National Bank of Canada

TSX:NA

Earnings Call Transcript 2021-Q4

[Operator]

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

[Linda Boulanger, Senior Vice President of Investor Relations]

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

[Laurent Ferreira, President, CEO & Director]

[Foreign Language] and thank you, everyone, for joining us. It is a pleasure for me to be speaking with you on my first earnings call as the bank's CEO. Over the last 23 years, I have had the privilege of working alongside great people at National Bank. I am proud of our culture, our employees, the relationships we've built with our clients, and our constant focus on value creation. It is with excitement and a great sense of responsibility that I, along with our management team, will lead the bank. On a personal note, I want to sincerely thank my predecessor, Louis, who retired after 15 years as our CEO. Louis' leadership will have a lasting impact on all of us, the industry and the broader business community. Moving on to our results. This morning, we reported a strong fourth quarter, capping off a great year for the bank. For fiscal 2021, pretax pre-provision earnings were up 12% year-over-year, reflecting superior loan growth, strong client asset growth and the resilience of our capital markets franchise. Our performance demonstrates the strength of the bank, supported by our culture, the strategic positioning of our businesses and our discipline. The bank generated an industry-leading return on equity, while maintaining strong capital levels and prudent credit reserves. Our credit quality remains strong, and our portfolios have performed very well since the beginning of the pandemic. Regarding capital deployment, our strategy has always been driven by discipline and that remains unchanged. Our number one priority is to generate strong organic growth while maintaining solid capital levels. We continue to see strong momentum in our businesses in this regard. Following OSFI's announcement on November 4, this morning, we announced a 23% increase to our common share dividend. Our objective was to reset our dividend towards the lower end of our medium-term payout target range of 40% to 50%, in line with historical practice. Following this increase, we remain committed to delivering sustainable dividend growth to our shareholders, demonstrating our confidence in the earnings power of the Bank. We also announced our intention to launch a normal course issuer bid, providing us with the flexibility to buy back common shares as appropriate. As communicated in the past, we view buybacks as a complement to organic growth, not as a substitute. National Bank has a strong record of delivering superior value to its shareholders over time, and that will remain a key focus going forward. Turning now to the performance of our business segments for fiscal 2021. P&C Banking had a very good year with PTPP up 10%. Our performance was characterized by strong volume growth on both sides of the balance sheet. We expect the strength in residential mortgages to continue, due to factors such as the imbalance in the housing market, labor market recovery, immigration picking up, the low interest rate environment, and strong household balance sheet. On the Commercial banking side, we experienced particularly strong growth in residential, insured, commercial real estate in 2021. Looking forward, we see good momentum with broad-based pickup in several sectors. Wealth Management delivered solid results in 2021 with PTPP up 22% from last year. Client assets grew close to 30% and reached a record level of $650 billion, reflecting record net sales across our channels and favorable markets. In fiscal 2021, our Wealth Management segment represented 24% of the Bank's total revenues and generated superior return on equity. We are pleased with the strategic positioning of our wealth franchise, a key growth lever and a strategic focus for the Bank. Financial Markets delivered solid results in 2021. Our Corporate and Investment Banking Group was well positioned to take advantage of strong market conditions and had a record year with revenues up 24%. Global Markets did well following an exceptional performance in 2020. Our results this year truly demonstrate the resilience and diversification of our earnings stream. As we enter the new fiscal year, we are seeing strong momentum in our Financial Markets business. Turning to our International segment. We are very satisfied with our strategy focused on Credigy and ABA Bank. Both have consistently delivered strong growth and superior returns. As we look ahead, our international strategy is unchanged. Our focus remains on these 2 activities. Credigy delivered solid returns in fiscal 2021. Asset growth has been picking up in recent months, and we expect double-digit asset growth in 2022. Revenues are expected to be relatively stable in 2022, given the $26 million gain on the sale of our portfolio in the first quarter. This translates into high single-digit revenue growth for 2022, excluding that gain. ABA Bank had another strong year with revenues up 24%, loans up 31% and deposits up 34% on a year-over-year basis. Conditions have greatly improved in Cambodia. Lockdown measures have been lifted and borders have reopened. Looking ahead, we expect double-digit growth for 2022. I would like to share a few thoughts on the economy. While the pace of the economic recovery remains dependent on the path of the pandemic and the emergence of new variants, Canada is doing well compared to the rest of the world. Employment has regained all of the ground lost after only 19 months, the fastest recovery in the last 4 recessions. Supply chain disruption and inflation are risks under current conditions, but high commodity prices are a strength for the Canadian economy. In addition, household savings are high, providing a good cushion to absorb a rise in interest rates in 2022. Quebec remains well positioned given the diversification of its economy and the resilience of its households, which will continue to benefit from the fiscal flexibility of the provincial government, who has just introduced more stimulus. The current business environment is positive. We are optimistic, but remain prudent in our approach, given uncertainties related to the pandemic, inflation and labor shortages. Based on what we are seeing today, our base case is that we will achieve mid-single-digit PTPP growth for fiscal 2022. To recap, the Bank delivered outstanding results in 2021, and we are all positioned heading -- and we are well positioned heading into 2022. The Bank's sustained performance reinforces our plan to continue to build on our strength, our culture, our strategic positioning, our discipline, when it comes to capital, risk and cost and our commitment to performance. These have served us well and will continue to be central to our decision-making in the future. Now let me outline some thoughts on where we plan to put more emphasis as we look ahead. First, our culture remains critical. We are committed to investing in our people and providing winning conditions for our employees. We want to offer our clients the best service and advice. We'll continue to focus on deepening relationships and gaining market share, both in our core Quebec market and across Canada. We are also focused on continuing our transformation. Digital innovation and automation are key to enhancing client experience and gaining operational efficiencies. As we continue to grow all our segments, we are looking to further leverage our Wealth Management and Commercial Banking franchises. We like our strategic positioning in these businesses as well as their growth potential. We believe in collaborative models between our businesses and our plan is to do more in the coming years in all of our client segments. Sustainability is also a key part of our strategy across the Bank and we will continue to support our communities and our clients in the transition of a net zero carbon Canadian economy. Finally, we will continue to deploy relentless energy towards a diverse and inclusive workplace where people can develop and thrive. The Bank is in great shape. It is well positioned to generate solid growth and to deliver superior returns to our shareholders. The National Bank team is excited about the future and ready to adapt to the challenges and opportunities ahead. On that, I will now turn it over to Ghislain.

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

Thank you, Laurent, and good afternoon, everyone. Turning to Page 8. The Bank delivered a very strong performance this year. Our pretax pre-provision earnings grew by 12%, reflecting strong performance across the Bank and positive operating leverage of 1.2%. All business segments performed well in 2021, reflecting the resilience and diversification of our business. Expenses were up 9.8% in 2021 due to the strong performance of our teams throughout the Bank, which resulted in higher variable compensations. Excluding variable compensation, expenses were up 4%, driven by talent and technology. We expect continued pressure on costs as we enter 2022, in the context of inflation, especially on wages. Cost management continues to be a priority at the Bank. Over the past 5 years, we have improved the efficiency ratio by more than 500 basis points. And over the same period, we delivered positive operating leverage every year. The entire management team remains highly committed to transformation and long-time disciplined approach to cost management. Looking ahead, we are confident that we can achieve positive operating leverage in fiscal 2022. However, operating leverage may be pressured in the first quarter due to the timing of certain expenses, and a low expense level in Q1 of last year. We continue to move forward with our transformation in 2021, as we adapt to the changing needs of our customers and reinforce our culture of change and operational agility. In fiscal 2022, our main focus will be on enhancing client experience, supporting new business initiatives and simplifying our systems and processes. Now turning to page -- to capital on Page 9. The Bank ended fiscal 2021 in a solid position with a strong CET1 ratio of 12.4%, a robust risk-weighted asset growth for the year, an industry-leading ROE, and significant credit reserves. In the fourth quarter, net income generation added 46 basis points to our CET1 ratio reflecting the solid performance of our businesses as well as our strong credit performance. Excluding the impact of foreign exchange, risk-weighted asset growth amounted to 17 basis points of CET1. As anticipated, the acquisition of Flinks reduced our CET1 by 11 basis points. Now turning to Page 10. Our total capital ratio stands at 15.9% this quarter. Our liquidity ratios remained strong with LCR of 154% and a net stable funding ratio of 117%. The Bank delivered an outstanding performance in 2021. All businesses performed well, contributing to a superior return on equity of 20.8%. With solid capital levels, a strong credit position, and diversified growth levers, the Bank enters 2022 from a position of strength. On that, I'm turning the call over to Bill.

[William Bonnell]

Merci, Ghislain, and good afternoon, everyone. I'll start on Slide 12 with a look back on the credit performance for the full year of 2021. We finished the year with total PCLs of just $2 million, driven by impaired provisions of 11 basis points and a release of performing provisions of 9 basis points. This strong performance reflects 3 factors: First, the solid footing with which we entered the crisis with strong credit quality, a defensive positioning in our product and sector mix, and a resilient geographic footprint. Second, the strong economic recovery, which has already brought Canadian employment back to prepandemic levels amid a supportive monetary and fiscal policy backdrop. And finally, our proactive approach to building and maintaining prudent allowances in the face of significant uncertainty. We were pleased with this performance in fiscal 2021, and while the pandemic continues to generate uncertainty, we believe our risk profile and prudent allowances continue to position us well for the year ahead. Now looking at the performance in the fourth quarter. The positive trends that began earlier last year continued across the portfolio last quarter. Impaired PCLs declined to $19 million or 4 basis points driven by retail and international provisions remaining at cyclical lows, a decline in Corporate Banking provisions quarter-over-quarter and the second consecutive quarter of net recoveries in Commercial Banking. Performing loan provisions saw a net release of $58 million or 13 basis points. Updates on portfolio quality and economic scenarios were the main drivers of performing provisions this quarter. Both our retail and non-retail portfolios benefited from releases, while good portfolio growth in the international sector generated a performing loan provision of $3 million. Now looking ahead to next year. For impaired loan provisions, we should begin to see a return to more normalized levels during the year. In both retail and international portfolios, this normalization is likely to happen over the next year and into 2023. In nonretail portfolios, we also expect some normalization, recognizing that impaired provisions or recoveries can be lumpy from quarter-to-quarter. Given the positive trends we saw at the end of 2021 in terms of delinquencies, formations and savings rates, impaired PCLs could remain unusually low in the early part of next year. For the full year of 2022 we are targeting a range in impaired PCLs of 15 to 25 basis points and currently expect to be towards the bottom part of that range. Our performing loan provisions should continue to be driven by changes to macroeconomic scenarios, portfolio growth and migration. Absent a significant deterioration in the macroeconomic outlook, we would expect additional releases from our performing allowances next year. Turning to Slide 13. Our total allowances for credit losses declined by $70 million quarter-over-quarter and remain about 52% above the pre-pandemic level. Performing loan allowances declined by $59 million, taking our cumulative release to 38% of the Performing allowances we built during the pandemic. The remaining $879 million provides strong coverage of impaired PCLs. Impaired loan allowances declined by $9 million quarter-over-quarter and provide good coverage of gross impaired loans. On Slide 14, we have provided some key metrics that demonstrate the adequacy of our allowances. We remain very comfortable with the prudent level of our allowances. Turning now to Slide 15. Our gross impaired loans declined to $662 million or 36 basis points in the quarter. Total formations also declined driven by net repayments in the commercial and corporate loan portfolios. Both GILs and formations are well below the pre-pandemic levels, so we could expect some normalization next year and into 2023. On Slide 16, the mix in our Canadian RESL portfolio remained stable with 33% being insured and 54% being in the province of Quebec. In the appendices, you'll find further information on our loan portfolio and market risks. In conclusion, we have been very pleased with the performance of our loan portfolios this year. We recognize that uncertainty remains in the future path of the economy. However, our disciplined approach to risk, our portfolio's defensive positioning and our prudent levels of allowances we are very confident that we're well positioned to continue delivering strong performance in the year ahead. On that, I will turn it over to the operator for the Q&A.

[Operator]

[Operator Instructions] The first question is from Doug Young from Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Just on Canadian P&C banking. I mean commercial loan balances increasing 18% year-over-year, 5% quarter-over-quarter. I guess I have a few questions around this. One, can you dig a little bit more into what drove the growth? And then second, as it relates to NIMs, your commercial loan growth clearly outpaced your mortgage loan growth. But I think there was an indication that the NIM compression was mix related. And so I'm just trying to get a little bit of more information or a little bit more color as to why mix would have had such a big impact on NIMs, given the commercial growth relative to mortgage. Is there something else that's going on within the book?

[Stephane Achard]

Doug, it's Stephane. So you're right. The growth was phenomenal last year at 18%, and it was largely driven by the book of insured real estate. And that book has almost doubled over the last year. We took opportunity in the market, and we wanted to grow that book outside of Quebec, particularly. And obviously, those loans call for much smaller premiums, because of their insured nature. They still provide an excellent RAROC. And that influenced the loan margins substantially. So that element, combined with the deposit mix, if I may say, actually explains the NIMs for the last year.

[Doug Young, Diversified Financials and Insurance Analyst]

And maybe just what is your outlook for NIM as we look at -- I mean, I know there's a lot of moving pieces in it, but if you had a crystal ball, what do you -- how do you think NIMs unfold through fiscal '22 for Canadian Banking?

[Stephane Achard]

Or Canadian Banking, Lucie, you want to add?

[Lucie Blanchet]

Maybe I can jump in. So thank you for the question. Obviously, expected increases in interest rates are positive for the P&C NIMs. But NIMs are also impacted by other factors than interest rates and business mix and market competitiveness being 2 important ones. So I would stay prudent and say that it's early to see clearly where NIMs will go in 2022. In 2021, we grew the balance sheet, kept our pricing discipline and rediscipline and generated net interest income growth of 6% despite a 7 bps decline in NIM. So our objective is really to continue to generate organic growth, grow the franchise and deliver consistent NII growth. So for Q1, though, we expect NIMs to remain stable on a sequential basis.

[Stephane Achard]

A lot of that, Doug, is going to be contingent as well on the deposits. What's going to happen with commercial deposits amongst other things, they've been really sticky up to now. But I mean all our peers have the same consideration and uncertainty.

[Doug Young, Diversified Financials and Insurance Analyst]

No, that's fair. And then, Laurent, maybe I could just -- when I look at the dividend and I modeled it, what you could have increased it and still remained at the bottom end. I was thinking the dividend increase could have been a little bit higher. So I'm just trying to get a sense, is this the step up -- one big step up? Or is this kind of a gradual step up and then every second quarter, you're going to continue to increase dividends and you've left yourself some room to further push the dividend up? I'm just trying to get a sense of that.

[Laurent Ferreira, President, CEO & Director]

Thank you for your question. I mean we've always positioned it towards the lower end of the range historically, because that provides us with flexibility. And I'll -- look, obviously, the objective that we've always had is to maintain sustainable increases. And we do have, obviously, confidence in the earnings power of the Bank to do that. But so yes, that remains the objective on the dividend side.

[Doug Young, Diversified Financials and Insurance Analyst]

And you're sure every second quarter is the plan to increase?

[Laurent Ferreira, President, CEO & Director]

That's the plan. Yes.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then just lastly, maybe on PCLs -- the 15 to 25 basis point wide range, you're kind of indicating more towards the low end of that. What would have to happen for you to hit 25 basis points of impaired PCL?

[Laurent Ferreira, President, CEO & Director]

Yes. Well, Doug, thanks for the question. I think that you've seen us remain prudent through the whole pandemic in terms of our guidance and we try to give you insights based on the facts that we know. So certainly, our expectation is to be close to the bottom end of that range. The -- what would have to happen to be at the top of the range would be a significant deterioration and one that we certainly don't see, and that's why we give you guidance on the -- towards the low end. I think last year, you will have seen that from the beginning of the year, through the year, as we got more visibility on the path of the pandemic, we did adjust our range, and we'll see how it goes this year. We'll try to give as much visibility as the facts allow. From where we sit now, the portfolio trends, the macro outlook, the level of uncertainty, it's really -- we feel very confident that the lower end of the range is the target. And if there isn't a significant deterioration in the macro outlook, we would expect to see continued releases in the performing allowance.

[Operator]

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

[Nigel R. D'Souza, Investment Analyst]

I wanted to follow-up on the line of questioning on your allowances. And I'm wondering why you haven't been more aggressive in releasing the current performance allowances. The reason I asked that is when I look at your disclosure on 100% weighting to your base case allowances, it's closer to $600 million. When I look at 100% weighting, to the pessimistic, it's closer to $1.3 billion. So your current allowances are halfway in the middle between your 100% base and 100% pessimistic, which suggests a fairly higher or substantial weighting into the pessimistic scenario. And that's one with lockdown and double-digit unemployment and negative GDP growth. So I'm just trying to get a sense of -- do you actually think that's a possible outcome where there's material risk probability of that happening? And maybe you can explain why you're still currently holding those higher reserves and weighting the pessimistic scenario higher?

[Laurent Ferreira, President, CEO & Director]

Yes. Thanks, Nigel. I think I'll just go back to my comments from last quarter, which were that we haven't been through a pandemic cycle before. And the -- in this environment, uncertainty remains high. So we want to remain prudent.

[Nigel R. D'Souza, Investment Analyst]

Okay. Fair enough. So maybe I could switch to another question on how you're thinking about pricing your assets and loans given current interest rate uncertainty. And I ask that because yields -- volume yields for government bonds, for example, are probably reflecting interest rate hike expectations and the spread -- do you see that in the spread between the variable rate and the fixed rate for mortgages? So how do you think about pricing your products in this environment where this considerable interest rate uncertainty? Are you waiting more on the policy rate pathway to have some visibility? Or are you looking at what the market yields are telling you?

[Laurent Ferreira, President, CEO & Director]

Nigel, this is Laurent. Could you just be a little bit more specific. Which product are you talking about specifically?

[Nigel R. D'Souza, Investment Analyst]

I think we could be focused on residential mortgages, but if you could touch on your commercial products, that would be helpful, too.

[Lucie Blanchet]

Yes. So it's Lucie. Obviously, since Q2, variable rates have been most popular at origination given the difference in pricing that we see. I mean here, we follow consumer behavior and consumer appetite on interest rate volatility. And with what we see right now, it's also a positive on the margin side.

[Laurent Ferreira, President, CEO & Director]

And on the commercial side, I'll say, Nigel, that we've got a balanced portfolio. So pricing strategy on products is not going to be a function of whether we've got rising interest rates or not, but it's actually, what may happen is much like Lucie mentioned, is clients moving on for the first time in maybe 10 or 15 years, moving on to longer terms than before that call for higher spreads. But -- and we've seen that in the market over the last 3, 4 months as the discussion on potential rate hikes has emerged.

[Operator]

The next question is from Meny Grauman from Scotiabank.

[Meny Grauman]

I have a question on the run rate earnings power of the Financial Markets business. I think we've talked about this before, how we should think about the run rate earnings power in that business as being higher after the pandemic than pre-pandemic. And I just wanted to get your updated thoughts on that, especially in the context of thinking about 2022, but beyond as well.

[Denis Girouard, Senior Executive Vice]

Yes. It's Denis. Thanks for the question. As you see, looking forward, it's always more an art than a science. But what I can say right now is that for CIB, we saw 2021 was a record year for us. Okay, ripping off the benefits of the past investments. we expect the activity level to remain elevated. Our M&A pipeline is very strong after a softer August and September, and the momentum continue on the SM -- on ECM, sorry. Global Markets, the trading activity level pickup in light of lingering COVID and economic uncertainty, meaning increased volatility. And we will continue to operate in our risk appetite. And I can tell you and the fourth quarter was kind of tough for us in the sense that August and September client activity was quite low compared to the rest of the year. But since mid-October, we saw a huge pickup in activity, and it's quite interesting for the coming months. Hopefully, things will remain as they are right now. A lot of volatility, a lot of client presence in the market, and we're going to be ready for that.That being said, as mentioned in the past, we tend to be agile. We are pursuing further diversification of our revenue stream. We invest quite a lot in the business in the last year. That's why you saw expenses going up. That's not something that we used to. But not least, cost management is a constant focus, and we continue to target an industry-leading efficiency ratio in the low 40. And that's what we're aiming for. I hope it's answering a little bit of your question.

[Meny Grauman]

And maybe just a follow-up, the guidance was given about mid-single-digit pretax pre-provision earnings growth in 2022. How does financial markets line up? I would imagine that at the lower end of that? But I just wanted to check.

[Denis Girouard, Senior Executive Vice]

Well, it's probably in the middle of that, same as the bank. -- mid-single digit. This is what we're aiming for on a constant basis, I would say. Some years is better, some other years is less, but that's what we're aiming for.

[Meny Grauman]

And just broadening that out into the other business segments. How does that pretax pre-provision earnings guidance look for the P&C business and for wealth and for the specialty finance business...

[Laurent Ferreira, President, CEO & Director]

Meny, it's Laurent. Look, I'm not prepared to go into specifics into each and every business. But I think overall, the fact that we gave some guidance here means that we're quite positive in all of our businesses for next year. P&C, we still see some good momentum on mortgages. We're seeing a bit of a pickup in cards with the discretionary spend going up. And the commercial lending trends that you've seen are still strong. Wealth, you saw our performance this year. That momentum is still there. I think Martin has always indicated in the past that we target double-digit earnings growth. That hasn't changed in our Wealth business. You just heard from Denis on our financial markets business. And as for the international, we're very well positioned. We have ABA in an economy that's a high-growth economy. We expect double-digit growth in 2022 for ABA. And for Credigy, well we have very good visibility on asset growth. So it should be also a good year for Credigy.

[Meny Grauman]

Thanks, Laurent. We always try and get more. I'm just trying to basically understand, which businesses are going to drive that number and which are going to lag. But thank you for the detail.

[Operator]

The next question is from Paul Holden from CIBC.

[Paul David Holden]

I want to go back to the mortgage conversation. I guess the specific question I want to ask is did competitive forces at all play a role in the lower NIM this quarter and particularly the impact it's had on the -- on new mortgage originations?

[Lucie Blanchet]

Yes, it's Lucie. So we all know that the mortgage business is probably one of the most competitive ones and sometimes navigating in that environment, like Denis said is half art and half science. What we see -- what's important for us is to send a consistent message to our stakeholders on our price positioning and avoid stopping the old messages. So our strategy is not to lead with price, but be more of a smart follower with a competitive positioning for our clients. So we've seen some peers with superior mortgage growth being more aggressive since last summer, but we always try to remain very disciplined on our approach, as you know. So in the past quarter, we've seen some margin compression due to competitiveness for sure. But also in the last 2 quarters, there's been some lag between cost of fund increase and increases in clients rate. So there's a bit of that of what we see right now.

[Paul David Holden]

Understood. That's helpful. And then I also want to follow up on earlier discussion around the growth in business deposits and the impact that, that's having on NIM. So I guess the first question there would be what could -- what factors could reverse the growth in business deposits? Is it simply business customers getting more comfortable with the macro environment, starting to invest again or maybe there's other factors at play? And then two, if those deposits do reverse, should we simply think about that as positive to NIM, but perhaps a net negative to NII overall?

[Stephane Achard]

So thanks, Paul. The first element, yes, the use of these deposits and any potential reduction will likely come firstly from, yes, positive outlook from Canadian businesses reinvesting. And the second element, obviously, we can't -- we need to highlight as well as supply chain issues. So a lot of Canadian businesses are not investing in their working capital the way they should be at the level, because it's not availability as it should be. And we're seeing that as well on the drawings in the operating lines of credit. It's starting to creep up over the last 2 or 3 months, but it remains very low relative to normal pre-pandemic levels. So I think the deposits and drawings on HELOCs will go in hand while one will go down, the other one will go up. That's the first element. And with regard to the impact on the NIM, it's been largely liquidity premiums on deposits that affected the NIM in the last year. So overall NIM for P&C could be affected, although we have an outlook of stable by the asset mix overall as these deposits move down.

[Paul David Holden]

Great. That's helpful. And final question for me is with respect to inflation again something that's already come up on this call, but just curious. Is there a risk at all to your PTPP guidance and expectation around operating leverage, if wage inflation accelerates more than any of us would expect? Or are there offsets in the expense base that you could use to offset that type of scenario?

[Laurent Ferreira, President, CEO & Director]

This is Laurent. Overall, we view the -- a little bit of inflation and obviously increases in interest rates fairly good for our business this year. Now I think what's important is the mindset that you have around the table here in terms of discipline on costs at all times and also a mindset that constantly delivers positive operating leverage year-over-year. So you could see from time to time, timing issues, which could be the case at the beginning of the year. But I mean, we're fairly confident at this point in time, I would say, in terms of inflation, anticipation and our business growth. And obviously, we're very focused on building our businesses.And on that, as I mentioned before, we're -- we feel pretty confident and our outlook is positive in terms of revenue growth.

[Operator]

The next question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

Wealth Management is now a larger portion, I think you said 24% of earnings. And then just digging down a little bit on the revenue side. When I look at fee-based revenue, which is a large portion of the revenues, is it fair to say a lot -- most of that line item is based on assets or asset growth or market?

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

It's Martin. Thanks for the question. The -- you're right that fee-based is an important source of revenue. I always say that looking at AUA and AUM is the key driving indicator for this. And the balance portfolio was up about 17% and you see how much we grew AUA and AUM. So that gives you a very good indication of how we've performed and how we have gained market share in many of our businesses in 2021, and we're really happy about that performance.

[Scott Chan]

And just a follow-up. So your fee base is up 21% year-over-year, annual and your AUA and AUM was up 28% and 34%. And you said a record net sales, I mean, I kind of see that chart that you showed. Can you kind of describe what you're -- but why you've been outperforming other financial institutions in terms of Wealth Management and Asset Management? I think you call that distribution, but if you've got anything else, that would be helpful.

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

I think there's a long explanation to this, but the industry focuses a lot on AUM, whereas we have a very large AUA business. And for us, the AUA is key. And there's a lot of differences in basis points you can capture, as there are different types of AUM and different types of AUA, but it's a mix of all of this, that explains the variation. But overall, we're gaining market share. NBF is doing exceptionally well, growing their AUA. It's been a really, really good year. NBIN keeps producing amazing numbers. So those 2 businesses are the main drivers of our AUA. And on the AUM front, yes, record net sales. We've distinguish ourselves, if you look at many different numbers like investor economics or so on, and we're doing really well there, too.

[Operator]

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

[Gabriel Dechaine, Analyst]

I just want to go back to that PTPP guidance. I know I don't want to go into too much detail on segmented views, but just maybe more of a seasonal view similar to the comments Ghislain made about the operating leverage maybe being a bit softer in Q1 due to the timing of expenses that's going to be reflected in maybe a ramp-up of PTPP growth over the course of the year or what?

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

Gabriel, this is Ghislain. So what I mentioned is you probably remember that in Q1 '21, that was, I think, in terms of expenses, our lowest quarter of the year, and we had probably one of the best quarter in terms of revenue of the year. So especially, because of the gain of Credigy. So of course, we should not expect the same kind of PTPP in Q1 this year. But if you look at 20 -- but the rest of the year should be better than Q1. But Q1 would be a challenge, I would say, even though, I mean.

[Gabriel Dechaine, Analyst]

Sorry, go ahead.

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

It's okay. Okay.

[Gabriel Dechaine, Analyst]

I was just saying like your comments on operating leverage applicable about PTPP as well. Then a question about the Flinks actually. What does this enable for the Bank strategically or as we are heading down in the future anyway, to an open banking system in Canada. What advantages of being bank-owned is that business have? Generally, what does it provide you in that sort of -- in the sort of environment we're heading to? And then what are the advantages of, if any, being owned by a bank or...

[Laurent Ferreira, President, CEO & Director]

Gabriel, I'll start. Maybe it's a bit early also, but I'll go back to -- and I think I answered that question in the last call. For us, it's our positioning in the fintech market, it's more of a fintech play. Flinks is a data aggregator that provides services to over 250 fintechs in the Canadian market and the U.S. market. We were early investors in Flinks in 2016 or '17, and we gradually increased our position. So for us, it's -- look, we're looking at the fragmentation of financial services, the growth that they've had during that period of time. So we obviously think that there's more potential going forward given that, that fragmentation has really increased in the U.S. and could potentially increase more. So it's more right now an option that we have.

[Lucie Blanchet]

Maybe I can add to that, Laurent. So Gabriel, for sure, the open banking discussion, it's at its infancy in Canada, but it is happening out there. It is there. So Flinks being the main data aggregator in Canada, is also very well connected with the fintech -- the current fintech ecosystem that is out there. So certainly, the Flinks acquisition gives us opportunities and also options from an IT perspective.

[Gabriel Dechaine, Analyst]

I mean it's -- I don't want to overblow it or anything, but I did get a few investors asking about that today, so.

[Operator]

The next question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, Research Analyst]

I just a point of clarification for Laurent. Laurent, I think I heard you mention that you're expecting double-digit growth at ABA. Just to be clear there, are you referring to earnings growth or something else like loan growth?

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

Well, this is Ghislain here. I can answer that. So just before we go there, so we have very positive things to say about ABA, especially the country, with the pandemic. So as Laurent mentioned, at the beginning, there's no lockdowns anymore, borders have reopened. And there's no more quarantine for fully vaccinated travelers, so which is a very good news, especially for the tourism sector. And another good point also is manufacturing, retail, construction sectors are almost back to where they were before the pandemic, so, which is once again a very good thing. And Cambodia recently signed a free trade agreement with Asian countries, including China. So we think that it could be positive for Cambodia -- for the Cambodian economy in the coming years.So to go to your question, we see very good momentum for ABA in the coming years and especially for 2022. And we expect another year of double growth -- double-digit growth in terms of loans, deposits, revenues and also net income.

[Lemar Persaud, Research Analyst]

Okay. Okay. That answers that. And then one thing that really stands out, just sticking with ABA is, the significant decline in the efficiency ratio. So one from the low 40s to the mid-30s in 2021. So could you talk a bit about what drove that improvement? And how is it expected to trend over time? Then I guess maybe some comments on the earnings power, guys. Looking out not just 2022, but even beyond that. I guess what I'm going at is, if you look at the start of 2020, earnings are in the $40 million to $50 million range a quarter. Mix ratio is in the low 40s. We go through COVID, the efficiency ratio drop to a low 30s, then earnings have gone up to the $70 million. So I'm just thinking about what's the outlook for ABA specifically?

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

Yes. So once again, it's Ghislain. So the first part of your question, it's related to the pandemic and the fact that activities have slowed down over the last 18 months. So there was -- there was few investments. So this is basically why they have this. Well -- and also, they worked on their expenses during the pandemic. So this is why you saw a decrease or an increase or an improvement in terms of efficiency ratio. But this would go back probably in the 40% range in 2022 and the coming years, because they will resume their investment, especially in their retail network. So this is for the first part.The second part, we always said in the past, you know that over time, what we're seeing for ABA is 20 -- around 20%, 20% plus growth every year. So we think that it's feasible. Knowing that the country is still on the Bank. There is a favorable demographic there, 65% of the population is under or is below 35 years old. So we think -- and the country is very well positioned in Southeast Eastern Asia. So we think that it's feasible. And I think that the 20% that we gave before still holds for the future at this point of time.

[Operator]

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

[Darko Mihelic, MD & Equity Analyst]

I think I'm going to start with a philosophical question for Laurent. Now at your first quarter as a CEO, I would have never expected a big change and anything. So this really is aimed at the moratorium on emerging markets. What I'm just curious about is do you just generally -- do you generally like that business? Do you have a team of people scouring emerging markets for opportunities? Do you ever see a point in time where you would reverse course and remove that moratorium? Just want to understand sort of your mindset when it comes to the emerging markets business and capital deployment there.

[Laurent Ferreira, President, CEO & Director]

Thank you for your question, Darko. I mean I think I was pretty clear in my script. We have a team that manages obviously, our investments, but it is currently not a priority to invest outside of our current investments. So we're very happy with, as I mentioned, our ABA franchise. Obviously, Credigy as well. And the focus is really on ABA outside of Credigy to really keep growing our bank in Cambodia, solidify our position there. But in the near future, there's definitely from -- on my side and the management team, there's no intention on investing abroad at this point in time.

[Darko Mihelic, MD & Equity Analyst]

Okay. But I'm going to press you a little bit on it. And the question is, why? So I understand that right now, you may not want to do it, but you've got a team, scouring. There could be a great opportunity. I just want to -- just trying to understand the mindset.

[Laurent Ferreira, President, CEO & Director]

It's a question of focus. If you just heard Ghislain talk about the potential growth for ABA. So we want to make sure that we grow that -- the ABA Bank prudently. That we make sure that we follow that growth as it goes through economic cycles potentially. So that's really where our mindset is. And as you heard it on -- as I talked a little bit about the future, one of the things that -- where we see a lot of potential is actually here in Canada and our domestic franchise. So we want to also put more emphasis in terms of growth in some of our businesses in Canada. So you could keep challenging me. I have no problem with that. But our -- I think we're very comfortable with our current business mix. The strategic choices that we've taken within those business mix, we're very, very comfortable with that. We're going to remain disciplined in terms of capital allocation, risk management, cost control. And we're going to commit to performance as we always did. And that -- you should not expect that to change with us.

[Darko Mihelic, MD & Equity Analyst]

Okay. Great. And I just wanted to sort of switch gears a little bit. One of the things -- again, I've only got 3 banks to compare against so far with respect to Q4. But one thing that does set you're Bank apart is risk-weighted asset growth -- total risk-weighted asset growth at NA, 10% this year, Scotia flat, Royal effectively flat. Now one of the things that we saw at the other banks, though, is there are opportunities for modeling, sort of updates, changes. Are there any opportunities that for NA at all as you see -- maybe this is a question for Bill or Ghislain. But is there any opportunity for model updates, parameter updates, any sort of help on the risk-weighted asset side, because the 10% growth in this year, I can only imagine as the economy takes flight, how much RWA growth you could achieve unless, of course, there are opportunities to reduce RWA density?

[William Bonnell]

So thanks, Darko. Maybe I'll start off. It's Bill. Laurent or Ghislain, any follow-ups they can add in. But thanks for pointing out. We were really pleased with the growth in RWA coming from the growth in the organic business, and that includes commercial banking, includes financial markets, both on the lending side, but also on the risk management products and the derivative side. So lots of client activity, growth in the franchise, franchises generating increases in RWA. And I'll point out as well that, that happened with a superior ROE. So the opportunities to grow organically, loan growth, RWA at really good ROE levels. We would like that to continue into the new year. So certainly, there's -- there are always potential opportunities with data refinement and model updates that could give some tailwinds to the RWA calculations.However, I don't have anything to signal, and I'll just remind you that the -- given the results that we've seen on the revenue side and the risk-weighted risk/reward equation on that RWA growth, we don't see it as an impediment for continuing the future growth. Does that answer your question, Darko?

[Darko Mihelic, MD & Equity Analyst]

Yes. That's great.

[Operator]

[Operator Instructions] The next question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, Analyst]

Actually, maybe I can just pick up where Bill left off there. When -- or when you and Darko, I guess, left off there. When you -- Bill, when you give us this outlook on impaired PCLs, for example, you gave it to us in basis point terms. What's the -- what sort of loan growth is implicit in that guidance?

[William Bonnell]

You're looking at the denominator, I suppose, of that calculation.

[Sohrab Movahedi, Analyst]

Yes.

[William Bonnell]

So given the -- thanks for the question, Sohrab. But the denominator, the delta and -- the potential delta in the denominator isn't the biggest certainly factor in that equation. It's really how I would frame the 15 to 25 basis points is, if you think, historically pre-pandemic, we were within that 15 to 25, mainly on the top end of the range. During last year, we were below that 15 basis points. We ended up with 11 basis points. And our discussion looking forward is we think we'll be at the low end of that range. And at some point in '22, '23, we should get back into the normal run rate in pre-pandemic. So the variability and/or the uncertainty in terms of the macro environment is certainly got more of an impact than the denominator of the calculation.

[Sohrab Movahedi, Analyst]

Okay. So when you combine that with how the performance kind of allowances may also contribute to the total number, I think if I read your message correctly, there could still be some performing allowance releases.

[William Bonnell]

That's correct.

[Sohrab Movahedi, Analyst]

And I guess what I'm trying to get, to get a feel for, Bill, and I think in quarters past, you guys have been pretty clear that you're comfortable growing into your allowances. I'm just trying to kind of get a sense of how much of that guidance implicit in your kind of performing is -- like are you growing into it? Or are you releasing it? Yes. So I'm trying to figure out how much of it -- how much is happening in each one of those buckets?

[William Bonnell]

Maybe both, Sohrab, is the -- I think probably the fuller answer, both. I think we saw even in the fourth quarter, we saw growth in performing allowances from international as growth in assets were quite strong. And yet we had releases from the performing allowance. I think if you look at the coverage ratio, kind of indicators about how the adequacy of the allowances that we have, I think as you can see, there is room for both growth in the balance sheet, and as uncertainty is removed and gets smaller, certainly some releases coming from those allowances as well.

[Sohrab Movahedi, Analyst]

That's helpful. If I can just come -- I know we're over time, but if I can just come at it from a slightly different angle here. Laurent, you mentioned mid-single-digit pretax pre-provision growth at the total bank level. What sort of balance sheet growth is implicit in that assumption?

[Laurent Ferreira, President, CEO & Director]

I think it's around 7%.

[William Bonnell]

And Sohrab, just one further addition as I see now a little where you're going, the nature of the growth is important as well. Just like for RWA growth in residential mortgages doesn't have the same consumption or insured real estate in Stephane's world. So it does depend on the nature of the growth in terms of the -- you think about risk density, you can think about ECL density as well.

[Sohrab Movahedi, Analyst]

Perfect. And then can you just remind us what's ABA's market share in Cambodia?

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

Well, Sohrab, this is Ghislain. Well, it depends on the products, but they are third -- they are the third bank in terms of asset size in Cambodia. But for some digital products, they are either second or first.

[Sohrab Movahedi, Analyst]

And Ghislain, am I right that a few years ago when you had ABA kind of discussion with the investment community, they would have said they're probably ranked fifth in market share by assets?

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

Yes, yes. I think that when we first invested in ABA, they were like 7th or 8th. At the moment of the Investor Day, they were fifth and now they are third.

[Operator]

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

[Laurent Ferreira, President, CEO & Director]

Well, thank you very much, everyone. Happy holidays to all, and we'll speak to you next quarter.

[Operator]

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