National Bank of Canada

TSX:NA

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the National Bank of Canada's Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Linda Boulanger, Vice President, Investor Relations. Please go ahead, Mrs. Boulanger.

[Linda Boulanger, Vice President of Investor Relations]

Thank you, operator. Good afternoon, everyone, and welcome to National Bank's Fourth Quarter 2019 presentation. Presenting to you this afternoon are Louis Vachon, President and CEO; Ghislain Parent, Chief Financial Officer; and Bill Bonnell, Chief Risk Officer. Following our presentation, we will open the call for questions. Also joining us for the Q&A session are Stéphane Achard and Lucie Blanchet, Co-Heads of P&C Banking; Martin Gagnon, Head of Wealth Management, Laurent Ferreira and Denis Girouard, Co-Head of Financial Markets; and Jean Dagenais, Senior VP, Finance. Before we begin, I refer you to Slide 2 of our presentation providing National Bank's caution regarding forward-looking statements. With that, let me now turn the call over to Louis Vachon.

[Louis Vachon, President, CEO & Director]

Thank you, Linda, and thank you, everyone, for joining us. Earlier today, we reported excellent results with earnings per share up 11% for the quarter capping off another strong year for National Bank. For the year, we achieved solid business growth and record profitability, while meeting all of our medium-term objectives. Our credit quality is excellent, reflecting our prudent approach to lending. Our transformation translated into further improvements in our efficiency ratio. Again, this year, we delivered an industry-leading return on equity of 18%. National Bank's share price reached new highs in 2019 and is in the unique position of having delivered industry-leading total shareholder returns over the 1-, 3-, 10- and 20-year periods. Our capital deployment strategy is clear and remains unchanged. First, maintain strong capital levels; second, continue to invest in our business, with the objective of enhancing our clients' experience and generating positive operating leverage. Third, return capital to shareholders through sustainable dividend increases and share buybacks. This morning, we announced a $0.03 increase in our quarterly dividend. In 2019, we raised our dividend by 9%, and we also returned $281 million of capital through share buybacks. During the first quarter of 2020, to absorb regulatory adjustment, we will stay on hold on our buyback program, but we plan to resume it later in the fiscal year. As a Canadian super regional bank with a leading franchise in Québec, we continue to benefit from favorable economic conditions, both in our home province and across Canada. The Québec economy remains strong, with historically low unemployment rates, sound public finances and housing affordability well above the national average. In this context, let me share some highlights on our business segments performance, and in growth drivers going forward. Our P&C segment delivered solid results in Q4 as well as throughout 2019, with its earnings exceeding $1 billion for the first time on a yearly basis. Our strong performance was driven by good volume growth in both retail and commercial, disciplined cost management and solid credit performance. In the retail market, we are deepening relationships with our clients and focusing on advice. We are investing heavily in our platforms to ensure a compelling client experience. As an example, last week, we launched an innovative branch concept where we combine advisory services and technology to create a highly personalized approach. While we are currently deploying the new experience in branches in Québec, it will be gradually rolled out in Canada over the next 24 months. We continue to progress in our digital transformation journey, which is driving client satisfaction and acquisition, overall business growth and increased efficiency. Around 50% of our clients are now active on our digital channels and more than 92% of core payment transactions are being delivered via mobile, Internet banking or ATMs. In Commercial banking, we are capitalizing on our proximity to Québec entrepreneurs. At the same time, we are pursuing a focused growth strategy across Canada in specialized markets, harnessing our strengths in health care, agriculture, technology, creative industries and real estate. In both commercial and personal banking, we strive to achieve the right balance between volume growth, healthy margins and strong credit quality. As we are entering a new year, we will maintain our overweight positions in the province of Québec as well as in secured lending, which we view as favorable in the current environment. Turning to Wealth Management, favorable markets and net inflows contributed to generating strong AUM growth and fee-based revenues in the fourth quarter. It also benefited from a solid operating leverage and an industry-leading efficiency ratio, achieving double-digit earnings growth this quarter. As a leading franchise in Québec that's firmly established in Canada, we are pleased with the differentiated positioning of our Wealth Management platform, which generated approximately 23% of the bank's total earnings this year. Our focus on distribution, our positioning as Canada's largest manager of managers and the diversification of our business model, which is less dependent on transaction revenues, allow us to be very confident in our future. As such, we are maintaining our double-digit earnings growth objective through the cycle. Turning to financial markets. Our global markets business delivered a record performance in Q4 driven -- particularly driven by structured products and securities finance. Over the years, we have built industry-leading capabilities in these businesses. Today, we are seeing the benefits resulting from sustained investments in our technology, products and talent. We also delivered good results in corporate and investment banking against a strong quarter last year. For the sixth consecutive year, we are proud to rank #1 in Canada in government debt underwriting. Our financial markets segment is a strong pillar for the bank. The strength and resilience of our franchise is underpinned by our entrepreneurial culture, our differentiated business mix and our flexible approach to capital allocation. Looking forward, we will continue to invest in our franchise. Now turning to our international segment, we are very satisfied with its overall performance. During 2019, as expected, Credigy delivered lower growth, reflecting a disciplined investment approach. For 2020, however, Credigy has a solid pipeline and expects to deliver double-digit earnings growth. In Cambodia, we now own 100% of ABA Bank, which had another very strong year. In the last quarter, earnings more than doubled from the prior year. Loans are up 50%, and deposits are up an impressive 85%. Looking ahead, we expect another very good year for ABA in 2020. At this point in time, we are very satisfied with our investment in Cambodia, and we're not seeking expansion in other countries. In that context, we're extending our moratorium on significant additional investments in emerging markets, until the end of 2021. At a time of profound change, we believe that people and culture are the cornerstone of our long-term success. Our entrepreneurial culture is a key differentiator in the way we transform the bank, serve our clients and attract people with the right skills and values. Our evolution as an agile organization goes hand-in-hand with our digital transformation, all essential components to deliver superior customer experience, sustainable revenue growth and higher operating efficiency. We believe that building long-term relationships with our clients, our employees and communities is key to creating long-term sustainable value for all stakeholders. In 2019, we therefore adjusted our mission statement to respond to the rapid evolution of our operating environment. At National Bank, we are putting people first. As we embark on a new year, I look forward to the future with prudent optimism. The outlook in Québec remains favorable, and we continue to take advantage of Canada's broader economic soundness. Our credit quality is excellent. Our capital ratios are strong and disciplined cost management remains a priority throughout the organization. In an environment of macroeconomic and geopolitical uncertainties, we are satisfied with our current positioning. Our overall objective remains to position the bank to perform well through the complete cycle. In that context, and assuming no recession in 2020, we are comfortable reiterating our midterm objectives for the year. As we mark our 160th anniversary, I am proud of the bank's influential role in the economic and social development of our community. I wish to sincerely thank my colleagues at the office of the President for their leadership and our more than 25,000 employees for their contribution in achieving our mission each day. I also thank our clients and our shareholders for their trust and continued support. We have the right team in place to ensure the bank's long-term success and truly live our mission of putting peoples first. On that, I will now turn the call over to Ghislain. Ghislain?

[Ghislain Parent, CFO & Executive VP of Finance]

Thank you, Louis, and good afternoon, everyone. My comments today will focus on efficiency and capital, beginning on Page 8. We ended the year with strong results in our fourth quarter, driven by a solid underlying performance across all businesses. Our P&C segment delivered good volume growth and positive operating leverage of 2.3% this quarter. Muted expense growth resulted from lower amortization following the write-down of obsolete technology recorded last quarter as well as from savings related to distribution optimization and corporate costs. For fiscal 2020, we expect expense growth to normalize around 3% for P&C, as we balance our disciplined approach to cost management, while investing for growth. Wealth Management delivered solid revenue and expense performance in Q4. Normal expense growth was compensated by numerous cost savings initiatives resulting in a strong operating leverage of 3% and a 60% efficiency ratio. For 2020, we expect the efficiency ratio to remain in the low 60s for Wealth Management. Financial markets delivered record revenues this quarter. A strong performance in the second half of 2019 triggered a catch-up in variable compensation in the fourth quarter, translating into negative operating leverage.On a yearly basis, expenses are up 6.6%, driven by continued investments in technology and talent. Despite a slower start to the year, our Financial Markets segment achieved a low efficiency ratio of 42.5% for fiscal 2019. Looking forward, the Financial Markets team remains focused on achieving a healthy balance between cost and investment in Financial Markets. On a total bank basis now, our transformation and continued focus on expense management is bearing fruit. We delivered solid efficiency gains in the fourth quarter and over the full year. During the fourth quarter, expenses increased 4.6% against revenue growth of 7.2%, leading to a solid operating leverage of 2.6%. More importantly, we were successful in delivering a positive operating leverage for fiscal 2019, despite a softer performance in financial markets in the first half of the year. For fiscal 2020, we target a positive operating leverage. To conclude my comments on efficiency, as a team, we maintain a disciplined approach to cost management, while investing in our people, enhancing our customers' experience and simplifying our systems and processes. Now turning to the capital review on Page 9. We ended the year with a CET1 ratio of 11.7%. Strong earnings growth contributed 41 basis points of internally generated capital this quarter. The risk-weighted assets increased by approximately $2 billion or 29 basis points, reflecting good volumes across all segments as well as new transactions and commitments at Credigy, supporting our expectations for double-digit growth, earnings growth in 2020 for Credigy. At the end of the quarter, our total capital ratio stood at 16.1%, and our liquidity coverage ratio at 146%. We bought back 1 million common shares in Q4, bringing total buybacks to 4.5 million common shares for the fiscal year. We are pleased with our capital and liquidity positions, which we view as prudent at this stage of the cycle. To conclude on capital. Regarding the upcoming accounting and regulatory changes in Q1 2020, we expect a combined CET1 impact of around 20 basis points. On this, I'm turning the call to Bill for the risk review.

[William Bonnell, Chief Risk Officer & Executive Vice]

Merci, Ghislain and good afternoon, everyone. I'll begin on Slide 11, looking back at the full year 2019 performance of our credit portfolios. Benefiting from our disciplined underwriting, our favorable geographic footprint and product mix and from ongoing benign credit conditions, our portfolios generated full year total PCLs of 23 basis points during 2019, slightly below the midpoint of our 20 to 30 basis point guidance. In our domestic portfolios, impaired PCLs remained close to cyclical lows at 16 basis points and performing PCLs were 3 basis points, stable from the prior year. Looking now at Q4 results, impaired PCLs in our domestic portfolios increased 1 basis point to 16 basis points or $59 million, reflecting good economic conditions in our core markets. Total impaired PCLs were stable at 20 basis points or $77 million. Performing loan PCLs in the domestic portfolios were 3 basis points or $10 million, also pretty stable from last quarter. Performing loan PCLs in the international sector were negative $1 million as they continue to track the amortization of Credigy's unsecured portfolio, which we've discussed on previous calls. Total bank PCLs were stable in the fourth quarter at 23 basis points or $89 million. I'll now turn my comments to look at the year ahead in 2020. In our domestic portfolios, while IFRS 9 could generate some quarterly volatility, we expect relatively benign conditions to continue with some normalization of PCLs from recent low levels. In our international sector, we expect a relatively stable level of impaired PCLs next year, but expect performing loan PCLs to increase throughout the year, tracking strong asset growth and product mix. Taking those 2 factors into account, we maintain our 20 to 30 basis point range for total PCLs for the full year and expect to be around the middle of that range. Turning to Slide 12. Gross impaired loans totaled $684 million or 44 basis points, stable from last quarter. Net formations declined by $7 million from last quarter to $118 million. Formations in Personal Banking increased from the low level last quarter, but declined on a year-over-year basis. Commercial formations were higher in Q4, mainly due to a few files in different sectors and across 3 provinces. Financial Markets had a net prepayment in the quarter. On Slide 13, you'll find details of our retail mortgage and HELOC portfolios, which remained stable during the quarter. In summary, we were very pleased with the strong performance of our credit portfolios in the last quarter and the last year. Our overweight Québec and underweight unsecured consumer lending continue to position us well for strong performance in the current economic context. And on that, I'll turn the call back to the operator for the Q&A.

[Operator]

[Operator Instructions] Our first question is from Steve Theriault with Eight Capital.

[Stephen Gordon Theriault, Principal & Head of Research]

A couple things for me. First, on Wealth and on expenses, very good operating leverage, not just for Q4, but for 2019, and, I think, 2018 as well. But I noted, Louis, you called it out as industry-leading. And then, Ghislain, I noticed you suggested that the low 60s is what we should look at for 2020. So is that intending to signal that the really phenomenal run in operating leverage is starting to hit a bit of a wall and will dissipate in 2020?

[Louis Vachon, President, CEO & Director]

It's a great question. So Martin will answer it.

[Martin Gagnon, Executive VP of Wealth Management & Co]

Well, thank you for the question. We did, over the last 3 or 4 years, take our efficiency ratio from around 70% to 60.3% in the last quarter. So as Ghislain said, this has been a great ride, and we had a lot of ideas for low-hanging fruits. I don't think they're that obvious now, but essentially, one thing I want to make a strong point on is, what we did is essentially working together, working better together, eliminating some of redundancies, operating not as each business as a silo, but together with Lucie and also in P&C. So that's what we did. But we're investing heavily in our private banker. We're actively recruiting investment advisers. So and we've doubled our IT investments over the last 3 years. So we did find a lot of ways of working better together, and there's obviously less of that going forward. We're focused on positive operating leverage every quarter. But I don't think you'll see the same 10% improvement over the next 3 years.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay, that's fair. And then, Louis, you're talking about another strong year for ABA in 2020, is a bit difficult given the size. But how should we think of that versus earnings nearly doubling in 2019?

[Louis Vachon, President, CEO & Director]

Well, as I said, it should be another good year. At some point, as the bank gets bigger and your earnings basis gets bigger, I think just arithmetics will do its work, and it's going to start slowing down. But I think it's still a business which over the mid, long term, should still grow a comfortable double digit for a pretty extended period of time, given the dynamics of the banking market and Cambodia and the fact that it's an economy that still can grow 6%, 7% real on an annualized basis for an extended period of time. So to the extent that you have a relatively stable global economy, that's an economy that -- and a bank that should generate, I would say, good double-digit earnings growth going forward.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay. And last thing for me, just you mentioned the commitments to Credigy in your double-digit outlook for 2020. Can you talk a little bit about what the pipeline looks like in terms of -- are you doing anything different in terms of mix of performing versus nonperforming or geography? It sounds like that's coming online in the short term, but any initial detail would be great.

[Louis Vachon, President, CEO & Director]

Sure. It is mostly U.S. So from a geography standpoint, it's the same focus as the last 3 or 4 years. So almost exclusively U.S., almost exclusively performing at this stage. We feel that performing, given where we are in the cycle, is a better risk return patterns. And then it's quite diversified from the rest, mostly secured but still a segment in unsecured, that's pretty much. And we have -- most of the deals that we were -- they have a strong pipeline that's been signed up already. That's why we have a relatively good level of confidence that they have a good year ahead of them in 2020.

[Operator]

Our next question is from Meny Grauman with Cormark Securities.

[Meny Grauman, MD & Head of Institutional Equity Research]

Louis, you spent a large part of your remarks highlighting the economic strength in Québec, and we definitely see it in your results, but I assume some of your competitors do, too. So I'm just wondering if you could comment on the competitive environment and whether you see that as a risk heading into 2020?

[Louis Vachon, President, CEO & Director]

Good question. Listen, I think the economy in Québec has been improving. It's not a phenomenon that dates back to the last 24 months. I think steadily has been improving. And I remind you that Québec did pretty well during the last recession. So since '08, '09, on a relative basis, the Québec economy has been pretty good. So -- and so our competitors are investing in Québec, I would say, it's more a 10-year phenomenon than a 1- or 2-year phenomenon. So that's why it's a continuing of a reality that we have lived in for quite a bit of time. That's why we don't have any special concern for 2020. We remain very focused on, as I said, our -- the balance between generating decent volume growth, good risk management and good margins. And that's what's driving pretty much where we're comfortable in terms of volume growth in both retail and commercial banking.

[Meny Grauman, MD & Head of Institutional Equity Research]

Can you -- on that subject of the margin specifically in the Canadian P&C business, can you comment on the expectation for next year? I'm not sure if you did already, if I missed it.

[Louis Vachon, President, CEO & Director]

No, I don't think we've answered that. Lucie will answer that.

[Lucie Blanchet]

Yes, it's Lucie. So the outlook on margin for P&C overall is mostly flat throughout the year, maybe some volatility, some dips from one quarter to the other, but mostly flat.

[Meny Grauman, MD & Head of Institutional Equity Research]

And does that include a forecasted Bank of Canada rate cut or no?

[Lucie Blanchet]

Yes, it does.

[Louis Vachon, President, CEO & Director]

A limited one.

[Operator]

Our next question is from Gabriel Dechaine with National Bank.

[Gabriel Dechaine, Analyst]

Just want to follow-up on the Québec market, but a different angle here. I'm seeing your loan growth, both Commercial and Personal, coming in a bit below what peers are delivering, mind you in -- across Canada. Just wondering if there's any deliberate action on your part to curtail loan growth, given the more conservative outlook? And I've got a follow-up.

[Lucie Blanchet]

I'll start with the more maybe the retail flavor of the question. So I would say generally, on mortgages, we're quite comfortable where we stand at 4% mortgage growth. Generally, I would say that we grew our portfolio by remaining disciplined on pricing also. And we've seen that for a flat margin also sequentially and within also our same risk appetite. And by the way, this appetite didn't change much irrespective of the real estate market. So we try to stay consistent on that front. And what's important at this point is that we see an upward trend in net interest income coming from the mortgage activity. And this for us is positive at this point. So that's why we're happy on the mortgage front.

[Louis Vachon, President, CEO & Director]

On commercial, Stéphane?

[Stéphane Achard]

And on Commercial, so you saw a loan growth of 8%, and we are very comfortable with that growth level at this stage of the cycle. And you got to recognize that as far as you look at the overall real estate growth, it was flat year-over-year on a bank-wide perspective. So it's solid and non-reliant on real estate. We're very comfortable with that approach.

[Gabriel Dechaine, Analyst]

Okay. Shifting to Credigy. I just want to get a sense, and it sounds like the pipeline is pretty tangible there. I want to get a sense for the funding, how big you want that portfolio to get before you start, I don't know, looking for funding alternatives from either partners or anything like of that nature that comes to mind when you think about growth of that book, in particular?

[Louis Vachon, President, CEO & Director]

Yes. We -- I think we still have room to grow there. That's a good question. I think we're looking at how much we can support through wholesale funding. But suffice it to say, we think there's still room to grow on that book that we can support. That being said, we have done a number of deals already with the other parties where we syndicate a part of the risk and the funding in exchange for fees. So that's a business which eventually could also grow quite significantly. But right now, we're more of the -- establishing the relationships and determining how we want to take that forward. But there is room to go for third-party money in that business eventually.

[Gabriel Dechaine, Analyst]

Okay. Not a near-term constraint?

[Louis Vachon, President, CEO & Director]

No, we've done a couple deals. It's small, but I think we're laying the basis that if one day, for instance, during a downturn, we see room for not $1.5 billion increase in assets, but $5 billion to $10 billion increase in assets in a particular year, then we would certainly look to partner up with people. And there's plenty of patient money looking to invest in alternative fixed income assets right now. So we don't think -- and we, frankly, rather have the relationships and the paperwork and the back-office systems lined up for that date to occur. So right now, it's relatively small, but we're just getting ready for that alternative scenario should that one day, should that occur.

[Gabriel Dechaine, Analyst]

Okay. Last one for me and sticking to Credigy, but also lumping in the international business. If I exclude corporate, we're just over 10% of the bank's earnings this quarter, that was a target for the bank. I'm just wondering, given that ABA is still probably going to grow quite nicely in 2020, Credigy is going to gear up for a good year as well, like where do you see that number going? And what's your comfort level, I guess, in it becoming a bigger part of the bank growth story?

[Louis Vachon, President, CEO & Director]

Well, I think if it continues to grow from 210 or 211 or 212 or 213 or in that range, I think as long as it's growing organically, and we're comfortable with the quality of the business, I think we're comfortable with letting that percentage creep up. To the extent that we remain comfortable with the quality of earnings that we've seen there, and again that it's mostly now coming from organic growth, I think that's fine. We're not going to tell them to slow down, obviously. That being said, in terms of the international segment, that's why we extended our moratorium until the end of 2021, we are not looking to deploy excess capital to the international division aside from supporting the growth of our existing businesses.

[Operator]

Our next question is from Doug Young with Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Just 2 quick ones on credit. I saw that there was an uptick in write-offs, believe it related, looked like it's related to commercial banking, hoping to get some color on that. And then on -- just trying to get a sense of what impact the Québec Mini payment change had on your cards? And if it didn't have a big impact, I'm just -- I'm curious why that would be the case?

[Louis Vachon, President, CEO & Director]

Thanks, Doug. I'll start off, and then I'll let Lucie comment on the second part. The write-offs that you noticed there were a couple of files that have been impaired for over a year in the oil and gas sector, that the work in process was finished, the files were closed and they were written-off. So I think that's what you saw in the write-offs. Lucie, on the second.

[Lucie Blanchet]

On the minimum payment, so yes, there was a new regulation starting in August 2019. It has not impacted us because we were already at the minimum payment, which was expected in August, which is 2.5%. So starting August 2020, we should increase by 0.5%, same as our peers.

[Doug Young, Diversified Financials and Insurance Analyst]

So you were already at the minimum, like with new and existing cards?

[Lucie Blanchet]

Yes, we were.

[Doug Young, Diversified Financials and Insurance Analyst]

And did you do that in anticipation of this change? Or was that just something that's always been part of that philosophy with your card book?

[Lucie Blanchet]

It has been at that level, I think, for the last 3 years, and I don't think we anticipated that change at the time. So it was -- yes.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. Well, okay. Sorry. And then Credigy, I saw there was a loss in noninterest income; hoping to get a sense as to what that related to?

[Louis Vachon, President, CEO & Director]

I think my friend Jean Dagenais will answer that.

[Jean Dagenais, Senior Vice]

It's more like the funding situation. So it's -- there's various amounts, sometimes you go into net interest income,, sometime in other income, and that's only an issue intercompany funding.

[Doug Young, Diversified Financials and Insurance Analyst]

So just kind of inter -- okay, that's fine.

[Operator]

Our next question is from Sumit Malhotra with Scotia Capital.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Starting with a couple of questions for the Personal and Commercial Banking segment. Louis, in your prepared remarks, you made the comment that the bank has been investing heavily in the business and some of the new initiatives. I know there's more that goes into investing than just looking at the overall expense line, but it is a question that comes up from time to time that the level of expense growth for this business has been lower. And I think you've indicated that it should increase heading into the next year. Is there -- let's put it this way -- when we look at 1% expense growth in the segment for the quarter, something like 2% for the year, is there more going on in terms of, for lack of a better term, recycling some of the expenses that is keeping the level low? Or are there some other factors at play that we should think about when you comment on investing heavily in the business?

[Louis Vachon, President, CEO & Director]

I'm not sure what recycling of expenses would be or -- but I think, Ghislain, I think you...

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Sorry, just to explain, maybe there's some projects that get completed and you're able to, in the next year, use those proceeds into another project rather than new money having to be allocated?

[Louis Vachon, President, CEO & Director]

Okay. I think Ghislain alluded, I think in your opening remarks, Ghislain addressed, I think, why I think we look pretty good on the expenses and so you have an explanation there. And then maybe Lucie after that, you can add to that. Ghislain?

[Ghislain Parent, CFO & Executive VP of Finance]

Yes. Well, for 2019, as you mentioned, I mean the expense level was low. But some explanations, we had a lot of opportunities and initiatives that we've put in place. We were helped also by, you remember some of the charges that we took in Q3 that will benefit not just Q4, but also 2020 and 2021. And some corporate costs also that we had some savings. So that was for 2019. And of course, we don't expect these in 2020, or most of these in 2020. So this is why we expect the expense level in P&C to normalize around 3% in 2020.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And -- I'm sorry, go ahead.

[Lucie Blanchet]

And on where we are investing, it's really in our people. This year, we've also added capacity in our sales force, both in retail and commercial, and we continue to deploy also training platform for all our employees and branches and contact center next year. So employee investments remains an important part as well as innovation in data, digital and AI also.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And it was asked earlier about -- given the strength economically in Québec, whether -- I think the gist of the question was whether you're seeing more competition from the Toronto-based banks in the province. I wanted to go about it the other way. When I think about some of your Québec-based competitors, one of them reported today has been having balance sheet declines for some time. Your larger competitor obviously had a well-publicized data breach and seems to be undertaking a management restructuring. I appreciate your candor here. Have the challenges that some of your closer-to-home competitors have been facing given National some greater advantage in terms of market share pickup on the lending or deposit side in Québec?

[Louis Vachon, President, CEO & Director]

I think Lucie had that question last quarter. And I think what we've been saying, Sumit, is that in terms of client acquisitions, it's been -- we had a very good year in 2019. And momentum continues to be very good. That being said, it is difficult for us to do -- there's been many initiatives related to this, a number of which predated the events at our main competitor. So in terms of attribution, in terms of acquisition, it's pretty difficult for us to comment on that. But I think the main thing is, we've always been very dedicated and very present in our local markets here. We do care about market share. We do care about the number of clients, but we do so over a longer-term perspective. We've seen the ups and downs and some of the most -- the longer-term perspective, in terms of the Québec economy, and we remain focused on the long term. That's why we keep repeating, and I think we've been pretty consistent on that, Sumit, that we look at the right balance between volume growth, the risk box that we put in and the margins we're generating because we feel that over the long term, that's what will drive, I think, good quality of business growth, but also long term, sustainable increase in market share. So that's what we're trying to combine. And so the ups and downs of our competitors from both Québec and outside of Québec, they come and they go, but I think we really want to stick, be predictable, be a reliable partner for retail clients and business clients and continue to drive that business going forward. Lucie, anything that I missed on that or anything else to add?

[Lucie Blanchet]

No, no.

[Louis Vachon, President, CEO & Director]

Or Stéphane?

[Stéphane Achard]

Oh, I'll add that we've seen our market share grow in the agri and ag business in Québec. And a lot of the clients have also come to us through open accounts as an alternative in light of what our competition is facing in Québec with regards to security issues.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Last one for me. This one, again, might be more for Lucie. Doug brought up the topic on credit cards. And I feel like it's one part of the business we haven't explored too much with National. Obviously, the industry is thinking a lot about the Air Canada redesign or relaunch in 2020. When it comes to credit cards, loans in the P&C segment have been pretty flat for a number of years, and that is bettered, if you will, by what we see in credit card fees in your fee income, which have actually been growing at a pretty good clip. So maybe a bit open-ended, but credit cards, at least from a loan perspective are a smaller part of your business, that's helped credit. But curious with competition perhaps heating up again in 2020 in the card space, how you view National's competitive response and what you want the credit card product to fill in your lineup to consumers?

[Louis Vachon, President, CEO & Director]

So I'll start, and then Lucie will pass. So in terms of the credit, in terms of risk management, I think we've been -- again, I think we've been very consistent, as you know, in terms of being very clear that we favor secured lending as opposed to lending at this stage of the cycle. So that we've been not the most aggressive grower of the credit card portfolio, I don't think is a surprise to anyone. In terms of, however, on the payment side, I think, we have a lot more interest. So Lucie on that.

[Lucie Blanchet]

Yes. So on the credit card, let's say in terms of outlook, credit card, I would expect would grow in the low mid-single-digit next year. We will continue to grow the portfolio within our risk appetite, like Louis said, but we will face some headwinds in terms of new regulatory elements coming into effect on over limit fees and also the reduction of interchange rate. So going forward, our plan is to continue to grow that business for sure, within our -- the penetration of our customer base mainly, and also increasing the number of active accounts. And working with our loyalty program, we believe it's important to own our own currency in terms of loyalty program. So it is an area where we want to distinct ourselves with the particularities of our program. So we will continue to invest in our loyalty redemption experience and program. So does that give you an overview?

[Sumit Malhotra, Managing Director of Canadian Financial Services]

That's very helpful.

[Operator]

Our next question is from Mike Rizvanovic with Crédit Suisse Securities.

[Mehmed Rizvanovic, Research Analyst]

First question for Lucie. Just going back to your commentary on margin expectations for 2020 in P&C banking. So we've heard some of your peers talk about competitive pressure driving margins down in mortgage lending, and that's an area where it looks like a lot of your larger peers have really focused a lot more in Québec, as was alluded to earlier. So when you have your margin outlook being relatively flat for 2020, does that imply that you're going to remain disciplined on pricing, and we should maybe expect a slightly lower growth relative to peers in that part of your portfolio?

[Lucie Blanchet]

It does. And we started doing that already in 2019. So part of the decrease that we see also in terms of mortgage is not happening in Québec, but outside Québec, where the real estate markets in Ontario and B.C. were very competitive in that context. So we have made conscious decision in favor of remaining -- increasing net interest income instead of volume. So this is definitely in our approach, in our management principle and in our discipline.

[Mehmed Rizvanovic, Research Analyst]

Okay. And then maybe just a quick follow-up for Bill. Looking at your regulatory capital disclosure. Your loss given default in the residential mortgage, uninsured portfolio. Now this is certainly a part of your portfolio, I would consider to be very low risk. But just given what we've seen with consumer insolvencies at the industry level in recent months. I guess my question here, what's peaked my interest is, why the loss given default would be so high? It looks like about 20% in your case? And just given that your starting point is a loan-to-value of no more than 80%. So how does it get to such a high loss given default?

[Louis Vachon, President, CEO & Director]

Mike, well, I'll answer it at maybe a broad level and see if that addresses it, and I'll talk to, but the insolvencies. On the insolvencies, the personal insolvencies in Canada that you have seen an increase in Québec as well as the rest of the country, I think it's important to look more granular at the data. I believe there's differentiation between the urban areas, in Québec like Montreal versus the rural areas, and that's a factor of demographic where population growth has been and job creation. And in the insolvencies in Québec, the dollar amount is typically lower than in the rest of the country because Québec consumers typically are less indebted, as well as there's more propositions than bankruptcies. And in that, you'll see the data for insolvencies going up, but you see the performance across the country and delinquencies for our mortgages not going up. So it really seems to be impacting the unsecured credit versus the secured credit. And of course, as we talked about a few times on the call already, we're comfortable with our weight in terms of secured versus unsecured. In terms of the loss given default, I don't have a technical answer for you, but I'd say generally, we try to, in our modeling for regulatory capital, we try to be conservative in the modeling on whole probability of default and loss given defaults. In regulatory capital, you look through the cycle views and downturn views on the loss given default. So I'd be more concerned if our loss given default number were to too low rather than a bit higher.

[Mehmed Rizvanovic, Research Analyst]

And so just to sort of finish off there, so that 20%, is that -- I get it, there's conservatism built into that. But would that largely just reflect the discount that probably has to get applied to a home that's in foreclosure. I'm just trying to run through the cost, and it seems like that would probably be the bulk of it?

[Louis Vachon, President, CEO & Director]

For sure, it sounds like maybe we could have an offline discussion, getting more technical details. I'm happy to do that with you, Mike.

[Operator]

Our next question is from the Nigel D'Souza with Veritas Investment Research.

[Nigel R. D'Souza, Investment Analyst]

If I could turn to your Financial Market segment. And I apologize if you've already gone over this, but I was wondering if you could provide more color for your outlook in 2020 for financial markets? And also, if you could touch on how you were able to buck the trend in this quarter? Because at a sector level, there's been a challenging and softer environment for capital markets, yet you've been able to grow that in Corporate Investment banking and also equity revenue in global markets was also really strong. Was that -- you mentioned structured products, but if you could just provide more color it would help, the strength this quarter and what your outlook is for 2020?

[Laurent Ferreira, Chief Transformation Officer, Executive VP & Co]

Sure. This is Laurent. Thank you for your question also. So for 2020, we remain optimistic, obviously assuming a good economic environment and favorable markets. I think in terms of our trading businesses, we're really well positioned. Our M&A pipeline, we invested a lot in terms of talent over the year. Our M&A pipeline today is probably double the size what it was a year ago. So we're very happy about the opportunities that we have there. Our lending book, we're going to remain prudent. We've had good growth in 2019, where we think we're going to see sort of the same kind of growth in 2020. But again, remaining prudent. So we're staying away from lever transactions. So in terms of outlook, we're optimistic, obviously assuming good markets and economic condition. Going back to Q3 -- sorry, Q4, yes, we've had a very good quarter. And I think Q3 was also strong. So the second half of the year versus the first half. I think overall, we're benefiting from a well-diversified business, which remains Canadian focused. And as you know, when we work on growth initiatives, we're working from, I think a competitive advantage in terms of our cost structure. So it's really well optimized, and it has been really well optimized over the years. So it does provide us, I think with some advantages there. So more specifically, in terms of performance, yes, structured products was very strong in Q4, and that was continued from Q3. What we've seen is -- so a couple of things. We've increased our capabilities over the year in terms of new products, and that has paid off in Q3 and Q4. We've widened distribution, specifically to institutions on structured products, and we've seen growth abroad. And overall, I mean the markets were good in Q4. So I mean the market conditions were good for the type of business. From a client standpoint, I think we're seeing a couple things. There's interest for our name as an issuer. And we've seen that demand grow throughout the year and specifically coming from outside of Canada. And overall, I think we're distinguishing ourselves with our structuring capabilities and our time to market. And the landscape on structured products over the past 5 years has changed significantly in terms of sales period, issuance size, growth, interest come from various investors. And National Bank, it has always been a focus for us. And we've adapted our business over time and made the proper level of investment in people and technology. And I think it allowed us today to capture a fair part of the market share. So the strength of Q4 there, we've also did quite well in rates overall, with our corporate clients and institutional clients. So I think that would provide you with a good summary of what went well.

[Operator]

Our next question is from Sohrab Movahedi with BMO Capital Markets.

[Sohrab Movahedi, Analyst]

That's actually a pretty good segue to my set of questions. If I look at the notional value associated with your total derivatives, it's up quite handsomely over last year. If I look at the risk density that you report on the counterparty credit risk exposure, it's also up year-over-year, really across all of corporate, I guess sovereign and financial institutions. Just trying to kind of get a feel for what sort of risks are you taking, presumably in Financial Markets for the trading revenue that may or may not manifest itself right now based on what we see in the capital ratios or RWAs? I'm just trying to get a better feel for that. I don't know who's the best positioned to answer that.

[Louis Vachon, President, CEO & Director]

Laurent will answer that.

[Laurent Ferreira, Chief Transformation Officer, Executive VP & Co]

Yes. So activities with our corporates, it's mainly derivatives in terms of hedging, foreign exchange and rates. And so when you see an increase in RWA, mainly, it is the increase in terms of counterparty credit risk and often linked to mark-to-market valuations of our position. So not additional market risk, but yes, additional counterparty risk, for sure, and then we do have to set aside more capital for that.

[Sohrab Movahedi, Analyst]

Okay. But is the -- I guess is the credit quality of the counterparty deteriorating here? I mean you've got on Page 40, 41 of your -- of the supplementary regulatory capital disclosure. I mean it looks like you've got still around 2,400 obligors, but the average LGD has gone from 28% to 37%. The risk density has gone from 16% to 20%. Just trying to kind of understand if you're taking basically additional risk to generate the trading revenue or not?

[William Bonnell, Chief Risk Officer & Executive Vice]

Sohrab, it's Bill. For some of the technical discussion on the risk densities, we could have an offline discussion. But I would say at a high level, where we have the transactions with corporate and commercial clients that are hedging either issues with bonds in the U.S. and Canada or hedging their FX, you would typically have those in a non-collateralized trade, which will lead to a higher counterparty risk, higher risk density. For a lot of the activity which Laurent talked about more in the, say structured products, where there is market risk isn't on the book of a National Bank, it's transferred through the products, you may have a high notional of derivatives involved. However, the counterparties would typically be large banks collateralized with the CSA, typically they got a 0 threshold. So the risk density is quite low. So I think depending on what type of activity it is, the risk density would be different. But happy to go through the chart and the sub-pack with you offline, if you'd like.

[Louis Vachon, President, CEO & Director]

Yes. So from a strategic standpoint, Sohrab, there's no big change in terms of counterparties. Counterparties are either Canadian corporates or Canadian governments or global financial institutions. That hasn't changed over the last X many years. So I don't think you should see a major shift in terms of risk preference or targeting. So I'm sure Bill can go through more details. But strategically, there hasn't been a big change in risk focus there.

[Sohrab Movahedi, Analyst]

I appreciate that. Bill, I'll take you up on the offer after the quarter.

[Operator]

[Operator Instructions] Our next question is from Mario Mendonca with TD Securities.

[Mario Mendonca, MD & Research Analyst]

Louis, can we go back to Credigy for a moment. So you've offered the commentary that you expect a little, well, stronger growth in 2020 than in 2019. If I could take you back to early in '19, you suggested that the environment may not be conducive for growth there, and then I think you've also suggested that there just weren't opportunities for growth. What has changed that's giving you a little more confidence to grow that business? Is it as simple as the assets you're targeting? Or is there something more to that?

[Louis Vachon, President, CEO & Director]

Good question, Mario. I think it was, I think late '18 and early '19, a couple of things were happening. The liquidity conditions in the U.S. were very, very, very good. And for Credigy, sometimes the best proxy is to look at what's going on in the securitization market in the U.S. So if people can take assets, any kind of assets, even complex assets and easily securitize them, that is not a good environment for Credigy. If you see the securitization market getting more difficult, more difficult to package and sell deals and for whatever reasons, more portfolios, more supply of product is coming on the market, that is a better environment for Credigy. So essentially, the difference between Q1 '19 or H1 '19 and H2 '19, was basically a better environment for Credigy and probably a tougher environment in terms of risk perception and from funding and securitization standpoint for other parties. So that's basically been the big change, too. And also we knew in '19 that we had quite a few of assets maturing. So we had the back end of the Lending Club deal maturing in late '18 and early '19, and also, the other deals maturing. So we knew that just to replenish some of the deals maturing, we had to generate X volumes, and we did. But things got much better in the second half of 2019. So that's been the big change. And the environment remains favorable for Credigy right now, Mario. I think it's still an environment where they feel they can deploy capital and get decent return on capital.

[Mario Mendonca, MD & Research Analyst]

And this new capital or capital you're going to deploy into these new assets, has the mix changed that would result in the change in the risk profile of Credigy or the margins from Credigy?

[Louis Vachon, President, CEO & Director]

No. I think it's -- as I said, it's all mostly performing. Nonperforming is a very small part of the portfolio right now. And in terms of asset classes, it's not new asset classes, that's I think the same stuff we've had for the last few years. So that's basically -- I don't think there should be a big change there.

[Mario Mendonca, MD & Research Analyst]

Okay. If we could just go then to ABA for a moment. And I could use a little help in understanding how you look at the risk-adjusted margins in that business. When I look at your net interest income and compare it to either the assets or the loans, it obviously speaks to a pretty big -- like a pretty healthy margin against loans at something like 10% against assets, it would be more like 650 basis points, but yet the PCLs remain fairly modest. So when you look at the risk-adjusted margins in that business, my guess is that they would look awfully healthy to you right now, much higher than what we've seen anywhere else in your bank. How do you look at those risk-adjusted margins changing over time as this business matures in the loan season?

[Louis Vachon, President, CEO & Director]

I think we're still comfortable that the -- as you know, we're very, very targeted in terms of the segments that we're covering on the lending side in Cambodia. So we're dealing with small family-owned businesses, but we take the real estate, the house as collateral. That essentially describes 90% of the portfolio in Cambodia, and that percentage has remained essentially flat for the last 4 years. So that's why we're quite comfortable. The industry has been quite good. Yes, some of these loans are new, so you know how it matures at some point, it could be a bit of a pickup in terms of loan losses. But fundamentally, we're quite comfortable with the risk profile of that asset. The reason that the NIMs have gone up, Mario, is that we had the deposit platform, because of the success of their Internet banking, mobile banking and the fact that we've been growing the branch network, we've been gathering more and more checking account deposits, transactional demand deposits where we pay 0 interest, and that's been replacing savings deposits where we paid some interest. And essentially, the drive up in NIMs has been coming from the fast growth. And as you saw in our stats when we -- in my opening remarks, we've had faster growth in our deposits in 2019 than we did in loans. And almost all of it was coming from transactional deposits, which is, as you know, the best performing, the best types of deposits we can hope for. So that explains essentially the performance and that's why I think just because of math and a bigger base, the speed of growth should lower over time, but we still expect good years over for 2020 and 2021 and the foreseeable future.

[Mario Mendonca, MD & Research Analyst]

Okay. And just to put a final cap on it then, is it the Cambodian real estate market like residential real estate that we should be most sensitive to for changes in the quality of that portfolio?

[Louis Vachon, President, CEO & Director]

Yes, those are small loans. The average, I remind you that the average loan is about USD 50,000. So we're not in large commercial development in Phnom Penh under the places like this. That's not our business. It's a series of very small loans to family-owned businesses, where we take the real estate as collateral.

[Operator]

Our next question is from Darko Mihelic with RBC Capital Markets.

[Darko Mihelic, MD & Equity Analyst]

Bill, I was going to lob a bunch of technical questions at you too, but I decided to maybe hold off, and maybe we can talk about it after the quarter or something. But I want to...

[Louis Vachon, President, CEO & Director]

Bill is disappointed.

[Darko Mihelic, MD & Equity Analyst]

Well, I will throw one at you. So your Stage 1, Stage 2, if I add those allowances together, you have good coverage against your last 12 months of losses, really only one of the peer as far as I can calculate, has good coverage. But that number has been around $500 million since Q2 2018. So the question I guess is, Bill, I know you're adding to the reserve a little here and there, but it's been very flat for a very long time. So how do you anchor -- or how should I look at that figure? I would have thought that it would be growing a little more aggressively, given the fact that you've got growth in loans.

[William Bonnell, Chief Risk Officer & Executive Vice]

Thanks for the question, Darko. I think the number you're looking at is probably aggregated across all of our loan books, including international. And I would say there's another slide, I think, it's Slide 27 in the SFI, where you can see it really broken down more by business, the different sectors in our business. And I say that because it's very important to look at that number, separating out international from the domestic books. If you remember, over the last 2 years in the international book, there was a lot of movement in the levels of both impaired PCLs and performing PCLs coming from Credigy's unsecured consumer book growing and then aging and then amortizing. So through the time period you're looking at, you had a significant decrease in Stage 1, Stage 2 PCLs in the Credigy line that made sense because the assets were being repaid. So when I look at the level of allowances, I think to answer the question of, do I feel comfortable that we've got a prudent level of allowances. I do look at the numbers separately. And in the domestic books, the ratio that you're talking about of ACLs on performing loans over the last 12 months impaired loans is around $220 million -- between $220 million and $230 million. And I think that's a good number because there hasn't been any significant change in our business mix or profile or geography in the domestic portfolio. So nothing to adjust in either the numerator or the denominator. And I'm quite comfortable in where that number is, the $220 million at this point in the cycle, that it's -- that we're prudently covered. In the international sectors, it's that the growth rate changes and the business mix and Credigy makes that a less useful metric, less useful ratio. I think looking at $220 million, I would expect the performing PCLs to increase, given the good growth, the visibility we have in good growth in Credigy. But even so, I would still counsel you to look at the businesses separately between domestic and international. Does that answer your question?

[Darko Mihelic, MD & Equity Analyst]

No, that's very good. And I wasn't kidding about that slew of technical questions. So if we could talk after. But one last thing just occurred to me that as we look at the growth in Credigy and ABA Bank, it's coming on at standardized risk weights, right? So it's fairly -- it consumes a fair amount of capital. Is there ever a hope that it would go to A or B or any of that stuff? Or is that just wishful thinking?

[William Bonnell, Chief Risk Officer & Executive Vice]

So I'll let Jean Dagenais, but ABA is certainly all standardized.

[Jean Dagenais, Senior Vice]

Some of it is advanced in Credigy. It depends if we have a model that we can use for that, but some of it is that.

[Darko Mihelic, MD & Equity Analyst]

Okay. And how much of that would -- like I mean and is that what we're looking at going forward from here? And when you're thinking about stronger growth in Credigy, are we looking at actually advanced modeling? So it's not too much of a hit on capital?

[Jean Dagenais, Senior Vice]

It depends because the portfolio are changing a lot and being paid really fast. So we don't want to develop a model that takes 1 year or 2 and the portfolio will be all repaid. So we will use model if the model already exists elsewhere at the bank. So the percentage of advance compared to the percentage of standard varies depending on the portfolio mix.

[Operator]

There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Vachon.

[Louis Vachon, President, CEO & Director]

Merci, thank you, everyone, and have happy holidays, and we'll talk to you for the results of Q1 in February. Thank you very much.

[Operator]

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