National Bank of Canada

TSX:NA

Earnings Call Transcript 2020-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 Ms. Linda Boulanger, Senior Vice President of Investor Relations. Please go ahead, Ms. Boulanger.

[Linda Boulanger, Vice President of Investor Relations]

Thank you, operator. Good afternoon, everyone, and welcome to National Bank Fourth Quarter and Full Fiscal Year 2020 Presentation. Presenting this afternoon are Louis Vachon, President and CEO; Bill Bonnell, Chief Risk Officer; and Ghislain Parent, Chief Financial 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-Heads of Financial Markets; and Jean Dagenais, Senior VP, Finance. Before we begin, I refer you to Slide 2 of our presentation providing National Bank's caution regarding forward-looking statements.With that, let me now turn the call over to Louis Vachon.

[Louis Vachon, President, CEO & Director]

[Foreign Language] Linda, and thank you, everyone, for joining us today. Before discussing our results, I would like to say a few words on the extraordinary circumstances the world is facing and in which we have operated in 2020. From the onset of the pandemic, our focus has been on the well-being of our employees, our clients and our communities. Our mission of putting People First guided us in all our decisions. I am very proud of the way we adjusted. This would have not been possible without the strong engagement of our employees and the transformation we have achieved over the past 5 years. Our entrepreneurial culture and the agility of our organization are true comparative advantage. They have played a key role in our ability to adapt and perform well through unprecedented circumstances.Earlier today, we reported strong results from the fourth quarter with EPS of $1.69, excluding special -- specified items, in line with the pre-pandemic levels. For the full fiscal year, our businesses performed very well with pretax pre-provision earnings up 9% compared to last year. Even after having set aside significant reserves over the last 3 quarters, we have maintained robust capital levels. We also generated an industry-leading return of 16% -- return on equity of 16% for the year, which speaks to the resilience of our franchise and the sound diversification of our earnings stream.Returning capital to our shareholders remains a priority. But consistent with OSFI's guideline, buyback activities and dividend increases remain on pause. Earlier today, we declared a quarterly dividend of $0.71 per share, unchanged from the previous quarter. Turning now to the performance of our business segment in fiscal 2020 and growth drivers going forward. I am pleased with our performance in Personal and Commercial Banking with pre-provision -- pretax pre-provision earnings holding steady year-over-year. This reflects solid growth on both sides of the balance sheet, offset by lower interest rates and client activity.Our performance translated into market share gains in key product categories, namely mortgages and deposits. We also saw some pickup in commercial activity in the fourth quarter. The depth of our relationships, the quality of our advice and the commitment and agility of our teams proved to be key differentiators, enabling us to support clients throughout the pandemic. We were pleased to see significant increase in client acquisition and satisfaction scores, which is a strong testimony to the ability of our teams to provide the support and advice our clients need. The bank's digital transformation has been at the heart of our strategy over the past years.Accordingly, we were ready to support a major uptick in digital adoption rates, which went up nearly 500 basis points among our core client base. In many ways, the pandemic has effectively accelerated our digital transformation. In 2021, we will continue to invest in our P&C franchise to support future growth. We will maintain our focus on client acquisition and priority segments, on offering proactive advice through both our sales force and digital channels, and on deepening relationships with clients through all business lines.Since the beginning of the crisis, the bank has been very proactive in helping businesses. In the context of the ongoing economic recovery, we recently created a National Bank SME Growth Fund in partnership with the Quebec government. I am pleased to announce that we have just completed the initial raise of $200 million in capital. The equity fund will complement the bank financing already offered to SME owners to help them with their transfer of ownership growth and acquisition plans, whether in Quebec or elsewhere in Canada.Our Wealth Management franchise delivered another strong performance with pretax pre-provision earnings up 10% for the year. This reflects solid transaction volumes and net sales more than offsetting lower interest rates. Our advice-first strategy is bearing fruit and resulted in a significant increase in our NPS scores this year. As we entered the new year in the context of persistent low interest rates, we remain confident we can generate future growth, fueled by our active recording strategy, enhanced cross-selling initiatives with P&C and market growth. We are pleased with the strategic positioning of our Wealth Management franchise and the diversification it brings to the bank. In fiscal 2020, it represented 23% of revenues and generated superior return on equity.For its part, Financial Markets generated record revenues and pretax pre-provision growth of 25% for fiscal 2020. Our global markets franchise were well positioned going into the crisis and delivered a particularly strong performance. Our corporate and investment banking franchise also performed well, driven by M&A and government debt issuance. Looking forward, our Financial Markets business remains well positioned to continue to deliver growth albeit at a slower pace against a record performance this year.Moving to our International segment. ABA Bank delivered solid results in fiscal 2020. Net income was up 50% from the prior year, driven by strong growth on both sides of the balance sheet. ABA continues to gain market share in Cambodia and is well positioned to benefit from the economic recovery anticipated in 2021. Credigy also performed well in the past year in the context of a challenging environment. We saw strong momentum in the fourth quarter with net income up nearly 40% sequentially and 84% over last year, driven by higher revenues and lower PCLs. Credigy's strong P&L performance and stable balance sheet reflects both asset quality and team's discipline.This morning, we announced the acquisition of the remaining 20% in Credigy, increasing our stake to 100%. For fiscal year 2020, the additional stake acquired in Credigy would have increased National Bank diluted EPS by $0.07. The senior members of Credigy's management team reiterated their personal commitment to leading the next stage of Credigy's growth strategy as well as their confidence in the future prospects for the company. Credigy has greatly exceeded our returns expectation since our initial investment in 2006, and we continue to see attractive growth potential in the future.Overall, we are very satisfied with the performance of our International segment, which continues to be well positioned to deliver strong growth next year. Looking ahead, while there continues to be uncertainty around the trajectory of the economic recovery, economic activity has recovered from its lows. In the province of Quebec, second wave lockdown restrictions have been more targeted and most sectors remain open. Overall and given recent developments regarding the availability of an effective vaccine in Canada next year, we expect a gradual improvement of the Canadian and Quebec economy in 2021.Looking back at 2020, I am proud of the bank's overall performance. In a year marked by unprecedented uncertainty and volatility, the bank managed to meet 4 out of its 5 of its medium-term objectives. The strong performance has confirmed that we have made the right strategic choices in terms of risk management, capital allocation and business mix. With 4 strong pillars, we are well positioned to maintain a sustainable pace of growth, and we are reiterating our medium-term objectives for 2021.In closing, I wish to sincerely thank our employees for their exceptional contributions to the success of the bank over the past year. Everyone across our organization deserves recognition for their dedication and flexibility. I would also like to thank our clients and shareholders for their confidence in the bank as we continue to build an agile bank, well positioned to grow and create sustainable value to the benefits of all stakeholders.On that, I will now turn the call over to Bill Bonnell. Bill Bonnell?

[William Bonnell, Chief Risk Officer & Executive Vice]

[Foreign Language] Louis, and good afternoon, everyone. I'll begin on Slide 8 with a look back on the credit performance for the full year of 2020. We entered the crisis on solid footing with strong credit quality and a defensive positioning. Our resilient geographic footprint and product mix helped to deliver an impaired PCL ratio of just 23 basis points last year. During the year, considering the uncertain macroeconomic outlook, we proactively built prudent allowances, taking a total of 30 basis points of performing provisions. And we finished the year with 53 basis points of total provisions for credit losses.In the fourth quarter, impaired PCLs were $82 million, a decline of $6 million from last quarter, as wholesale and international Stage 3 provisions declined and retail Stage 3 provisions remained stable at low levels. Provisions on performing loans were $20 million or 5 basis points as we continue to build our performing allowances. Our updated macroeconomic scenarios are presented in Appendix 17. As you can see, the pessimistic case was adjusted to depict a scenario of unemployment rates remaining higher for longer, and the weight of this pessimistic scenario was increased. Even with those changes, retail performing PCLs were negative $9 million, reflecting the continued strong performance in those portfolios.Non-retail performing provisions were $27 million, primarily reflecting the scenario change and some migration from Stage 2 to Stage 3. Our international performing provision was $2 million, driven primarily by portfolio growth at ABA. Looking ahead to next year, significant uncertainty remains about the path and the speed of the economic recovery. We expect impaired provisions to increase throughout the year. In retail portfolios, the exceptional recent performance should normalize and impaired should begin to more closely follow employment trends.Non-retail impaired provisions should also increase during the year and, as you know, can be lumpy from quarter-to-quarter. Performing provisions should largely be driven by changes to macro scenarios, portfolio growth and migration. Combining our view of these factors and our portfolio mix across geographies, products and sectors and considering the level of allowances we've already built, we're targeting a range in total PCLs of 25 to 35 basis points in 2021.Turning to Slide 9. Our allowances for credit losses grew to more than $1.3 billion in the fourth quarter, which is 75% higher than at the beginning of the pandemic. Performing allowances reached almost $1.1 billion, an 80% increase since Q1. The nonperforming allowances as a percentage of gross impaired loans was stable at 43%. With all the information we have today, we are confident that we have a prudent level of allowances.On Slide 10, we provide some key metrics to help assess the adequacy of our provisioning. Our strong performing ACL coverage was stable at 2.8x, and our total allowance coverage of net charge-offs increased to 5.4x. Absent a significant deterioration in our forward-looking scenarios, I expect that we're close to the peak in these coverage ratios. Has impaired provisions increase over the next year and some Stage 2 allowances migrate to Stage 3, I would expect these coverage ratios to be lower at the end of 2021.Turning to Slide 11. Our gross impaired loan ratio was stable at 49 basis points. Formations in Retail and Corporate Banking declined, while formations in Commercial Banking increased due primarily to new formations in oil and gas and wholesale trade sectors. On Slide 12, you'll find an update on our loans under deferral. As expected, deferral balances declined significantly, down by 81% in retail lending and by 74% in non-retail lending on a quarter-over-quarter basis. Deferrals in RESL now represents just 0.9% of that portfolio and more than 40% of those are insured.Our payment experience to date has been positive with 98% of expired RESL deferrals and 99% of expired non-retail deferrals having restarted regular payments. The trend we saw last quarter of performance varying significantly across provinces continued with Quebec consumers showing the best payment rates. We will continue to work closely with those impacted clients to provide support through this difficult period.Turning to Slide 13. The mix in our Canadian RESL portfolio remained stable with 38% being insured and 55% being in the province of Quebec. Uninsured mortgages and HELOCs for condos represented 7.4% of the total portfolio, with the majority being in Quebec and with an average LTV of 59%. In the appendices, you'll find further information on our loan portfolio, including details on our exposure to COVID-impacted sectors, which remain modest and manageable.In conclusion, while there have been positive signs of ongoing improvement in employment and GDP as well as recent optimistic news about vaccines, there remains much uncertainty to the path and speed of the economic recovery. We have been pleased with the performance of loan portfolios this year, but recognize that there is a long road ahead to return to pre-pandemic economic conditions. Given our portfolio's geographic, product and sector mix as well as our prudent level of provisioning, we remain very confident that we're well positioned to continue to support our clients throughout this period.On that, I will turn it over to Ghislain.

[Ghislain Parent, CFO & Executive VP of Finance]

Thank you, Bill, and good afternoon, everyone. Turning to Page 15. We ended the fiscal 2020 with solid results in the fourth quarter, capping off another strong year for National Bank. Revenues were up 7% for the year, and we delivered solid operating leverage of 1.6%, demonstrating the resilience and diversification of our business mix. We were also very pleased with the positive year-over-year revenue and pretax pre-provision growth in the fourth quarter. The higher corporate expenses were linked to a year-end variable compensation adjustment associated with higher revenues, a one-off payment to a supplier, costs related to the pandemic and higher investments in brand and technology.Despite the pandemic, we continued to move forward with our transformation in 2020 as we adapt to the changing needs of our customers and reinforce our culture of change and operational agility. In the fourth quarter, we took further measures to address the evolving needs of the bank as part of our ongoing transformation. First, we reassigned employees to fill vacant positions based on their professional skills and reduced positions considered redundant in our current operating environment. This will allow us to limit headcount inflation in fiscal 2021. It resulted in $48 million of severance costs.As second measure, we also wrote-off $71 million in technology assets no longer useful to the bank's business. Both items were reported as special items in the fourth quarter results, as they were related to our transformation and will result in ongoing operational efficiencies. These measures are expected to generate pretax savings of approximately $43 million in fiscal 2021 or $50 million on a fully annualized basis.The entire management team remains highly committed to maintaining our longstanding, disciplined approach to cost management. We also remain fully committed to the transformation of the bank as we continue to invest in our business to support the bank's sustainable growth. In fiscal 2021, our main focus will be on enhancing client experience, supporting new business initiatives and simplifying our systems and processes.In the current context, we are confident that we can achieve positive pretax pre-provision earnings growth in fiscal 2021. Our scenarios also suggest positive operating leverage is achievable in 2021, depending on the level of revenue growth. The team is committed to achieving good revenue growth despite the context of significant economic uncertainty. The first part of 2021 will provide more insight.Now turning to capital on Page 16. We ended the fourth quarter with a strong CET1 ratio of 11.8%, a 35 basis points from last quarter. Growth in credit risk-weighted assets was offset by a reduction in market risk from lower VAR, resulting in flat risk-weighted assets quarter-over-quarter. In the quarter, our CET1 ratio was negatively impacted by 20 basis points due to credit risk-weighted asset as a result of the combined effect of 2 items: first, continued asset growth in each of our business segments, which reduced CET1 by 10 basis points; second, net negative migration reduced CET1 by 10 basis points, mainly driven by the rerating of wholesale borrowers in COVID impacted industries, partly offset by improved credit scores from retail clients.In fiscal 2021, the regulator -- the regulatory scaler for ECL relief will decrease from 70% to 50%. Based on our current expectations, we anticipate the change will have a negative impact of 7 basis points on our CET1 ratio in the first quarter of fiscal 2021. Now turning to Page 17. Our LCR remained strong at 161%, with continued growth in deposits in the fourth quarter. Our total capital ratio stood at a solid 16% at the end of the fourth quarter. In conclusion, the bank ended fiscal 2020 in a solid position. With a strong balance sheet, significant reserves and diversified revenue growth levers, our franchise is well positioned to generate attractive growth in 2021.With that, I'll turn the call back to the operator for the Q&A.

[Operator]

[Operator Instructions] Our first question is from John Aiken from Barclays.

[John Aiken, Director & Senior Analyst]

A couple questions on Credigy, if I may. Louis, in terms of the transaction, first off, is there any contracts being put in place to make sure that the current management team stays on for an extended period of time? And secondly, can we assume that the transaction is being funded by cash and not issuance of additional shares?

[Louis Vachon, President, CEO & Director]

So on the second part, it is funded by cash. So there's no issuance of shares. And on the first part of your question, the team, I think, remains -- the senior management team remains very committed. They have committed to us and to their colleagues today that they are staying on for many more years. They already have incentive plans in place. But as you know, we've been working with these guys now for 14 years. And from everything we see, they remain fully committed to the business going forward. So we don't have any concern, John, on that particular part for Credigy going forward. And on top of that, our bank strength of that team has, obviously, over the last 5, 10 years, we brought on a new generation of managers also. So A, I think we expect to keep the founders on board for many years to come; and secondly, we have a good team surrounding them now. So all good.

[John Aiken, Director & Senior Analyst]

That's good to hear. And if I may follow-on in terms of the performance of Credigy this quarter, I know you guys look at year-over-year, but I was looking at this saying on a sequential growth basis. Very strong growth in revenues and yet we actually saw a decline in the average loans and receivables Q4 over Q3. Was there anything in terms of additional revenues that Credigy earned this quarter that you can explain for that? And then, by definition, does this mean that we would expect headwinds to revenue coming into the first quarter of next year?

[Louis Vachon, President, CEO & Director]

Jean, do you have the explanation for that?

[Jean Dagenais, Senior Vice]

Yes. A portion of it is due to volume -- showing your average volume. But during the quarter, there was a higher volume at some time. And also, there is mark-to-market of some of the portfolio that are booked in revenue like reverse mortgage and other type of portfolio. And they were downgraded in previous quarter and upgraded in the fourth quarter. So altogether, it helped the business.

[Operator]

Following question is from Meny Grauman from Scotiabank.

[Meny Grauman]

Just wondering how big a headwind do you think trading will be in the coming year. Definitely a very strong year in 2020. And how important will that be in terms of your guidance on PTPP next year?

[Louis Vachon, President, CEO & Director]

Laurent will start on the first part.

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

Sure. And thank you for your question. Yes. 2020 was an exceptional year, driven a lot by trading volumes. So going forward, we're still very positive, but we expect, obviously, lower growth and specifically in trading. Now having said that and based on also the good momentum that we've had in the second half of the year, we think there is some potential growth in 2021. And there are couple of sectors that we're confident about.There's fixed income and public finance that has done quite well for us this year, and we remain quite optimistic about it in 2021. Our structured product business as well. We also expect a pickup in securities finance. We saw a reduction over the past 6 months, but we're seeing a pickup right now with markets. And the M&A market is really picking up. So we're seeing positive momentum there. So that drives acquisition finance as well. So yes, headwinds, but remaining positive.

[Meny Grauman]

And then just as a follow-up, more generally on the guidance on PTPP, you talk about positive, but no other sort of numerical guidance. Relative to the 9% you put up in 2020, is there any more you can give us? Like what are the key factors here? I know there's a lot of uncertainty, but if you had to pinpoint sort of key variables that would kind of push up that number, what are the more realistic areas where you think maybe you could drive better PTPP results in '21?

[Louis Vachon, President, CEO & Director]

Meny, it's Louis. I think the way we look at it, we see revenue growth as the main delta here. Not -- I think we've remained very disciplined in terms of expenses. But when we look at different scenarios going forward, the delta in the scenarios is all about -- for the PTPP is around revenue growth, not expenses. So the good news is, I think, we're going into 2021 with very good momentum in all our business lines. So what gives us comfort of being positive PTPP for 2021 is the momentum of P&C. You've seen continued very good momentum in Wealth Management, continued very strong momentum in international.And then in capital markets, well, maybe not strong growth compared to 2020, but I think we -- low single-digit growth compared to 2020, I think, we'll be happy with that. So that's why I think we're not going to give you additional -- just having a positive sign on PTPP, I think, is going to be good news for us, frankly. And for the rest, we'll see how it goes. And then the other big delta that we want to talk about is PCLs, obviously, and Bill will -- I'm sure we'll get questions about that. So revenues -- in all of our scenarios, revenue growth and assumptions around PCLs are the main point of differentiation between the scenarios, not revenue growth -- not expense growth, sorry.

[Operator]

Following question is from Doug Young from Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Maybe just to start with P&C Banking NIMs, 2.19%, the sequential increase was quite nice. I'm just wondering if there's anything unusual in there. Is that repeatable? Just hoping you can unpack what actually drove the sequential increase in NIMs. And what's the outlook for NIMs as you kind of peer into fiscal '21?

[Louis Vachon, President, CEO & Director]

Lucie?

[Lucie Blanchet]

Yes. Thank you for your question. So our margin has hold quite good in the current environment, I would say. The negative impact of the yield curve was offsetted by better spread on the repricing of the loan book on a sequential basis. And on the outlook, I would say that we've been successful at growing our balance sheet, while being disciplined on pricing, and we will maintain that. We will also continue to evolve our pricing methodology. Like, for example, we introduced AI-based modeling in the pricing of the mortgages. So we will continue to refine that and evolve that to other products. But that being said, we expect a bit of pressure coming from the low interest rate environment and also the slowdown we expect in the deposit growth, mainly in the second half of the year.

[Doug Young, Diversified Financials and Insurance Analyst]

Perfect. And then just on -- I noticed in capital markets, the mix ratio, 37.2%. And I know this is just a quarter, not an annualized basis, but I'll throw it out there. Is this a new run rate for the division? Does this factor in some of the cost saves that you've got from the severance? Or is this just a clawback in the quarter and we should be looking at something a little bit higher as we kind of peer out over the next few years?

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

So Doug, this is Laurent. We've always targeted low 40s. From quarter-to-quarter, you're going to see some movement because of higher revenues or a reduction in expenses. But in the case of Q4, what we did is we reduced expenses, specifically on comp, and that was for -- to address realized loan losses. So it is just a onetime item for the quarter.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then just, lastly, 25 to 35 basis point PCL total fiscal '21. Does that factor in releases on performing loan ACLs through the year? Can you maybe unpack a little bit more what's behind that 25 to 35 basis points?

[William Bonnell, Chief Risk Officer & Executive Vice]

Yes, sure, Doug. Thanks for the question. It's Bill. So looking ahead to 2021, I think you've heard us mention a high level of uncertainty. However, what gives me confidence in talking about that target range is a few factors. One is really understanding our positioning, geographic product, business mix and the disciplined underwriting we had before the downturn. And now we have more history on the performance of the expired deferrals. The -- we've -- our deferrals expire more rapidly, I think, than some peers. So we now have a good experience and understanding of the geographical differences in performance and product differences. I think two, our modest exposure in COVID sectors and seeing how they performed through the year has helped, gave us some clarity. And as well, this quarter, we made our pessimistic scenario even more pessimistic and increased the weight of that scenario. So we have -- we think that the pessimistic scenario really does account for the dark potential path of the recovery. And finally, really understanding the size of the allowance that we've built so far, which should help us be able to absorb some of the growth and if there is more migration than expected. So that's kind of what's behind our thinking in setting that target range. And as for the path during the year, we do expect impaireds to increase throughout the year and probably more in the back half. And the -- as impaireds increase, there's a natural migration of Stage 2 allowances into Stage 3. Does that answer your question, Doug?

[Doug Young, Diversified Financials and Insurance Analyst]

It does. I guess just on the migration, I mean, does this factor in -- and the IFRS 9 models as you look out in Q3 and you start to see a bit of an improvement in the economic outlook and you have to bring down your -- you would bring down your Stage 3 -- sorry, Stage 1 and Stage 2 allowances, is that factored into this? Or is this just a normal migration between 1, 2 and 3 and it's not factoring in your forward-looking indicators being adjusted?

[William Bonnell, Chief Risk Officer & Executive Vice]

Yes. I would say the -- a change in our forward-looking view during the year would be an additional change into this. Certainly, it would generate some releases, if the forward-looking view was much more positive than our base case or the weight that we have now on the mixed scenario. So the 25% to 35% is pretty broad. I think as we go through into next quarter, maybe in 3 months on this call, some of the uncertainty will be down, and we'll be able to give you a little more guidance on where we think in that range we'll end up. But as of now, it's -- given the level of uncertainty, I think that's a pretty good range.

[Louis Vachon, President, CEO & Director]

Doug, it's Louis. So just to -- I think, as Bill mentioned, in an ideal world, we don't live in an ideal world. But ideally, we want to grow the book -- our loan book into the Stage 1, Stage 2 reserves that we have and -- as opposed to releasing them over a quarter or 2 or 3. So that's why the 25% to 35% does not include scenarios of releases.

[Operator]

Following question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, Research Analyst]

So when you're talking about the momentum in P&C, is expense savings a part of it? Like where I'm going with this is, when I look at the sub pack, branches in Canada have declined for the past 5 quarters. Is the strong digital adoption the catalyst to revisit your branch strategy perhaps shifting to smaller branch footprints or accelerating the rationalization?

[Louis Vachon, President, CEO & Director]

Lucie, do you want to take that one?

[Lucie Blanchet]

Yes. So we talked in previous call on our -- on the efficiencies that we generated in 2020 coming from the distribution network and also from the resizing of our branch footprint. So actually, we are -- we've been rightsizing in some urban markets with our branches, where we had more redundant location, but that didn't change our branch share. So we had a plan from '18 to '21, and we've been executing on that plan. So that's what you see there. And of course, I think the digital adoption is a lever for us to continue to improve on efficiency. I think the pandemic gave us the opportunity to increase the percentage of digital adoption in our customer base. So our intent is to take the full potential of those opportunities, but also reinvest part of these gains into revenue-generating activities to make sure that we reinvest in our growth for the future. So that's kind of the plan at a very high level.

[Lemar Persaud, Research Analyst]

Okay. So then we won't see like an acceleration? Like specifically, if I look at Q3 2020, 409 and then down to 403 in Q4. We're not going to see it like -- go to like something like 15 branches a quarter, that sort of thing?

[Lucie Blanchet]

No. No. Overall, in 2020, I think we're up to 19. And through that, we also have a couple of openings in some very specific areas.

[Operator]

Following question is from Nigel D'Souza from Veritas Investment.

[Nigel R. D'Souza, Investment Analyst]

I wanted to turn to your macroeconomic forecast for 2021. And if I could touch on your expectations for a decline in the housing price index next year. I was hoping you could expand on what you see as drivers for that decline? And is it fair to say that the read-through here is you expect mortgage growth to soften a bit going forward and then lower demand for real estate to play out over the next few quarters?

[William Bonnell, Chief Risk Officer & Executive Vice]

Nigel, it's Bill. I'll start and then I think Lucie can comment on expectations for mortgages. So I think, overall, when you look at the macroeconomic scenarios, the takeaway is that they're prudent. We were pleasantly surprised by the performance in house prices so far during the pandemic. Although in our forecast, particularly in the pessimistic case, we don't assume strength in the housing market. But I think for the macroeconomic scenarios and that which goes into generating our allowances, you can consider those -- that scenario quite prudent. Lucie, do you want to talk about looking forward for the mortgage growth?

[Lucie Blanchet]

Sure. But just before going into the outlook on mortgages, I think we had an excellent execution on mortgage in 2020. So we had originations hit historical levels coming from the performance of our distribution channel, and we've been able to improve the margins like I just said. And at the same time, we absorbed more volume while decreasing our operational costs. So we really start 2021 with that strong momentum. We expect we will grow slightly lower than what we've achieved in 2020. And I think demand will still continue to be stimulated. However, we expect some slowdown in the retail market due to the slowdown in immigration but also the concern around the supply potentially across the country. So this is kind of what we expect for next year.

[Nigel R. D'Souza, Investment Analyst]

Okay. And just to clarify, you expect the dynamics to be consistent and play out in Quebec as well or is that more sort of national outlook?

[Lucie Blanchet]

National outlook.

[Operator]

Following question is from Mario Mendonca from TD Securities.

[Mario Mendonca, MD & Research Analyst]

Can you guys hear me okay?

[Louis Vachon, President, CEO & Director]

Yes. We can hear you, Mario.

[Mario Mendonca, MD & Research Analyst]

Right. I want to go back to an answer to a question that caught me a little offguard. It was with a response to trading revenue. Trading revenue was up about 23% year-over-year in 2020, a good year. Did I hear you correctly in suggesting that you see avenues of growth that could -- where you can actually grow that still further in 2021 or were you referring to capital markets earnings when you made the reference to growth in 2021?

[Louis Vachon, President, CEO & Director]

We were talking about capital markets as a whole. I think we have a -- has a greater level of confidence at the capital markets level as a whole, Mario. Trading, as you know, it's a question mark. It's -- Q2 was an unbelievable quarter. So it's going to be -- it's a hump for 2021, no doubt. But that being said, Mario, none of us know how an economy transitions out of a pandemic. So that's why also we may be surprised with the level of volatility and volume. So that's why it's a question mark around trading. It's not an exclamation mark. But the other avenues that we see, the M&A pipeline is extremely strong. Underwriting on the bond side and even on the equity side has been very good year-to-date. So let's just hope for the best.

[Mario Mendonca, MD & Research Analyst]

Sure. And when you're referring to growth in capital markets, you're referring to earnings, not revenue again? I just want to -- I don't want to put too fine a point on it, but I want to make sure I understand what you're suggesting.

[Louis Vachon, President, CEO & Director]

That is correct.

[Mario Mendonca, MD & Research Analyst]

You're talking about earnings.

[Louis Vachon, President, CEO & Director]

So you're not -- we went through that in 2009, 2010. If you recall, you were there at that time. And so I think it's -- we did it then. I think we can do it again, a small increase year-to-year.

[Mario Mendonca, MD & Research Analyst]

Now just real quickly on expenses. Expenses were somewhat elevated this year, all for very good reasons. I mean, they tracked the revenue growth, obviously, positive operating leverage. When you think about expenses in 2021, and I know your operating leverage target is far more leverage to revenue than it is expenses. But what do you contemplate for expense growth in 2021? Is it conceivable that you could fall back to the expense growth we saw more like 2019 when it was lower than what we saw in '20?

[Louis Vachon, President, CEO & Director]

Listen, it will depend on how things evolve. We -- I think as a team, as you know, Mario, we've shown agility in the past of maintaining and discipline on the costs. Ideally, I would say, I think where we're at today, I think we're being disciplined on the cost side. But hopefully, if we continue to see good momentum on the revenue side going into Q1 and Q2, I think that's where we'd rather focus as a franchise as opposed to cutting expenses at all for any scenarios. So I think that's where we're at going in. And that's why the op leverage scenario will depend on revenue growth because I think we're looking pretty much at low single-digit increases in expenses in 2021. So the delta will be whatever the revenue growth is around that.

[Operator]

Following question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

My question is on international, Louis. And I think during the start of the pandemic, you were pretty cautiously optimistic on the earnings traction this year. And you kind of fast forward and International segment delivered similar earnings growth than fiscal 2019, I think, around 25%. So when you look out into fiscal 2021, as economies improve, is there drivers of the business to kind of maintain that profitability going forward?

[Louis Vachon, President, CEO & Director]

Well, let's start with one -- the first driver is Credigy and the portfolio growth. So what's interesting is they've managed to grow their portfolio, as Jean mentioned earlier, in Q3 and Q4. So we already have the growth in the portfolio that was done in 2020, acting as a catalyst to help grow our businesses in 2021. So I think for Credigy, I think, we have relatively good level of comfort around their growth prospect for 2021. For ABA, it's -- what's been a -- frankly, a positive surprise for us is the extent to which their digital solution has brought a gain in market share over the last 6 months in Cambodia. So as everybody move to less physical, to more digital types of payments, their client acquisition has accelerated and also the adoption of their payment solutions has also accelerated. So that's very interesting. Now the question mark there for the earnings of ABA is how long is the pandemic going to last? It's impacting negatively the tourist industry in Cambodia. The good news is manufacturing, agriculture and construction remains quite strong. That's why we've continued to grow our loan. So -- but I think -- that's why, overall, I think we should -- if we don't have double-digit revenue growth for international in 2021, I think we'll be disappointed as a team.

[Scott Chan]

That's fair. And just, lastly, before the pandemic, you kind of talked about unwinding some of the non-core investments in Mongolia, Mauritius and Ivory Coast. I'm wondering if there's an update there on that front as things seem to be looking a bit better heading into 2021?

[Louis Vachon, President, CEO & Director]

Nothing to report, Scott. I think it's -- the pandemic is not an ideal environment to monetize that type of assets. So it's probably been delayed for a little while because of the pandemic.

[Operator]

Following question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, Analyst]

Okay. Maybe I'll go to Louis, but maybe the business heads want to chime in as well. Louis, you said something I thought kind of interesting. The allowances are pretty healthy and you'd rather grow the loan book to grow into them as opposed to release the reserves. And I think that makes sense. Obviously, you were very careful with your volume growth pre-pandemic. I'm just curious to understand, for example, in capital markets, do you think part of the growth will have to come from more balance sheet intensive businesses next year? Or where do you see risk taking, if you will, on loan growth to grow into those reserves that you're talking about? How important is that going to be? And what sort of implications could that have on RWA?

[Louis Vachon, President, CEO & Director]

Okay. So I'll start. And if I'm not making sense, my colleagues will step in. The -- I think where we see right now, well, let's start with retail. I think we have good momentum with mortgages going through the year. You saw that, at Q4, our friends, Stéphane in commercial, and his team had pretty good momentum on commercial. We're hopeful that sometimes during 2021, the usage of credit by small and medium-sized businesses will start growing again. We're quite active on real estate right now, industrial and CMHC insured residential housing. And then capital markets, I would say, balance sheet, yes. I think the main thing there could be the M&A pipeline. I think that's where over a 6- to 12-months period, you could see an increase -- a significant increase. It could come from a very busy M&A pipeline, which appears to be the case right now. But as you know, that can be very fickle. So those are the -- what we see going into the new year, 3.5 weeks, 4 weeks into the new year, where we see as potential driver to grow the balance sheet in 2021.

[Sohrab Movahedi, Analyst]

Okay. So just to be crystal clear, Louis, the M&A pipeline capital markets, this would be what providing acquisition financing, for example?

[Louis Vachon, President, CEO & Director]

That is correct. And same thing, by the way, in commercial. I think people underestimate the level which M&A and ownership transfer can play an important role in growing the commercial loan book, particularly for non-real estate -- the non-real estate category.

[Sohrab Movahedi, Analyst]

And is there any -- I mean, would this cause the RWA to grow faster than the loan growth? Is it possible the riskiness of this relative to the kind of the back book, if you will...

[Louis Vachon, President, CEO & Director]

Probably not. I'm looking at Bill or Stéphane. I don't think there'll be a big change there. But if we have slightly higher or faster growth in the loan book, then that's why -- that is a scenario. And that's maybe a little bit more optimistic scenario. But under that scenario, we would not release model-driven Stage 1, Stage 2. We will just, as I say, grow our RWA into those reserves. Stéphane?

[Stéphane Achard]

I think it will be -- Sohrab, I think it will be particularly -- it wouldn't be the case because as we venture into commercial markets, we're going to also have the impact of our real estate multi-residential strategy, which is largely insured, like Louis mentioned, thus minimizing the impact on risk-weighted assets.

[Sohrab Movahedi, Analyst]

And I guess is Louis requiring you to even look further into your crystal ball, I guess. But when you think about this mix of volume growth, can you quantify what sort of spread you would be generating on these types of activities or what you would hope to be generating or what you would be targeting to generate on these things?

[Louis Vachon, President, CEO & Director]

I think when I look at this crystal ball, I just see my face reflecting into it right now.

[Sohrab Movahedi, Analyst]

Fair enough. Okay. That's fine. That's fine. No, but I mean I think like Lucie mentioned that, for example, mortgages are coming on at about 3 basis point better spread than those that are rolling off. I'm just trying to kind of get a feel for, is this reason to feel optimistic about margins at the -- at all bank level, non-trading margins at all bank level as well?

[Louis Vachon, President, CEO & Director]

I think the issue, Sohrab, is competitive behavior in the market. And that's what makes it more difficult to give you guidance on because I just don't know, hopefully, in an environment where the economy is improving, what will be the competitive behavior in the market. Operator, do we have another question?

[Operator]

We do have a question from Darko Mihelic from RBC Capital Markets.

[Darko Mihelic, MD & Equity Analyst]

Can you hear me?

[Louis Vachon, President, CEO & Director]

Yes. We can hear you, Darko, now.

[Darko Mihelic, MD & Equity Analyst]

I apologize. I'm going to dive into the weeds here a little bit with a few of my questions. I also wanted to revisit the idea of momentum. And so my first place that I wanted to dive into for my model was Wealth Management. When I look at the revenue picture, especially with what occurred over 2020, I see net interest margin compression. And I'm not sure that rates change much. So I don't know that picture. By the way, you should probably talk to treasury on your funds transfer pricing. You're being penalized for growing deposits and assets.But anyway, I also see -- you had a really strong transaction and other revenue in the year. That could be fleeting just like Financial Markets trading could be. And then when I think of the fee-based revenues, I think, of stronger equity markets. And so as I sit back and as I think about revenues for the wealth business, 6% was a very strong showing, but I don't see any of the pressures going away on net interest income and it'd be hard to reproduce transaction kind of revenue. So is revenue growth low single digit a reasonable number for the wealth business in 2021?

[Louis Vachon, President, CEO & Director]

So Martin will -- Martin is very happy that he has a question. So he is keen to answer, Darko.

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

Thank you, Darko. We -- I believe you need to look at some of the trends that we had in 2020 to give you an idea of what's going on. And if you look at AUA and AUM growth, we did really well and clearly above the industry. And I think that shows the strength of the franchise and the fact that we have a diversified business model. And we were able to compensate for a lower net interest income in 2020.Now looking at 2021, we had a record number of new IAs at NBF, very, very strong recruiting in 2020, which is not reflected in the numbers yet. We have a strong pipeline at NBIN. We also have invested a lot in our Private Banking franchise. There's new cross-selling initiatives. All of this to say that, of course, if you annualize lower interest rates, which we have in our forecast for 2021, the impact on NII is the same, but we are forecasting still strong AUA/AUM growth. We also have -- we don't have hard numbers to prove this, but we believe we've gained market share in trading revenue and commission revenues. And so this is also going to be strong for 2021. And we believe growth in fee-based to be above market growth, again, related to AUA and AUM growth. So we're confident.

[Darko Mihelic, MD & Equity Analyst]

So a 6% kind of revenue run rate is conceivable? Is that -- or am I putting words in your mouth?

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

We're going to work really hard to put up the best numbers we can.

[Darko Mihelic, MD & Equity Analyst]

Okay. Fair enough. I always try and overstep the boundary. And a question on mortgages as well. To what extent are you thinking about more sort of mortgage acquisitions in 2021? Or is that activity expected to slow down?

[Louis Vachon, President, CEO & Director]

Are you talking -- sorry, Darko. Are you talking about new -- you're not talking making strategic acquisitions. You're talking about new client acquisition, right?

[Darko Mihelic, MD & Equity Analyst]

Yes.

[Louis Vachon, President, CEO & Director]

Yes. Lucie, I think, we remain quite -- I think that's a market we like, and we want to continue to grow in that market. Lucie?

[Lucie Blanchet]

Yes, of course. Because for us, the mortgage product is an anchor product also for the whole banking relationship. And we've seen quite good results on customer engagement on that front. So it is an anchor strategy for us to continue to grow, for sure.

[Operator]

Following question is from Mike Rizvanovic from Crédit Suisse Securities.

[Mehmed Rizvanovic, Research Analyst]

Question probably best for Lucie. Just wanted to touch on the tech-related spending and just being the smallest bank of the Big 6. I know we've had discussions on this in the past. It doesn't seem that there's anything in your numbers to suggest that you're disadvantaged by any means. But I'm just thinking, given what we've seen is a bit of a -- I guess, a step function in the push toward digitization because of COVID, do you see any gaps that you maybe need to fill? Are you still confident that you're very well positioned in terms of your capabilities versus your bigger peers?

[Lucie Blanchet]

I would say we're very confident of our capabilities versus our peers. And when I look at the numbers, some of the really leading indicators we look at really the digital adoption. And COVID has given us leapfrog in terms of progression. And obviously, with that comes from -- come the improvement in the customer experience, but it comes also with the automation and digitalization of our process. So like I said, we really want -- we really intend to make the benefits of those gains at all -- in every areas of the business that we can.And I think also from a cultural perspective, the fact that we are smaller gives us an advantage in being agile into implementing the changes. Like, for example, this year, we had a plan to -- we have a plan -- along with the rightsizing of our branches, we have a plan to repurpose our branches more towards advice. And so we had a plan with that. We saw that COVID could accelerate our plan, and this is exactly what we did. So at this point, we are -- we have 25% of our network that is repurposed, and we see positive KPIs on all fronts, even with the increase in digital adoption in those branches. So I think we've been able to show that we have been quite agile with the opportunities that COVID brings us.

[Mehmed Rizvanovic, Research Analyst]

Okay. So thanks for that color on the repurposing, but what about branch closures? So just given the big sort of step function or step move that we've had here on digitization, like why not be a bit more aggressive on your thought process on maybe closing branches? I'm assuming Canadians would probably be a lot more prepared for that today than a year ago. Is that something you can comment on? And maybe you can touch on any sort of hindrance to that potential strategy, whether it's the optics around it or government interference or any type of hindrance that you think could maybe pull that back?

[Lucie Blanchet]

Yes. So I would say, right out of the gate that I think that we are probably the most aggressive on that front compared to our peers right now. So that's one thing. Our plan is really aligned with the behaviors of our customers. So that's the piece for me that is really important. We need to go at the pace that the customer want to change their behavior, and we don't want to push them out of our branches. So I would say it's really -- that is probably more of a driver than anything related to regulation. But we're quite actually happy with the pace and the cadence that we have so far. And like we mentioned maybe in the past, through that, we also want to reallocate our capacity into more advice-based role more than in transactional role. And in between that, we also reduce the square footage of our branches. So without necessarily closing a point of sale, reducing it gives us also the benefits. So that's kind of where we're heading.

[Operator]

[Operator Instructions] Following question is from Gabriel Dechaine from National Bank Financial.

[Gabriel Dechaine, Analyst]

Figured I'd throw a couple in there. Also, sticking to the mortgage theme here or topic, a lot of people are going to be renewing mortgages in the next year, a few years anyway, if rates hold the way they are and having a lot of extra spending money, saving 50 to 100 basis points on their mortgages. Like is there a strategy in place or is there anything that you think you can do to kind of translate those household savings into some sort of growth opportunity for the retail business? And then I've got a follow-up on commercial.

[Lucie Blanchet]

Yes. So on the first part of your question, Gabriel, it's really what we are doing right now. So repurposing our branches more towards advice is exactly that's still going. Over and above, just a discussion with a customer on renewing a mortgage to going in an in-depth discussion about what's their financial goal and how we can help them achieve what the target is exactly what we're doing everywhere in our branch network right now. So yes, definitely, we want to take all opportunities that we have on that front.

[Gabriel Dechaine, Analyst]

I guess that would be easy or easy enough cross-sell to the wealth business. The commercial question -- well, it's more like kind of surprised. I saw the 2% sequential growth in commercial. I suppose that's somewhat tied to Quebec having reopened a bit more quickly over the summer. Wondering how you see commercial lending evolve over the next year. I know any forecast is tough these days, but it's typically a later cycle kind of growth driver, certainly what we saw before COVID. Or if you're seeing opportunities that you may have shied away from before COVID that are now more attractive from a risk-reward standpoint?

[Louis Vachon, President, CEO & Director]

Stéphane?

[Stéphane Achard]

So Gabriel, on the first part, certainly, the 2% Q-over-Q is partly due to the rebound of the large closures we had in Quebec in the spring, but it's also reflecting the fact that the economy here is quite resilient. There's quite a -- Louis has mentioned quite a bit of activity. On the construction side, infrastructure projects are still going on. And what I feel and what we feel we hear from business owners is business confidence remains strong -- quite stronger than we'd be led to think despite the pandemic. So there's plenty of M&A activity. So there's -- yes, there's the opportunity of reverting back to a pre-COVID numbers. But I mean, the uncertainty in front of us will dictate where we land as far as that goes. As far as new sectors are concerned, we're sticking to our strategy, and that also entails moving our specialty banking, which is a large portion of our growth outside of Quebec. And we've done so with success in the past, and there's plenty of opportunities in the tech, agri and food ag business as well as real estate and particularly on the insurance side. And that insurance side on the real estate is perhaps the one area, which has accelerated substantially since the COVID environment. So I hope that answers the question.

[Gabriel Dechaine, Analyst]

It does.

[Operator]

Following question is from Mario Mendonca from TD Securities.

[Mario Mendonca, MD & Research Analyst]

My question was asked and answered.

[Operator]

We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Vachon. Please go ahead.

[Louis Vachon, President, CEO & Director]

Thank you, everyone, for listening to the call. And happy holidays and stay safe. And we'll be talking to you for the first quarter results in February. Have a good day.

[Operator]

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