National Bank of Canada

TSX:NA

Earnings Call Analysis

Strong Q3 Results and Strategic Acquisition

In the third quarter, National Bank of Canada reported strong financial results with earnings per share of $2.68 and a return on equity of 17%. The bank’s performance was driven by diversified earnings and organic growth across segments. Personal & Commercial Banking revenue grew by 7%, while Wealth Management achieved a 14% increase in net interest income. The acquisition of Canadian Western Bank aims to expand the bank's national reach, with regulatory approval in progress. The bank’s CET1 ratio remains robust at 13.5%, and dividend payouts were 41.2%.

Strong Financial Results

National Bank of Canada reported strong financial results for the third quarter, with earnings per share of $2.68 and a return on equity of 17%. These impressive figures highlight the bank’s ability to balance revenue growth, costs, investments, and credit performance within a complex economic environment【4:0†source】.

Solid Segment Performance

In the third quarter, the Personal & Commercial Banking segment delivered a 7% year-over-year revenue growth. Personal mortgage growth increased by 2.4%, driven by strong originations in internal channels, while the commercial loan portfolio grew by 14%, demonstrating continuing momentum across various industries. Wealth Management also experienced robust performance with net interest income up by 14% year-over-year【4:0†source】.

Revenue and Efficiency Highlights

National Bank achieved $1.4 million in pre-tax pre-provision (PTPP) income in Q3, with all business units witnessing double-digit growth. Operating leverage was strong at 6% and the bank maintained an efficiency ratio below 52%, emphasizing its commitment to expense management and efficiency improvements【4:1†source】.

Capital Position and Strategic Acquisitions

With a CET1 ratio of 13.5%, the bank's capital position remains robust. National Bank is also progressing with its acquisition of Canadian Western Bank, an initiative aimed at accelerating Pan-Canadian growth and enhancing the bank’s presence and service offerings across the country【4:2†source】【4:5†source】.

Credit Performance and Provisions

The bank’s credit portfolio performed well against the challenging macroeconomic backdrop. Total provisions for credit losses stood at $149 million, slightly higher than in the previous quarter. Despite an increase in impaired provisions, the bank expects to keep full-year 2024 impaired provisions within the range of 15 to 25 basis points【4:4†source】【4:8†source】.

Global Markets and Investment Banking

The Financial Markets segment posted net income of $318 million, supported by favorable market conditions and strategic investments. Corporate and Investment Banking revenues were up by 16% year-over-year, showcasing a solid platform performance. Credigy and ABA Bank also reported strong growth and high profitability, reinforcing the bank’s diversified earnings mix【4:6†source】【4:19†source】.

Loan and Deposit Growth

Both loans and deposits saw significant growth in Q3. Loans increased by 9% year-over-year, while deposits (excluding wholesale funding) grew by 6%. This healthy growth momentum is indicative of strong organic growth across all business segments, contributing to a loan-to-deposit ratio of 97%【4:2†source】.

Consumer and Credit Card Behavior

Consumer prudence is evident as revolving balances on credit cards are not growing as quickly as expected, reflecting cautious spending habits. Meanwhile, commercial real estate and growth outside Quebec remain strategic priorities, driving solid performance within these areas【4:8†source】【4:16†source】.

Looking Ahead

The bank remains vigilant about maintaining a balanced growth strategy, delivering superior returns, and navigating economic uncertainties. With the groundwork for the Canadian Western Bank transaction underway, National Bank is well-positioned to continue its growth trajectory【4:8†source】【4:17†source】.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to National Bank of Canada's Third Quarter Results Conference Call. I would now like to turn the meeting over to Marianne Ratte, Vice President and Head of Investor Relations. Please go ahead, Marianne.

[Marianne Ratte, executive]

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

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

[Laurent Ferreira, executive]

Merci, Marianne, and thank you, everyone, for joining us. This morning, National Bank reported strong financial results for the third quarter with earnings per share of $2.68 and a return on equity of 17%. These results reflect our diversified earnings mix and solid credit profile. Moreover, they underline the performance of our team and disciplined execution across the bank in balancing revenue growth, costs and investments as well as credit performance in a complex environment.

Looking at the Canadian economy, monetary policy remains restrictive as evidenced by further normalization in the credit environment and a rising unemployment rate across the country. Recent rate cuts are a step in the right direction in providing relief for consumers and supporting business investment.

Looking at our performance year-to-date, we are pleased with our progress in executing our growth strategy, supported by our strong capital levels with a CET1 ratio of 13.5%. First, we are generating strong organic growth and have been growing our balance sheet across our businesses. We are also returning capital to our shareholders through sustainable dividend increases. We ended Q3 with a payout ratio of 41.2%, reflecting last quarter's dividend increase and robust earnings growth. We will review our dividend next quarter consistent with usual practice.

Finally, this past June, we announced that we entered into an agreement to acquire Canadian Western Bank to accelerate our Pan-Canadian growth. We will be bringing together 2 strong teams and highly complementary banks. The combination will strengthen our Western presence and national reach and would also provide more choices to individuals, entrepreneurs and businesses across the country. The regulatory approval process is underway, and our integration road map is progressing in partnership with CWB leadership.

Turning now to the Q3 performance of our segments. Personal & Commercial Banking delivered solid revenue growth, up 7% year-over-year. As anticipated, personal mortgage growth picked up, increasing [ 2.4% ] year-over-year driven by strong originations in our internal channels. Our commercial loan portfolio grew 14% year-over-year, underlying continued momentum in insured residential real estate and broad-based growth across our industries. Wealth Management delivered a strong performance in the third quarter.

Net interest income was up 14% year-over-year with strong deposit inflows in our full-service brokerage and private banking channels. Benefiting from strong markets, fee-based revenues were up 12% while transaction revenues were up 21% year-over-year.

With a strong top line and operating leverage of nearly 3%, net income grew 19% from last year. AUM also grew 20% year-over-year as the franchise continues to experience strong organic growth. Financial Markets generated net income of $318 million in reflecting a well-diversified business mix and the benefits of our strategic investments.

Favorable market conditions also contributed positively across most sectors. Revenues for Global Markets exceeded $450 million again this quarter, supported by momentum in our securities finance and interest rates businesses. Corporate and Investment Banking revenues were up 16% year-over-year with a solid performance across the platform.

Credigy delivered another solid performance in Q3 with average assets up 13% year-over-year and strong investment volumes year-to-date. Net interest income was up 12% over last year and 2% sequentially. Credigy's portfolio continues to generate strong underlying performance while maintaining a defensive position. And the team also remains disciplined as it pursues opportunities with attractive risk/reward profiles.

Finally, ABA Bank generated net income growth of 24% year-over-year. ABA's loans and deposits were up 17% and 21%, respectively, and its client base up 29% year-over-year. ABA's performance once again reflects its unique strengths, including its digital payments and cash management capabilities.

Looking ahead, our capital deployment strategy and delivering superior returns remain key priorities for the bank. With our strong execution, diversified earnings stream and prudent approach to capital, credit and costs, we remain well positioned in the current environment and for the growth opportunities ahead. I will now turn it over to Marie Chantal.

[Marie Gingras, executive]

Thank you, Laurent, and good morning, everyone. My comments will begin on Slide 7. The bank delivered strong results in the third quarter and year-to-date, underpinned by consistent execution, a balanced approach to growth and investments and continued cost discipline.

PTPP reached $1.4 million in Q3 with all businesses achieving double-digit growth year-over-year. Organic growth was broad-based and revenues were well diversified. Operating leverage was strong at 6% in Q3 and 3% year-to-date. Our highly efficient business segments generated an all-bank efficiency ratio below 52% in both Q3 and year-to-date. We remain disciplined around expense management which continues to yield results. Revenue growth of 17% year-over-year led to higher variable compensation, particularly in financial markets and in wealth management.

Excluding variable compensation, expenses rose 6% year-over-year, mainly reflecting the annual salary increase and investments. Our investments contribute to simplifying our businesses, gaining efficiency and building for the future. Again, this quarter, we are pleased with the performance of the business segments and the bank as a whole. These results underscore our resilience and diversified business model.

Now turning to Slide 8. Sequentially, nontrading NII was up 9%, or 6% excluding the impact of the conversion of BAs to CORRA loans. At the all-bank level, this conversion has minimal impact. The all-bank non-trading NIM stood at 2.22% and rose 5 basis points sequentially, largely reflecting higher NII from treasury activities. As a reminder, ALM results can be lumpy from quarter-to-quarter, particularly against the current backdrop of high interest rate volatility.

As anticipated, NIM in P&C banking was down sequentially. This reflects in part the conversion of BAs to CORRA loans as well as lower deposit margins stemming from lower rates and lower loan margin, reflecting the current market environment. Based on what we're seeing today, we expect the P&C margin in Q4 to be relatively stable. We are pleased with the healthy volumes and broad-based growth that we are generating within this segment. And as always, we remain committed to growing with the right balance between margins, returns and credit quality.

Moving to Slide 9. We achieved significant growth on both sides of the balance sheet in Q3. Loans were up 9% year-over-year and 2% quarter-over-quarter. Deposits, excluding wholesale funding, were up 6% year-over-year and 3% quarter-over-quarter, and we are pleased with this momentum. In particular, personal demand deposits increased by $1.4 billion, up 3% sequentially; while nonretail deposits increased by $5.7 billion, up 4% from last quarter. With strong organic growth, our loan-to-deposit ratio stood at 97% as at Q3.

Now turning to capital on Slide 10. We ended Q3 with a robust CET1 ratio at 13.5%. Third quarter earnings net of dividends contributed 40 basis points to our ratio, again, underscoring our internal capital generation capacity. Strong growth in credit risk RWA weight was primarily driven by organic growth in commercial and corporate banking and to a lesser extent, from credit migration in nonretail portfolio. A reduction in market risk RWA driven by lower underlying market volatility and exposure at quarter end added 15 basis points of CET1.

And now moving to Slide 11. Following the announcement regarding our intention to acquire CWB, we have taken action to protect our capital position against the impact of potential interest rate fluctuations. Recall that under purchase accounting, we are required to fair value CWB's assets and liabilities at close.

Changes in interest rates impacts fair value which in turn, will impact the amount of goodwill and level of capitalize at closing. Based on our current estimates, our CET1 sensitivity to interest rate is limited. If we have taken no action, the projected impact at closing from a variation of 100 basis points in term interest rates would be about $100 million in fair value, representing approximately 7 basis points of CET1.

However, we are proactively mitigating this exposure by implementing an economically neutral hedging strategy to minimize the impact of interest rate fluctuations on capital. As such, the impact on CET1 after the implementation of that hedge is expected to be nil. The hedge will be adjusted progressively until the closing date.

To conclude, having delivered strong performance in Q3 and year-to-date, we are well positioned for the final quarter of 2024. Moreover, our strong balance sheet and diversified business model put us on a solid footing to continue to execute our strategy as we lay the groundwork for the approval of CWB transaction. I will now turn the call over to Bill.

[William Bonnell, executive]

Merci, Marie Chantal, and good morning, everyone. I'll begin on Slide 13 with comments on the macro environment and our credit performance in the third quarter. The main trends in the Canadian economy that we discussed on prior calls persisted through the third quarter. Employment conditions continued to weaken, particularly for the younger age cohort. GDP growth remained muted as the lagged impact of higher interest rates continued to slow the economy and inflation further decelerated, enabling the Central Bank to begin reducing interest rates.

Against this complex macro backdrop, our credit portfolio has performed very well, with total provisions for credit losses of $149 million or 25 basis points, just 1 basis point higher than last quarter. Impaired provisions also increased 1 basis point sequentially to 21 basis points or $122 million. Retail impaired PCLs were stable quarter-over-quarter at $49 million, while commercial PCLs declined significantly quarter-over-quarter to $17 million.

In Financial Markets, a $20 million provision was due primarily to one newly impaired loan in the mining sector. In the USSF&I segment, performance continued to meet our expectations. Credigy saw normal seasoning of portfolios and as expected, impaired provisions remained elevated at ABA. Provisions on performing loans increased to $25 million or 4 basis points, with the primary driver being portfolio growth.

Looking ahead, we expect the current trends of rising unemployment and sluggish growth to continue in the coming quarters, which should generate further increases in delinquencies and impaired provisions. Taking into account our defensive business product and geographic mix, we remain confident in our guidance for the full year 2024 impaired provisions of 15 to 25 basis points and still expect to end up around the middle of that range.

Turning to Slide 14. We continue to prudently build our total allowances for credit losses, which reached more than $1.5 billion, representing a strong coverage of 4.6x our last 12 months net charge-offs. Performing ACLs increased for the ninth consecutive quarter and represents 2.7x the last 12 months' impaired PCLs. Additional metrics on our allowances are provided in Appendix 10.

Turning to Slide 15. Our gross impaired loan ratio increased to 59 basis points. As you can see on the slide, the main driver of higher deals throughout the year has been ABA due to elevated formations combined with a longer collection cycle.

I'll share a few additional insights on ABA's impaired loans. They have an average size of about $70,000 and an average LTV around 50%. When the loan becomes impaired, we take prudent Stage 3 provisions that are in excess of our historical charge-off experience. And finally, about 2/3 of the impaired loans, which were resolved in Q3, experienced $0 loss, which supports our expectation that ABA's net charge-off rate should remain low.

Formations in the third quarter declined to $226 million. In the commercial portfolio, formations were significantly lower quarter-over-quarter and spread across a few sectors, including wholesale trade, transportation and real estate. In the financial markets portfolio, net formations of $17 million related to one file in the mining sector that was partially offset by repayments and other sectors. As discussed, ABA's formations remain elevated to a slow recovery in tourism and softer external demand.

Slide 16, we present highlights from our Canadian RESL portfolio. The geographic and product mix remained stable with Quebec accounting for 54%, insured mortgages accounting for 29% of total RESL. Higher risk uninsured borrowers represent around 50 basis points of the total RESL portfolio. 90-day delinquencies on uninsured mortgages and HELOCs remained low at 14 basis points and 10 basis points, respectively. You can find additional details on our Canadian mortgages on Slide 17.

And I'll note that 60% of our mortgage portfolio has now been repriced at higher interest rates and 90-day delinquencies remain below the pre-pandemic level. We've included additional insights on trends in 90-day delinquencies for the entire Canadian retail portfolio in Appendix 9, and the trends discussed on prior calls remain.

In conclusion, we are pleased with the strong credit performance again this quarter, which reflects defensive positioning, resilient mix and prudent provisioning. Before I turn the call back over to the operator, I'd like to share a few comments since this is my last investor call.

First, I want to sincerely thank Laurent and the exceptional team of colleagues around the table. It's been a true pleasure working with you very, very closely for more than 20 years. I also want to express a deep gratitude to all my excellent colleagues in the risk team, and in particular, Jean-Sebastien. I take great comfort for knowing that our risk management is in very good hands. And finally, thanks to the investor and analyst community for your great questions and conversations over the years.

With that, I'll now turn the call over to the operator for the Q&A.

[Operator]

[Operator Instructions]

Our first question is from Matthew Lee from Canaccord Genuity.

[Matthew Lee, analyst]

Maybe just starting off on CWB, can you maybe provide an update on the implementation of cost synergies? And just any learnings around the integration of that bank so far? I know it's early days.

[Marie Gingras, executive]

Matthew, it's Marie Chantal. I will take that question. So as you know, we've just recently announced this transaction and in the current process, we're working on our different regulation application. So it's not just too early to give an update on synergies, but we are definitely looking forward to giving you some more information as we progress into this process.

[Matthew Lee, analyst]

Okay. Maybe in terms of the revenue side then. I think this is perhaps maybe an area where you underestimated the opportunity. But do you have any kind of prerequisite numbers or early numbers as to what you might be expecting in terms of cost opportunities between the 2 banks?

[Laurent Ferreira, executive]

It's Laurent. I'll take this question. No, and we didn't disclose that yet, and we will as it moves along. Look, I just want to remind you that we're early. There's a vote next week. CWB shareholders will be voting. We are working very closely with OSFI with the Competition Bureau and things are progressing really well. As we move along, we'll be able to update you on timing of close, and we will be able to provide you more insights on synergies, both cost funding and revenue as well.

So look, we understand your question. We know you're eager and we are also eager to be able to, at some point, share all of that with you. But there will be a time in the very near future where we will be able to do that.

[Operator]

Following question is from Meny Grauman from Scotiabank.

[Meny Grauman, analyst]

I wanted to ask about the dynamics impacting the decline in the P&C margin after a period of relative stability. So I think you referenced the conversion to CORRA is part of the impact. Maybe you could quantify that and just help me understand sort of the moving parts here, taking the margin down?

[Lucie Blanchet, executive]

Yes. Thank you. It's Lucie. I'll take that one. So as you said, there are several components impacting this quarter. One of them is the business mix which is nearly half of it and mainly due to the migration of the BAs to CORRA. And then also on the deposit spread this quarter, which is a component also, the spreads on the variable rate commercial deposits have been impacted by the rate cuts.

And the fixed term deposit spreads continue to be pressured like we discussed a couple of quarters ago. But as a portfolio rollover, that aspect should diminish over time. And on the asset trend in the current environment, the commercial loan spreads have faced some pressure. And as you know, as rate decreases, they get back quicker to the businesses compared to the retail side. So that's basically the difference parts of it.

[Meny Grauman, analyst]

Got it. And then the bigger question is just to understand how we go from pressure there to margin expansion sequentially at the top of the house? Maybe you could just help me understand how you're able to offset that pressure in that segment and then actually see margin expansion beyond that? A little confused in terms of how that actually all fits together going from P&C to the -- which is your biggest business to the overall bank?

[Marie Gingras, executive]

Yes. Meny, it's Marie Chantal here. So you're absolutely right. The 2 main drivers of the expansion of the all-bank NIM excluding trading this quarter were mainly driven by the ALM activity. In the Treasury segment considering the current backdrop of high interest rate volatility. So as you know, ALM can be volatile from quarter-to-quarter, and we've beneficiated on the all-bank NIM from those activities this quarter, and it was partly offset by the P&C margin.

[Meny Grauman, analyst]

Okay. I got it. The other question I have was just in terms of market risk. A pretty sizable decline in your market risk RWA. So I know there's some notes here explaining it, but just if you could go into a little bit more detail in terms of what's actually going on here? And is that -- is this just sort of normal volatility? Or is there something more. It looks like something more than your typical movement in that line item?

[Etienne Dubuc, executive]

Right. Meny, it's Etienne. So it's pretty much what Marie Chantal said in her script. There's not much more to this. It's pretty much half lower volatilities at quarter end generally, both in FX rates and equities and lower sensitivities in our books that are mark-to-market. So that's really the story there.

[Meny Grauman, analyst]

And then if I look -- I mean, this measure has been coming down over the past few quarters. I mean, the introduction of the FRTB, I think it, maybe prevent us looking further back, but it looks like there's a downward trend here in terms of market risk RWA. Is that correct? And is there something that we could say -- expect this line to continue to -- expect this line to continue to trend lower, if we look at this?

[Laurent Ferreira, executive]

That's a good question, Meny. And no, I would not expect that line to continue to decline as our business ebbs and flows and the markets, I expect, will be more volatile in the next few quarters. We've had a lot of geopolitical things going on. You have a lot of -- well, the easing cycle is starting with central banks all over the world. So I would actually, all things being equal, expect that to creep back up.

[Operator]

Our following question is from Paul Holden from CIBC.

[Paul Holden, analyst]

A couple of questions for Bill. I want to talk a little bit more about what you're seeing in customer behavior in Canada just because the delinquency trends, while they're getting somewhat worse, are still better than I would have expected.

So wondering if you give us some context maybe starting with sort of variable -- those on variable rate mortgages, their behavior is, how the delinquency rates are there? And if there's any kind of read-throughs you would use to determine how those on fixed rate mortgages might be impacted as they have to renew?

[William Bonnell, executive]

Yes. Paul, thanks for the question. I think it's Appendix 10 -- no, it's -- that is Appendix 9 where we showed that quite clearly. And you see on the left column, we show pre-pandemic levels for the 90-day delinquencies and break it down by the different classes.

So the behavior has been, I think, stronger than we would have thought 2 years ago where if you had said if interest rates go up 400 basis points plus and economy slows down, what would it be? And certainly, we see resilience in the behavior of our retail Canadian clients.

However, we aren't surprised by the -- like the geographic aspect of that and that our overweight in Quebec with more resilient consumers is certainly continuing to show through in the delinquency trends you see in Appendix 9.

Variable rates, we have called out specifically for the last few quarters because, as you know, our variable rate payments go up every time the rate changes. And you can see certainly that variable rate mortgage delinquencies have increased. However, as I think I've called out on a few slides, where it's increased the most is in the insured variable rate on borrowers because those are, as you know, customers that had less down payment, typically first-time home buyers.

So the payment shock of the increased rate is a bigger part of their household budget and the uninsured variable rate mortgage at 27 basis points is still pretty close to pre-pandemic levels. And I think that demonstrates that it's not only the mortgage payment, which has gone up, but income and liquidity has been quite strong as well. Lucie, any other comments you want to add on consumer behavior?

[Lucie Blanchet, executive]

Yes. I may add to that. When we look specifically at a very low rate mortgage holders, they've always had a better risk profile than the portfolio. And when we look specifically at, let's say suppose the credit card delinquency, you remain the population with the lower credit card delinquency. So a very good risk profile there.

[William Bonnell, executive]

Does that answer your question, Paul?

[Paul Holden, analyst]

I guess it's the second half and almost like to my perspective. The more important part is kind of like can we take anything away from that better experience than expected than you would have had 2 years ago and translate that to how maybe those fixed rate borrowers might be able to deal with higher borrowing costs over the next 1 or 2 years?

[William Bonnell, executive]

Yes. I think, Paul, the way I'd frame that is the -- you know with retail credit performance, unemployment rates are significant factor, not just interest rates. So I would say the -- if you think about in terms of the impact of the payment shock when fixed rate borrowers renew will be determined by what interest rates are at that point. And certainly, with the Bank of Canada already reducing interest rates twice and expectations for further decreases. If the trend continues, then maybe the payment shock won't be as significant.

However, I would remind you that the housing market given the undersupply nature and still strong integration trend has led to pretty resilient home prices. And so many of the borrowers, even if the payment shock is significant, they still have a lot of options with significant equity in their homes. And so there's a lot to balance there and I think it's probably too early, hard to predict exactly what will happen in 2026-'27 renewals, but there's some balance, not just balanced to the situation for the borrowers, not just higher mortgage payments.

[Paul Holden, analyst]

Okay. Okay. And then second question I have for you both is related to the ACLs. As I look at Slide 14, you show the conservatism there. And again, I think with actual losses trending maybe at a lower rate of increase than expected. At what point or what would be the catalyst for National to sort of turn the double on the build and allowances? What could lead to allowance is actually starting to come down?

[William Bonnell, executive]

So Paul, I think the -- as we called out for this quarter, we have had good organic loan growth across the businesses, and that generates increases in -- generates performing provisions and the building allowances. So we have not changed our weights and we have not -- look at our macro scenarios, it has been really consistent. Our base case is still for unemployment to trend up early in 2025 for it to peak at around 7%, and that hasn't changed.

Every quarter, we get together with our economists and the team and we review all of those factors and the decisions on weights and such. And we'll do that again in the fourth quarter and every quarter into 2025. So it's hard to predict when there may be a change, but it is going to be based on what the macro context are and our expectations for the future, each quarter as it comes.

[Paul Holden, analyst]

All right. Thanks for the answers, Bill, today and in the past. Great discussions with you and all the best in retirement.

[Operator]

Following question is from Jill Shea from UBS.

[Jill Glaser Shea, analyst]

I was wondering if you could touch on loan growth in P&C and what you're seeing on the personal side as well as the commercial side, which is posting really strong growth. Can you just talk about the backdrop and where you see the best growth opportunities and how we should think about the pace going forward?

[Lucie Blanchet, executive]

Yes. Thank you. It's Lucie. I'll start, and Michael will add on with the commercial. We continue growth in the loan portfolio, I would say, similar to the pace that we see right now. We continue to perform very well on the mortgage front in our internal channel, which is in line also with the real estate market performance. But at the same time, I'm happy to see the discipline that we have also on the margin side. We've had good growth in the auto loan book.

And as we look forward, the market opportunities, again, in terms of margin, maybe compressed a bit. So we expect maybe to see some lower growth in that portfolio, but still good ROE for the business. And the credit card portfolio, I would say, continue to remain -- I would say I continue to see consumers that are prudent and adjusting. So the revolving balances are not growing as fast as we thought they would. The payment rate continues to be elevated. The purchase volume is in the high single digits, but nothing major there.

So it should continue to grow, the credit card, but not maybe as fast as we thought it would. But at the same time, it's positive on the [ credit side ].

[Michael Denham, executive]

On the commercial side, as Lucie said in her comments, it is a broad-based growth really across all parts of the business. But the 2 areas to call out are: one, our real estate insured lending, and that's been a strategic priority for a while. And second is our growth outside of Quebec, which again has been a strategic priority for a while, and those are the 2 areas that are growing at a faster rate than the rest of the portfolio.

[Jill Glaser Shea, analyst]

Okay. Very helpful. And then perhaps being on the theme of growth. Could you touch on Credigy with the assets up 11% year-over-year? Can you just talk about the piece of growth as we move forward and also touch on the risk profile and profitability of the assets that you're putting on the books?

[Etienne Dubuc, executive]

Yes, sure. It's Etienne. Thank you for your question. So Credigy delivered a pretty solid quarter in Q3. And year-over-year, the assets are now up 12%. It is a very high-quality, diversified portfolio. Margins are stable. And really, we see -- the performance of the book is really strong. We're not seeing any deterioration in the secured side of the book, which is 94% of the book. And the unsecured part has been amortizing as expected.

Overall, the assets have grown a bit less than previous quarter. It continues to be a highly competitive market. And visibility into new opportunities can be a bit difficult because it's an environment where you have a lot of other players who are pretty aggressive. So because we are very strict about our risk/reward discipline, that may mean that in some quarters like this one, you will see amortization of our existing book is muting overall asset growth, but we did make about $500 million of purchases this quarter. Does that help answer your question?

[Operator]

Our following question is from Nigel D'Souza from Veritas Investment Research.

[Nigel D'Souza, analyst]

I wanted to ask a broader question on your credit risk profile. I understand why credit losses tend to run lower for your retail portfolios in Quebec, lower household leverage, lower debt servicing costs, less [ faulty ] real estate market. So that makes sense. I was wondering if you could elaborate on what generates or keeps a lower ceiling on credit losses in your nonretail or commercial portfolios. Is that specific to underwriting practices at National Bank or your business mix? Or is it more reflective of broader characteristics of commercial lending in Quebec?

[William Bonnell, executive]

Nigel, thanks for the question. I'd just think about it in terms of the -- the Quebec economy is very diverse in terms of sectors. It is one which typically has got lower peaks and troughs than other geographies. And it's one -- and the retail is one that benefits from institutions being in place that supports entrepreneurs and support economic growth that -- probably more significantly than other jurisdictions. So that's one part of it.

The other part would be some sector selection on our side. I think we have been less or relatively underweight in consumer discretionary exposed sectors. If you remember back at the beginning of the pandemic, where we called them COVID-impacted sectors, but primarily it is consumer discretionary. And on a relative weight basis, we've been underweight, say, or less exposed to those sectors. So there's various reasons, I think. But on a macro basis, performance is driven by the economy.

We're in an environment where the lag impact of interest rates are still flowing through the economy. So our base case calls for continued increase in delinquencies and migrations across the country, and I would include Quebec, but if that may be lower peaks and troughs than other jurisdictions. Does that help?

[Nigel D'Souza, analyst]

That helps. And I think the follow-on to that is assuming CWB acquisition closes, there's an equipment financing piece that you can roll out in your home province of Quebec. Does that at all change your sector exposure? Or do you think that's going to change the credit risk profile even incrementally your commercial portfolio?

[William Bonnell, executive]

Yes. It's too early really to say, Nigel. I can say, when I think about our overall portfolio, geographic diversification is good. We have been happy to grow organically, and it's been part of our strategy. I think, as Michael has already talked about, the last period and before the integration, we have been growing out West, our commercial portfolio faster than Quebec, and we're quite happy about that. But too early to say any specific sectors of CWB.

[Nigel D'Souza, analyst]

Okay. And then last question, just touching on your mortgage portfolio. Specifically, investor mortgage component, we are seeing some stress build there for investment properties, just negative cash flows. Any insight you could provide on the composition of that portfolio between Ontario and Quebec and other characteristics of the financial stream different in Quebec versus what Ontario that the property owners are experiencing?

[William Bonnell, executive]

I think generally, the trends would apply simply because home prices are less in Quebec and the shock of interest rates are less and would stress the cash flows a little less, but it's a relatively small proportion of our portfolio. Certainly, any performance in that segment would be -- you would be able to see them in our disclosures in the overall mortgage portfolio. Nothing specific to call out, Nigel.

[Operator]

Following question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

Etienne, last quarter, you provided a pretty fulsome discussion around your outlook for capital markets going into Q3. And I think you broke it up between global markets and corporate investment banking. It had the added benefit of being right because the numbers were pretty strong this quarter. So it would be helpful if we had a similar rundown. Are you as optimistic about Q4 as you were Q3 because maybe this was a fairly optimistic outlook back then?

[Etienne Dubuc, executive]

Yes. Thanks for the question, Mario. And yes, you're right. We feel good where we are year-to-date, especially how balanced the performance has been between global markets and between corporate and investment banking. That said, usually, the second half in our businesses is a bit slower than the first half. So I don't think you'll be seeing record Q3 for us every year or like the highest quarter being Q3 every year. So that could be a bit unusual.

That said, we are seeing some continuing strength. So first of all, in the equity and the rate markets, I think we're in a great position to continue to deliver good results. I'm thinking of the retail issuance business, especially if markets keep trending higher as a significant portion of our book could be called and rolled into new structures, and that's true both in equities and in rates. And since equity implied volatilities closed the quarter at a very low level, I think we're seeing upside there if we have volatility episodes in the coming months, and that could very well happen due to everything that's going on in the market, the geopolitical tensions and the rate cutting cycle underway.

And we're seeing whenever it gets volatile that we tend to do well both in our structured business and in our Market Making business where we invest a lot in technology. We feel we have the best-in-class technology. So we focus on speed, agility and when markets get volatile, we continue to perform very well. So that's -- these are potential tailwinds.

A big tailwind for Q3 was the equity funding markets. Those have partly normalized after the volatility of end of July, early August due to the yen scare there. Although we continue to see good client activity and some opportunities in the equity Delta one area, this area could normalize a little bit. And on the rate side, well, the focus will be on economic data and whether or not a soft lending will be achieved. We're still seeing strong institutional activity and we're seeing strong activity on the advisory side. We expect corporate issuers to take advantage of the constructive markets while they have the opportunity to do so.

We're certainly seeing the government borrowers still very active in the markets. And we're looking for M&A to reaccelerate a bit after being a bit slower the last couple of quarters and that would simply be a return to historical averages. So all in all, more tailwinds than headwinds, that would be my summary, Mario.

[Mario Mendonca, analyst]

Okay. And then maybe one quick follow-up then. What would you identify as the one or 2 most meaningful differences between National's financial markets business and that of the other banks in Canada. What would you draw the attention to as the one or 2 most meaningful differences?

[Etienne Dubuc, executive]

Well, difficult for me to comment on what the others are doing. That said, what are we? We are a domestic focused operation. We focus on structuring liquidity providing. We focus on being leaders in our niches. We focus on leading with deep expertise. And we are really about maintaining a risk management approach that is all-weather that is able to perform in good times or bad times.

That puts us into -- so that can mean a bit more defensive positioning, but that puts us into a great position to be a consistent partner in liquidity providers even when the times get bad, and I think clients understand that. So a mix of cyclical and countercyclical businesses is a lot of what we're about. And then the goal is to continue to increase the balance between everything we do between corporate investment banking between rates, between equities. We want to grow while maintaining our return on equities. We don't want to sacrifice that for growth.

And the goal more and more will be to make the incremental balance sheet we deploy work harder for us. So more ancillary, more advisory, more hedging solutions for our clients. I think that these are really the key points of our strategy, Mario.

[Operator]

A following question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, analyst]

I want to come back -- maybe I'll start off with a very quick one here. If the impact of the changes in interest rates is so minor on the CWB deal, why bother with the hedges at all? And then how should we think about the cost of these hedges? Is that an important consideration or not?

[Marie Gingras, executive]

Lemar, it's Marie Chantal here. So really, as we shared with you in the remarks, you're right, it's a really small impact. However, because it's a corporate strategy and we want to protect, depending on how quickly or not interest rates go down, this could have an impact for us. So in terms of our -- aligned with our prudent approach to capital, we preferred -- we saw more advantages of protecting the capital level at closing for CWB. Then there were disadvantages of just taking the risk of not knowing exactly how interest rates would fluctuate. So corporate strategy and protecting our CET1 ratio.

[Lemar Persaud, analyst]

Okay. That's perfect. And then my more fulsome question. I want to come back to the discussion that Marie was having here on these treasury gains and margins. You seem to suggest that these results, the ALM results can be volatile, and I can appreciate that. That's really nothing new. What I'm hoping you can help me think here is, is this volatility driven by market factors or more so the bank-specific interest rate positioning?

Because what I'm trying to understand is the more important factor is the volatility of interest rates and maybe it's easier to forecast. But if it's the bank's interest rate positioning, then it's just something that as an external analyst, it's very tough to kind of back into. Any thoughts on that would be very helpful.

[Marie Gingras, executive]

Lemar, it's really a little bit of both. You can't just say -- expect that there will be absolutely no impact on the environment. However, there is some of the factors that are related to our positioning as well. So it's really a little bit of both.

[Lemar Persaud, analyst]

And then would you say the more important factor here is the level or the volatility in the level of interest rates? Or is it the shape of the curve like the steepening or flattening of the curve?

[Marie Gingras, executive]

I would say that the level for this quarter was mostly the impact. But then again, it can change -- it can vary from quarter-to-quarter. But for this quarter, yes, this is what it was.

[Operator]

[Operator Instructions]. Our following question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, analyst]

Okay. Maybe I can just start off with Etienne. Etienne, can I just follow through with some of Mario's questions and generally speaking, I mean, this quarter -- or this year, sorry, financial markets has had 3 quarters of over $300 million earnings contribution a quarter. What does it take for that to go below $300 million next year per quarter, do you think? Or what does it take for you to maintain that? Do you need more RWA? Or do you need more luck?

[Etienne Dubuc, executive]

Well, we need our clients to remain active. We don't need more RWA. What we need is clients being active. You remember, Sohrab, we had not our best quarter last year in Q3. And I went into detail there that really was all about the markets didn't do anything in Canada. Stocks stayed flat throughout the quarter and clients were very, very inactive as a result compared to historical averages.

Look, when you -- when it comes down to it, that's what this franchise is about. It's about covering our clients, being super client-centric through our solutions of intermediation, structuring, risk management, advisory, corporate lending. And as long as our clients remain active, I think we have the environment for that, we will continue to do okay.

[Sohrab Movahedi, analyst]

Okay. That's very helpful. And a quickie for Bill. Bill, congrats on the retirement. We've asked you to play many roles over the years. I'm going to ask you to play a bit of an economist role here. You talked about 60%, I think, of your mortgage book has repriced.

What I'm trying to kind of get a sense of is what's the consumer behavior of those 60% that have repriced? And do you -- is there any reason to believe it's additive to the let's call it, economic activity or growth in the Quebec market, presumably because it took you back?

[William Bonnell, executive]

Thanks, Sohrab. The link to the economic growth is direct. The less money that households have to spend on goods and services then has an impact on lower growth in the economy. So I would say it's difficult to see the direct link between our specific National Bank clients and the growth in the Canadian economy. But in an aggregate in the economy, as fixed rate mortgages are repriced across all banks, the level of rates will have an impact on the amount of discretionary spending that the consumers have, and that has been one of the reasons why we forecast on continued sluggish growth.

If there is a positive surprise in terms of interest rates declining faster than expected, not too fast because that might be a negative surprise, but if there is more cash in the household budgets, then one can expect that would be a tailwind for economic growth.

Does that help answer your question or...

[Sohrab Movahedi, analyst]

Yes. No. That's very helpful. And within your customer base, what do you -- are you seeing those ones that have repriced? Do you see a change in consumer behavior? That would be positive or negative or is it neutral?

[William Bonnell, executive]

Yes. And I'm going to share this one with Lucie. She talked a little bit about it already in terms of credit card spend, and we are seeing prudency, payment rates being high, but Lucie, you want to continue.

[Lucie Blanchet, executive]

Yes. So what -- in general, we really see consumer adjusting and continued adjusting. And the positive -- going back to your question on economic growth, the positive on this quarter is that it's the first quarter where we reversed a trend in positive inflow in demand deposit accounts. So definitely, customers have adjusted for the past year.

They have delevered. We see that clearly the lines remained low and they stayed low. Purchase volume, specifically in Q3, which is usually a high season for purchase volume is lower historically than it's been in the past. So I see a prudent consumer there. And on the positive of that, we start to see the demand deposits that are increasing. So that's other color, maybe I could give you if that's helpful.

[Operator]

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

[Laurent Ferreira, executive]

Thank you, operator. And before we disconnect, Bill, on behalf of the entire bank, thank you for your leadership over the last 12 years. You were key in the growth of our bank and so we thank you.

[William Bonnell, executive]

Thanks, Laurent.

[Laurent Ferreira, executive]

Thank you, everyone, for joining us today.

[Operator]

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