaired provisions, and our total allowances provide 6.6x coverage of net charge-offs and represent 77 basis points of total loans. Turning to Slide 10. Strong credit performance is also evidenced in the decline of our gross impaired loans to $699 million or 39 basis points. I'll point out that this is the lowest GIL ratio we've had in several years. Formations remain low across the portfolio with 1 new formation in financial markets, net repayments in Commercial Banking and continued low formations in retail banking and international. On Slide 11, details of our retail mortgage and HELOC portfolio are presented. Credit performance in the portfolio continued to be strong and the geographic and product mix remained stable. Quebec represents 54%, and insured mortgages represent 34% of the portfolio. Additional details of our credit portfolios and market risks are presented in the appendices. In conclusion, we are pleased with the performance of our loan portfolios. Positive credit trends continued during the third quarter, generating new cyclical lows and impaired provisions. We are cautiously optimistic about the continuing economic recovery. However, we recognize that significant uncertainties remain on the path forward. In this context, we remain very comfortable with the positioning of our portfolios across geographies, sectors and products and with our prudent approach to provisioning. I'll now turn the call over to Ghislain.

[Ghislain Parent, CFO & Senior Executive VP of Finance]

Thank you, Bill, and good afternoon, everyone. Turning to Page 13. In the third quarter, revenue was up 14% on a year-over-year basis, reflecting a strong performance across the bank. We posted an efficiency ratio of 52.8% in the third quarter, maintaining a balanced approach between growth, investment and cost management. As mentioned on our last call, expense growth this quarter was impacted by the combined effect of higher variable compensation related to our strong performance this year and the lower variable comp expense recorded in Q3 last year. Expenses other than variable compensation were up 3% year-over-year, reflecting prudent cost management. We are very pleased with our performance year-to-date. We achieved a superior revenue growth, fueled by the momentum across our businesses. PTPP was up 14% for the 9-month period and we delivered positive operating leverage of approximately 2% over the same period. Before turning to capital, let me say a few words on the bank's sensitivity to interest rates. As mentioned during our last call, we have broadened the scope of our net interest income sensitivity disclosure, which now reflects the sensitivity from client deposits across P&C and Wealth Management. The disclosure is presented on Page 31 of our report to shareholders, and shows that the bank is well positioned with regards to interest rate variations. It also highlights the bank's prudent approach to managing interest rates. It is important to note that the bank sensitivity to interest rates is dynamic and will vary from time to time as the team manages interest rate volatility. As an example, earlier in the year, we took actions to mitigate some of the volatility in interest rates, allowing us to stabilize net interest income. Now turning to capital on Page 14. The bank ended the third quarter in a strong position with a high CET1 of 12.2%, above average risk-weighted asset growth, industry-leading ROE and significant credit reserves. Net income generation added 56 basis points to our ratio, reflecting a strong underlying business performance and our strong credit performance helped as well. However, momentum in risk-weighted asset growth continues. The expansion of our book size represents 45 basis points of CET1 this quarter, excluding the impact of foreign exchange. In particular, good pickup across commercial lending and client-driven activity in derivatives contributed to above average risk-weighted asset growth. Favorable credit migration in retail and nonretail portfolios freed up 9 basis points of CET1 this quarter, while the unwinding of the regulatory market risk relief substracted 12 basis points. For the fourth quarter, we estimate that the acquisition of Flinks Technology will reduce the CET1 by approximately 10 basis points. Now turning to Page 15. Our liquidity ratios are strong with LCR ratio of 154% and a net stable funding ratio of 123%. Our total capital ratio stands at 15.8%. This quarter, the bank delivered an excellent performance on all fronts. All businesses performed well. We maintained strong capital levels while generating strong organic growth. Our return on equity exceeded 21%, and our credit position is excellent. The bank enters the new economic cycle from a position of strength. Before we end the call, I have to take a moment to thank Louis for his inspiring leadership of the bank over the last nearly 15 years. Louis, you leave a strong legacy behind, one, we are all very proud to carry on. On behalf of the entire team, it has been a real honor and a privilege to work alongside you all these years. On that, I'll turn the call over to the operator for a Q&A session.

[Operator]

[Operator Instructions] Our first question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

Congrats, Louis. Just have a question on your decision to quote $0 commissions. What kind of prompted the decision? Was it kind of a long, I guess, case file? Or is it the pandemic and retail acceleration, maybe facilitate that? And the second part of the question is just on financials, when we look at the modeling or other income, is it in security brokerage commissions and does it flow through anywhere else? So I'm just trying to see what the revenue impact would be and where to find it.

[Louis Vachon, President, CEO & Director]

Sure, thanks for the comment. Scott, Mr. Gagnon has been keen to answer that question. So go ahead.

[Martin Gagnon, Senior EVP of Wealth Management, Co]

All right. Thank you. So let me take you through the rationale. First of all, in Wealth Management, we've embraced a differentiated and innovative strategy for a while now. And examples of this include being the only bank without its asset management unit embracing open architecture and even National Bank independent network being the only Canadian bank supporting independent brokers and portfolio managers in Canada. So this initiative is just a continuation of this same differentiated approach. I need to remind you that 5 years ago, in 2016, we started -- we were the first to offer free trading of ETFs, and that's when Robinhood was just starting. Since then, we've worked with our colleagues internally, we fine-tuned our processes, we improved our pricing, essentially getting ready for free transactions. So this is not a brain cramp that happened this summer. We've been getting ready for this for many years, and we were recently at $0.95, which is pretty close to $0. With this announcement, we're putting a relatively small amount of revenues at risk. As you said, some people identified the bank's securities brokerage commission, which is $60 million this quarter. This has many things in it, but I'll only say that we're putting a very small fraction of this with our new pricing at risk. And the reason is twofold. First of all, yes, we do have a relatively small market share in this business in Canada, especially compared to our full-service brokerage unit, which is much bigger. But most importantly, we've been constantly reducing the percentage of the revenues of direct brokerage coming from transactions over the years in preparation for this, and it has become fairly small. So the objective is very simple. It's to increase our client base. We know exactly how many clients we need to have to make up the loss in revenues. And we currently estimate that we will achieve this as revenue accretion in fiscal 2022. And remember, gaining just a few percentage points in market share could be very significant for us in relative terms. And if you look in the U.S., there's been significant adoption of free transaction. So it's very good news for investors. Louis said people first. We also want to say investor first. There's no hidden agenda here. We're really happy to provide the standard bank offering that had fintech pricing plus all the added benefit of real quotes, real-time quotes, all the registered accounts and everything. And also, remember, we ranked #1 in J.D. Powers for Investor Satisfaction this year. So we do have the service offering that comes with it, and that's why the timing is good. So this is the result of 5 years of planning, investment in our platform. We're very proud of this achievement. And we will continue down this path of disrupting the industry if it improves customer experience.

[Operator]

The next question is from Doug Young from Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

In the commercial loan growth, 14%, hoping you can dive a little bit more into what some of the drivers are. And I can see some of the sectors where you've shown some more expansion. Just wondering, what's been driving the growth? And at the same time, it seems like a lot of your competitors are obviously focused on driving commercial loan growth in Canada, in particular. I'm just curious as to the competitive environment out there? And how -- like how are you generating this level of growth?

[Louis Vachon, President, CEO & Director]

Stephane, over to you.

[Stephane Achard]

Yes. Doug, so essentially a couple of things. For one, the Quebec economy was doing very well before the pandemic, and it's rebounding probably better than the other provinces, and that's our forte. The second element you've seen are our numbers in real estate, our growth in real estate, and we've said in the previous quarters, there is plenty of opportunities and demand for affordable housing. We're focusing on mid-rise, low-rise insured real estate, and that represents about 80% of our growth in mortgage real estate. And the other element you've seen it as well in the latter part of Q3, we've seen a strong rebound in other sectors of the non-real estate sectors and very diversified finance, manufacturing, wholesale trade and others are picking up quite strongly, mostly due to M&A activity, business transfers. Drawings on line of credits are still remaining at the same level. So there's money in the bank there when the economy picks up even further.

[Doug Young, Diversified Financials and Insurance Analyst]

And so is disproportionate of the growth out of Quebec? Is that -- and when you talk about unused lines of credit, like where would your utilization be right now relative to what it was pre-COVID?

[Stephane Achard]

So I'd say utilization is approximately, I'd say, 20% below what it was before COVID. And it's pretty typical across the market from what we can see. And so -- and because of obviously the high level of liquidities in Canadian businesses as we speak.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then just -- sorry, the other -- just to clarify, like most of the growth you're seeing is out of Quebec. Can you maybe quantify how much was Quebec or how much is outside the Quebec?

[Stephane Achard]

So basically, the growth outside of Quebec is higher than within Quebec, and -- but it's not only real estate, it's also our specialty business being ag, being tech and others.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then just second on ABA. I mean, I think, Louis, you talked a while back about maybe seeing a bit of a slowdown. I mean, we've seen anything, but I mean earnings are up -- pretax, pre-provision earnings are up 41% year-over-year, 13% quarter-over-quarter. So -- and there is some ebbs and flows related to COVID. I mean is this level of growth sustainable? Is this level of profitability sustainable? Can you maybe give a little bit of color of what you're seeing in terms of an outlook with that investment?

[Louis Vachon, President, CEO & Director]

I think the outlook for short, mid- and long term remains extremely favorable for ABA, given the strength of the platform, the combination of strong physical network and very good digital offering and lastly, on -- given the long-term potential of growth in Southeast Asia and in Cambodia particularly. So I think we're well positioned there for double-digit growth over multiple time horizons. From quarter-to-quarter, there's -- the COVID situation is a bit of an unknown. The impact so far has been less than what we had prudently anticipated. But it's quite clear that the franchise has gained strength throughout the pandemic because of its very strong digital offering. And the fact also that they managed to stay open even when portions of Phnom Penh were closed, they did manage to keep their physical stores open. So no, I think the future on all-time horizon looks very positive for that asset.

[Doug Young, Diversified Financials and Insurance Analyst]

And if I may, just one last one. Bill, I mean you provided guidance for impaired PCLs for fiscal '21. Do you care to provide any level of guidance or how you see things unfolding for fiscal '22?

[William Bonnell]

Thanks for the question, Doug. I think we have a tradition of talking about that in the fourth quarter, and I think we'll maintain that tradition. But I'll share some comments on it what we're seeing. There is still uncertainty about the impacts of what's coming in the near term, the government programs winding down. And we expect that the impact of those will be mainly felt in those portfolios that were most hit by the pandemic. I think the -- what we see in terms of the trends in the portfolio is a continuation of the positive trends since the beginning of the year. So the metrics that we look at are still flashing green. And it certainly, every quarter, I think our view is that our normalization is pushed a little bit further into the quarter. But I wouldn't want to give you any specific guidance for 2022 yet. We'll talk about that in December.

[Operator]

The next question is from Meny Grauman from Scotiabank.

[Meny Grauman]

And congratulations on your retirement, Louis. It's best...

[Louis Vachon, President, CEO & Director]

I still have to go to your -- Meny, I still have to go to your event.

[Meny Grauman]

Yes, we can do it then. Let's kind of get it anew. Just 2 follow-ups. One, just on the direct brokerage commission. In your business case, are you assuming a competitive response where your peers match you? So that's the first one.

[Louis Vachon, President, CEO & Director]

Mr. Gagnon?

[Martin Gagnon, Senior EVP of Wealth Management, Co]

So we obviously want to capture market share, and we made the bet that they would be hesitant and so far so good.

[Meny Grauman]

Got it. And then just in terms of the P&C business, the net interest margin down 5 basis points quarter-over-quarter. I'm curious what the impact specifically of loan mix is given how strong the commercial growth was in the quarter?

[Lucie Blanchet]

Yes. It's Lucie. So I'd say, quarter-over-quarter, it's the reduction of the deposit spreads also mixed with the asset mix. That was partly offset by favorable deposit growth. So it's all of these drivers coming into play really.

[Meny Grauman]

Okay. And then maybe just one more, just on Flinks. Is this a signal that there's a new approach that National Bank has to how it looks at fintechs? How significant is this decision from a strategic point of view for the bank?

[Laurent Ferreira, COO & Director]

So -- it's Laurent, Meny. I'll take the question. We were already investor. We had nearly 30% of Flinks. So what we're seeing here is, obviously, we see a growth opportunity in the segment, fintech. Flinks, they provide services to the P&C segment as well as Wealth. So the intention here was to provide more flexibility for Flinks in terms of a capital injection. But no, I mean, we've been investing in several players in the market. And from time to time, we take small investments and grow them bigger where we see opportunities. Obviously, we look at trends like consumers gravitating towards digital, looking for improvement on consumer experience. The underlying trend of the financial services industry that's more and more fragmented, that's not disappearing. So all of those reasons why we're increasing our investment in Flinks.

[Meny Grauman]

On a percentage basis, would this be the largest stake you have in a fintech? Or are there other examples in the portfolio?

[Louis Vachon, President, CEO & Director]

Just to -- it's Louis, Meny. I think just to put it in a historical perspective because I'm now the ancestor on the table. The 80-20 approach we used that back in the old days with Lévesque Beaubien before it became National Bank Financial. It did serve us extremely well. We used the same thing with Credigy, which I think would be defined as a fintech today. That's my view. It's a fintech that provides financing to other fintechs. And we use something quite similar with ABA Bank. So we do have a history of making these 80-20 type investments, and over a period of time, working with partners to grow that. And I think it served us extremely well. So that's for the history of it. Now for the future, Laurent, anything else to add?

[Laurent Ferreira, COO & Director]

I mean we -- to answer your question, it is from our portfolio, the largest investment that we have at this point in time. And you could see from time to time strategic plans like that, but that's the only 1 we have right now in the books.

[Operator]

The next question is from Paul Holden from CIBC.

[Paul David Holden]

Just want to follow up on the NIM discussion, I guess. The direct question I'd have is, what should we expect for NIM going forward? Like is there going to be continued gradual decline in NIM based on the same factors that impacted the Q3 results? Or should we expect something different?

[Lucie Blanchet]

Yes. It's Lucie. So sequentially, we expect some pressure on the margin, mainly due to the same factors. So we expect our deposit levels to decrease gradually. No drastic runoff, but a gradual decrease. At the same time, the increase of loans will also pick up, like Stephane explained also on the commercial side. So that's what we see coming for the next quarter.

[Paul David Holden]

I'm assuming as loan mix gradually improves with commercial picking up, potentially residential mortgage slowing, or at least that's my expectation, then eventually, NIM will stabilize and reverse. Is that -- if I look further out to next quarter, is that reasonable in your mind?

[Louis Vachon, President, CEO & Director]

That is our scenario, Paul. Yes.

[Paul David Holden]

Okay. Good. And then I want to ask you a question around capital. So some of your peers have benefited from lower RWA density, specifically on credit. Some of it is migration, some of its model refinement. Just wondering if you see a similar benefit. Like when I look at your PD and LGD assumptions and then the table with the actual experience, it appears to me that your assumptions remain relatively conservative. So just wondering if there's an opportunity, again, either for further migration or for model refinements?

[Louis Vachon, President, CEO & Director]

Bill will take a first crack at it and we'll see if...

[William Bonnell]

Yes. Thanks for the question, Paul. We're happy that our actual performance has been better than our conservative assumptions in those models. And we'll certainly continue to look for opportunities ahead as we refresh our models. Nothing specific in mind. Jean, is there anything else to add. Thanks, Paul. Does that answer your question?

[Paul David Holden]

I mean -- so you have been putting up -- let's reframe it. And so it sounds like not necessarily any model refinements, but the potential for continued credit migration. And I get that IFRS accounting and capital accounting aren't exactly 1 for 1 for -- but maybe you can give us a sense of -- or some way of framing how much additional capital you might be carrying for higher loss rates than you typically would or maybe you're not today?

[William Bonnell]

Well, I think to frame it, I'd say that certainly, we feel that our provisions and our approach on allowances has been good. And certainly, if the good progress in the recovery continues, we would expect that to add to capital. On the modeling, certainly, the normal process is we refresh our models, and as the models go through where there's demonstrably lower actual defaults or loss given defaults have been higher that will impact the models both in IFRS 9 and capital. So that's ahead of us. But nothing specific to signal to you.

[Paul David Holden]

Okay. Okay. And then last question on capital, if I may, and that's related to the increase in RWA related to counterparty risk. It's up fairly significant year-to-date. I understand that's capital markets driven. So maybe just walk us through what exactly -- what line of business is driving that? And then maybe tie that to future expectations as well if you can?

[William Bonnell]

Yes. Maybe I'll start on that one, too, Paul, and then Denis might have something to add. But primarily, it's client business, client activity. It's providing risk management products, derivatives to help our corporate clients manage the different types of risks. Anything else to add?

[Denis Girouard, Senior Executive Vice]

Well, exactly that. It's more volume with more clients. That's it. And a lot of that outside of Quebec, by the way.

[Operator]

The next question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, Analyst]

Just wanted to ask an overall bank question here. If I look at the last 10 or so years' top line growth, I think you're on track to have the best top line growth, revenue growth of the last decade or so. And -- so I'm curious if you're in a position right now to talk about what sort of top line growth expectations you have for next year, granted this year is not over yet? And what would be the top 3 drivers of that growth next year?

[Louis Vachon, President, CEO & Director]

Those are great questions, Sohrab. I can quickly attempt a drunken sailor type of prediction as I'm leaving in a few months. But...

[Sohrab Movahedi, Analyst]

Can Laurent answer that question?

[Louis Vachon, President, CEO & Director]

That's where I was going, but I think I will shield him with my body. That's a great question for next quarter, I think, and possibly even early 2022. But that's certainly the question that you'll be -- him and the team will be ready to answer.

[Operator]

Okay. Well, then Louis, I may ask you another question. You self-proclaim to be the ancestor at the table. You would have seen many elections come and go. I mean, are you worried about some of the rhetoric coming out of this election, and I'm specifically focused on this bank tax that may be hitting the headlines now.

[Louis Vachon, President, CEO & Director]

Sohrab, I have enough scars on my face to not comment proposal during an election. So I'll take the Fifth on that one, even though we're in Canada. I'll apply U.S. constitutional law.

[Operator]

The next question is from Gabriel Dechaine from National Bank Financial.

[Gabriel Dechaine, Analyst]

I'll echo the positive vibes with Louis and enjoy your retirement and whatever is next in your phase -- in the next phase of your life. So on to the questions, Credigy, the assets there are kind of flat for the past few quarters. Just wondering if there's any insight on reassessing what assets you could be targeting for origination? I know the business has been nimble in the past based on market conditions. And right now, pricing is not optimal for distressed asset pricing, but if there may be some other initiatives that work that could drive some growth there? And then the other question would be directed to the Canadian bank, we're seeing about a 51% mix ratio there, pretty phenomenal improvement over the past year. Wondering if there's a target of getting below 50% over time and what your thoughts are on that?

[Louis Vachon, President, CEO & Director]

That's -- the second part of your question, again, I think that's a great question for early 2022 when Laurent, they're updating the strategic plan and guidance. On your first part on Credigy, just a reminder that in U.S. dollar terms, the portfolio has been growing. So some of that has been volatility with the currency level. But net-net, the portfolio denominated in U.S. dollars has been growing. The good -- there's many good things about that business, but one of the things that we like is that they're doing more trades with more diversified counterparties. So in terms of portfolio effect, we have less of a risk of a portfolio coming to maturity, a big portfolio coming to maturity and having to replace that income. So they've been doing more trades, smaller trades, but with a diversified and more diversified asset base and a greater, broader group of counterparties. When we talk to the team, they remain very optimistic about the future and potential for growth. Clearly, given a lot of liquidity in the system, they've pivoted to financing more of the acquisition of portfolios by third-party as opposed to them buying portfolios of assets given what they feel is expensive prices in the markets. But as you mentioned, they've been agile and very flexible in terms of deploying capital. Needless to say, I can -- again, because it's my last call, I don't know how many portfolios they've bought. I think it's in the hundreds of portfolios, hundreds of trades since we partnered up with Credigy in 2006. To my knowledge, we've had 1 case of a 0 IRR. And to my knowledge, we've never had a negative IRR on any of the portfolios that they purchased. So over a 15-year period, I think it's been a very, very strong track record.

[Operator]

The next question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, Research Analyst]

I just wanted to circle back to the formation in the markets business referenced on Slide 10. Last quarter, I think the formation in the market was also due to a client in the utility sector. I'm just wondering, is this evidence of broader systemic issue in the portfolio?

[William Bonnell]

It's Bill. Thanks, Lemar, for the question. The answer is no. Two cases are coincidental quarter-by-quarter, very, very different. One was related to weather event in south of the border. And the other one was specific event with some technologies that didn't work. And so no, completely different and don't see any negative trend in that portfolio.

[Lemar Persaud, Research Analyst]

Okay. And then just my next question, just looking at the supp, there's a meaningful step-up in technology spend in late 2020 and into 2021. I wonder if you can provide some thoughts on what drove the sharp ramp up? And then more broadly speaking, are there any other expense categories that we should start thinking about to accelerate over the course of the next year?

[Louis Vachon, President, CEO & Director]

It's Louis. I'll start, our technology spend has been going up steadily for the last 15 years. So I don't think there was anything particular about 1 or 2 quarters. I'm looking at Jean here, he is checking.

[Jean Dagenais, Senior Vice]

No, it's only the timing of when we do invest in project. And sometimes, there's more spent upfront in the year. And other times, it's get later in the year. So it depends on where the projects are in their development. No other particular reason for that.

[Louis Vachon, President, CEO & Director]

It's quite clear that us with the rest of the industry, technology spend is not going away. So between customer-facing technologies and cybersecurity, that segment will continue to grow. We need to keep it growing in a disciplined fashion. But in terms of investments in technology, again, that's going to be a great question for Laurent and the team early in 2022.

[Operator]

The next question is from Nigel D'Souza from Veritas Investment Research.

[Nigel R. D'Souza, Investment Analyst]

Had a few follow-up questions here. The first on your move to the $0 commission model. And it makes sense that your strategy is to pick up market share. But I was wondering if you could expand on the sensitivity of your market share gains based on when your competitors might move to follow your $0 commission strategy. So in other words, in the U.S., competitors move very quickly. So how sensitive are your assumptions to, let's say, a scenario where your competitors match the $0 commission strategy within the next 30 days versus, let's say, a year from now and they still haven't moved to the $0 commission mark? Can you give a sense of the range of your potential market share gains there?

[Martin Gagnon, Senior EVP of Wealth Management, Co]

It's Martin. I don't think I want to get into the specifics, but the Canadian market is very different. As you know, we don't have payment for order flow here, while it's 82% of Robinhood's revenues. So different landscape. Also the other comment I'll make -- I'll reiterate, we've been getting ready for this for many years, which I think is pretty -- we're the only one who are doing that. And there's a 6.5 million autonomous investors in Canada, about 5,000 households. I'll stop there. You can get an idea of market share if you look at strategic insights or economic investors. And I'll stop there in terms of what the math is. I don't want to give all of our tricks to our competitors.

[Nigel R. D'Souza, Investment Analyst]

No, that makes sense. So if I could then pivot to your allowance levels for your performing loans. And I know there's a lot of uncertainty related to COVID-19. But I was wondering, is there a scenario where your allowance levels don't fully normalize within the next 12 months? In other words, do you think there's a possibility or a scenario where there's still meaningful PCL reversals and still substantial excess reserves more than 12 months from now?

[William Bonnell]

I'll -- thanks for the question, Nigel. The -- I'll start off by saying we have no experience at a pandemic cycle. And so to try to be specific in timing of when the end of the pandemic and the impacts will flow through, it's very, very difficult. So I don't know about the 12 months or 6 months or 18 months. But if we return to an environment similar to pre-pandemic in terms of economic growth and unemployment and forecasting of the future, we should return to pretty close to where our allowance levels were relative to the portfolio pre-pandemic. Does that help?

[Nigel R. D'Souza, Investment Analyst]

Yes. Yes, that's helpful. I mean, if you could just touch on maybe what you're seeing on the liquidity side in terms of when you think the loan growth would normalize? I mean I understand the credit risk side might be harder to predict, but do you have a sense on the timing of the normalization at least over the next -- do you think it's closer to the next 3 to 6 months or further out than that?

[William Bonnell]

I think the loan growth has been -- we've been pretty happy with the loan growth this quarter and the last couple of quarters, but I'll hand it over to Stephane and Lucie, if you have any other comments.

[Stephane Achard]

Well, certainly -- this is Stephane. Just it's surprising, but the loan growth is -- remains very strong, and we've seen it increasingly pick up over the last few months, while the liquidities also keep on gaining momentum, not as much as high of a pace as before, but they're still growing. So I would argue we probably have several quarters of these buildups before they revert back to normal levels. I'm not concerned about them drawing up too quickly.

[Lucie Blanchet]

Maybe I can expand on the mortgage growth following Stephane. So we believe that the forces driving the real estate market will continue to be present. We think demand will continue to be stimulated by the lower interest rate environment as well so as the changing housing needs as a consequence of the flexible working conditions that the employers are now offering. And eventually, the reopening of the immigration will also be a factor in medium term. I think one of the factor also is the short supply that will continue to put pressure on the market. It's not an easy one to solve. But certainly, when we look specifically at National Bank, Stephane explained the opportunity that it brings in terms of commercial real estate, especially in Quebec. So we see it as -- we see that we are continuing to be well positioned to capture that market share.

[Operator]

The next question is from Darko Mihelic from RBC Capital Markets.

[Darko Mihelic, MD & Equity Analyst]

I have a couple -- a bunch of really quick questions. I think I'll start with Martin. So one of the things that's also missing in the Canadian marketplace is fractional share ownership. Is that a big thing? Is it difficult to do expensive? Is that something you guys are considering?

[Martin Gagnon, Senior EVP of Wealth Management, Co]

It's been on the list of things that we want to do, and we constantly survey our investors. And I think that what won the vote recently is before and after hours trading. So I don't know exactly where fractional shares stand, but it's in the list, Darko.

[Darko Mihelic, MD & Equity Analyst]

Okay. A quick question for Lucie. The mortgage growth that we're seeing from National is above average -- industry average. How much of that is coming from mortgage brokers? And is it material at all?

[Lucie Blanchet]

No, I would say, well, thank you for our performance. We're very happy about what's happening. We've been working on that business for many years now. So 70%, 75% of our growth comes from our proprietary channel, which is really at the core of our strategy, and mortgage broker, all inclusive with our Paradigm Quest activity, represents about 15%.

[Darko Mihelic, MD & Equity Analyst]

Okay. And has that grown from past years?

[Lucie Blanchet]

Not really. Since we exited the mortgage broker channel, we started our partnership with BQ, and now we've complemented it with M3, as you know. But our intent is to keep our strategy focused on our proprietary channel going forward.

[Darko Mihelic, MD & Equity Analyst]

Okay. Great. And a real quick question for Bill. I'm looking at Slide 9 of your presentation, where the performing ACL coverage, total allowances covering 6.6x net charge-offs. And the question that comes to mind and staring at these graphs is surely the uncertainty today must be less than the uncertainty we saw last year at Q3. So it begs the question, and I know you were asked this previously, but as we get into Q4, a lot of the things that you cited will obviously be less uncertain, like the programs will be over or should be over, we never know, I suppose it could be extended. We -- but we'll know a lot more about the Delta variants and so on and so forth. Does it not scream at you when you look at these lines going up that maybe you have to have a much bigger release and really quickly?

[William Bonnell]

Thanks, Darko, for the question. I think you and I spoke about when IFRS 9 was implemented, how it would work before the pandemic and I think I was calling out some of these ratios before the pandemic. Certainly, I would not have predicted the lines to go up so sharply to have 3.8x coverage or 6.6x coverage. I think there's a couple of factors in that, though. One is that the impaired levels have been very low, with a consequence of many of the things that we've already talked about. But the -- in theory, before the pandemic, I would have expected some transfers of the allowance into impaired or in Stage 3 as impairments came. So that's one thing. I think the second point I'll mention is when we think about reserving and our reserving philosophy is certainly, our history has been to be very proactive and build reserves quickly where we see a deterioration. I think we did that early on in the pandemic, starting even in Q1 as we saw the situation evolving in Asia. And our philosophy at this stage, I think, is really to remain prudent. So if you add up the releases in the last couple of quarters, we have released 20 -- less than 25% of the build over that time. The reason why we're retaining the 75%, 80% is not because we see imminent deterioration, and we recognize there has been a lot of good things that have happened. We have the vaccines, the rollout of the vaccines and vaccination rates are very positive. It looks like the programs did provide a bridge to the reopening of the economy. And those are the factors which drove the release. But the -- we really think that being prudent, given some of the uncertainties is the right approach. And just like as the positive news to date has generated its releases, certainly, if it continues to be positive news, there will be more releases. I think if I would describe it in adjectives, our mindset is the -- we're optimistic and prudent.

[Darko Mihelic, MD & Equity Analyst]

Yes. I mean I guess I mean just -- it just seems that if this continues on into next year, I would have thought maybe that we would see more aggressive releases and then they just sort of tailing off. But I guess you're not willing to sort of commit to any sort of a pattern.

[William Bonnell]

Yes. As I mentioned earlier, we haven't been through a pandemic cycle before. And if we have to err, we'd rather err on the prudent side. However, if the economy continues to follow the path and the positive news continues, there will be releases. I think it's as far as I'll go.

[Operator]

[Operator Instructions] Our next question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

I just got a quick follow-up question on Flinks. You kind of provided your investment impact to CET1 and expected to gain next quarter. But from a P&L perspective, is there anything to consider on that front?

[Louis Vachon, President, CEO & Director]

I think we guided -- sorry, Scott, it's Louis. I think we guided that it was neutral in terms of EPS.

[Ghislain Parent, CFO & Senior Executive VP of Finance]

Yes, that's what we said in the press release.

[Scott Chan]

You did, okay.

[Louis Vachon, President, CEO & Director]

For the next year or 2, I think it's pretty neutral.

[Operator]

There are no further questions at this time. I would like to turn the call over to Mr. Louis Vachon.

[Louis Vachon, President, CEO & Director]

So thank you, everyone, and Laurent and team will be ready to take your questions at your Q4 meeting. So thank you all, and have a good day.

[Operator]

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