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National Bank of Canada
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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.
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; Marie Chantal Gingras, Chief Financial Officer; and Bill Bonnell, Chief Risk Officer. 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; Denis Girouard, Co-Head of Financial Markets, along with Etienne Dubuc, Co-Head of Financial Markets since November 1; Ghislain Parent, Head of International; 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.
Merci, Linda, and thank you, everyone, for joining us.
Earlier today, we released strong financial results. Pretax pre-provision earnings were up 9% for the quarter, capping off another year of solid performance for the Bank. For 2022, we generated double-digit growth across all business segments and positive operating leverage, highlighting the resiliency of our business model.
Again, this year, we delivered an industry-leading return on equity by striking the right balance between growth, capital deployment, discipline and credit quality. Our superior ROE also underscores the strategic diversification of our earnings stream and our highly accretive business model.
In the context of macroeconomic uncertainty, we are maintaining a defensive positioning with a prudent approach to capital, risk and cost management. Our capital position is strong with a CET1 ratio of 12.7%. Our credit portfolios continue to perform well, and we have a prudent level of reserves.
Turning to capital deployment. Our strategy has always been driven by discipline and that remains unchanged. First, maintain strong capital ratios. Second, invest in business growth in our core markets. And third, return capital to shareholders through sustainable dividend increases and share buybacks. This morning, we announced a dividend increase of $0.05, up 5% from the previous quarter. Our objective is to gradually bring back our dividend level within our midterm payout range of 40% to 50%.
During the year, we returned $245 million of capital to shareholders through share repurchases. Today, we announced the renewal of our NCIB program, providing us with the flexibility to buy back common shares as appropriate. Our intention is to resume share buybacks in the near term. National Bank has a proven track 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 segments. Our Personal and Commercial Banking segment delivered a strong performance with pretax pre-provision earnings up 24% in the quarter and 17% for the year. This was supported by growth on both sides of the balance sheet as well as higher revenues and margins resulting from rising interest rates. 2022 was a record year for net client acquisition and improvement in customer satisfaction, 2 achievements, we are very proud of. This was driven by our focus on advice, sustained investments in the client experience, and the close collaboration between our business lines.
Looking ahead, we expect higher interest rates to result in some margin expansion over the next couple of quarters. Demand for residential mortgage to continue to slow and gradually normalize back near pre-COVID levels and commercial loans growth to remain robust, but below the exceptional growth rates observed in the last 2 years.
Our Wealth Management segment delivered a strong performance in 2022 despite challenging market conditions. Pretax pre-provision earnings increased by 23% in the quarter and 13% over the full year, reflecting our well-diversified revenue mix. Our successful client acquisition strategies have delivered a robust deposit base that benefits from rising interest rates and contributed to a significant increase in net interest income. We are pleased with the positioning of our Wealth franchise, a key growth lever for the Bank. As we look to 2023, we are maintaining our objective to achieve double-digit earnings growth through the cycle.
Financial Markets delivered strong results again in 2022, propelled by its defensive positioning and prudent risk management. Revenues grew 11% over and above last year's record results. The performance track record of our Financial Markets franchise demonstrates its resiliency, the diversification of its earnings and its ability to quickly adapt to market conditions through cycles. While the environment continues to be uncertain, as we begin a new year, our Financial Markets segment is well positioned. For 2023, we aim to deliver year-over-year revenue growth.
Turning to our International segment. ABA Bank's 2022 performance was strong with net income up 19% for the quarter and 35% for the year. This was driven by solid growth on both sides of the balance sheet. ABA Bank continues to expand its client base, benefiting from a competitive digital offering, favorable positioning and strong brand recognition. In 2022, ABA was again recognized as the best bank in Cambodia by Euromoney and Global Finance.
Similar to what we are seeing globally, economic growth is slowing in Cambodia. Given that context, we expect double-digit growth for ABA in 2023, however, at a slower pace than last year. Longer term, the outlook continues to be very attractive. Cambodia is a high-growth economy with favorable demographics, and it remains an under-banked market with strong growth potential.
Credigy performed well in 2022. Assets were up 6% sequentially on a constant currency basis, driven by a combination of new deals and extensions. Revenues were pressured by unfavorable mark-to-market adjustments at assets at fair value. This reflects the increase in discount rates due to rapidly rising interest rates. We expect these accounting impacts to reverse over the life of the assets as the underlying performance of the portfolio remains strong. Looking ahead, the environment is increasingly favorable for Credigy. The deal flow is accelerating, and we foresee double-digit asset growth for 2023.
Now let me say a few words on the economic outlook. In Canada, efforts to achieve a soft lending continue. Economic indicators are moving in the right direction, which could allow the Bank of Canada to slow the pace of interest rate hikes and reach a peak in the policy rate over the next few quarters. The labor market is showing signs of moderation and inflationary pressures are less acute than earlier in 2022. At this time, the growth of the Canadian economy is expected to continue to moderate in 2023.
Having said that, we are confident that National Bank's solid foundations will enable us to support our clients and help them navigate through an evolving macroeconomic environment. We are on solid footings as we enter 2023, with a diversified business mix, robust capital position and a disciplined risk and cost management. To support our long-term growth, we will continue to invest in our people, focus on deepening our client relationships, capitalize on our momentum in digital innovation and leverage our collaborative models to drive growth across the country in the years to come.
With a strong balance sheet, strong credit quality and a diversified earnings stream, we have the strength and resiliency to face uncertainty and generate continued profitable growth. Our commitment to creating long-term value for our employees, our clients, our shareholders and our communities is unwavering.
On that note, Marie Chantal, over to you.
Thank you, Laurent, and good afternoon, everyone.
Turning to Slide 9. For the full year 2022, the Bank generated excellent revenue and PTPP earnings growth of 9% and 11%, respectively. This was driven by strong organic growth across our business segments, underpinning the strength of our diversified business mix.
Regarding costs, we maintained our discipline in an inflationary context, and expenses were in sync with our growth throughout the year. This resulted in operating leverage of 2%. While our objective was to achieve positive leverage for the full year, we were also pleased to deliver the same for each and every quarter.
Turning to our quarterly results on Slide 10. We capped off 2022 with a solid fourth quarter performance from all business segments. Revenues were up 8% year-over-year, driven by continued balance sheet growth, resilient client activity and a favorable interest rate environment. PTPP earnings were up 9%.
Looking at expense growth, areas of investments in Q4 across the Bank are consistent with what we've been doing throughout the year. This includes investments in talent, in line with strong business growth, increased amortization expense consistent with technology investments and higher travel and business development costs. It also reflects steady investments in systems and processes to support business and client acquisition growth and to protect the Bank and its clients. Looking ahead, we will maintain our usual balanced approach to business growth and investments in the context of continued uncertainty and challenging markets.
Turning now to the performance of our segments on Slide 11. All our business lines generated strong organic growth, and we were disciplined in managing costs. On a total Bank basis, this resulted in a 52.6% efficiency ratio for the full year, an improvement from the 53.7% level of 2021. We are proud of the consistent execution by our team. This has once again translated into best-in-class efficiency ratios for some of our segments.
Looking at the other segments. It remained under pressured in the fourth quarter as anticipated and discussed on our last earning calls. Revenues for the segment were negative $85 million in Q4, which we expect to be the low point. We expect revenues for this segment to remain challenged in 2023, similar to levels observed in the second half of 2022, where revenues averaged negative $60 million per quarter. Entering into fiscal 2023, the Bank as a whole remains well positioned given our diversified business mix and prudent approach to cost and risk management.
We are once again targeting positive operating leverage for the full year, although we expect operating leverage in PTPP growth to be pressured in the first quarter of 2023. In addition, our goal is to achieve mid- to high single-digit PTPP growth for fiscal 2023. This assumes that the Canadian economy remains resilient and that the favorable momentum in our business activities remains.
Turning to Slide 12. Total net interest income, excluding trading, was a strong $1.3 billion this quarter, up 24% from last year. The year-over-year benefit from client-driven volume growth and higher interest rates was broad-based across our core businesses. Total Bank NIM, excluding trading, was up 19 basis points from last year and up 5 basis points on a sequential basis, primarily reflecting higher deposit margins in the context of higher interest rates. We continue to be pleased with the strength of our margin profile underpinned by, first, our long-standing balanced approach in managing volume growth, profitability and credit quality. Second, our strong deposit franchise within P&C Banking and Wealth Management; and lastly, accretive margins in our International business.
Now turning to Slide 13 for capital. The Bank ended the year with a robust CET1 ratio of 12.7%. In the fourth quarter, earnings net of dividend added 34 basis points to our CET1 ratio, reflecting the strong performance of our business segments. Excluding the impact of foreign exchange, RWA growth represented 41 basis points of capital. In a context of continued macro uncertainty, we are pleased to maintain a strong capital position. It allows us to support organic growth with all segments expected to contribute to RWA growth next year, while also returning capital to our shareholders through sustainable dividend increase and share buybacks.
In conclusion, the Bank's diversified business mix, continued cost discipline and robust capital levels position us favorably as we enter fiscal 2023.
Now before I turn it over to Bill, I would like to take this opportunity to recognize our colleague, Jean Dagenais, who will be retiring in a few weeks after 32 years of service at the Bank, and after supported the finance team through no less than 129 reporting quarters. As our Senior Vice President of Finance, Jean has been instrumental in these exercises and an invaluable member of the team. I want to thank him on behalf of everyone at the Bank for his contributions through the years and to wish him the very best in his well-deserved retirement.
Bill, over to you.
Merci, Marie Chantal, and I'll just echo your comment. Jean has been a real pleasure to work with you so closely all these years and wish you all the best in your new adventures.
Thank you very much.
Now I'll start on Slide 14, looking back at credit performance in 2022. Our loan portfolios benefited from very strong employment conditions and high level of savings coming out of the pandemic. Retail portfolios performed exceptionally well with impaired provisions remaining about half of pre-pandemic levels. Non-retail portfolios also performed very well throughout the year with some normal lumpiness from quarter-to-quarter. Our International portfolios performed as we expected with higher provisions driven by the expiry of the moratoriums at ABA. Overall, we finished 2022 with total provisions of only $145 million and with impaired PCLs of just 7 basis points.
Turning to the results in the fourth quarter. Impaired provisions rose to $87 million or 17 basis points, largely due to 2 factors. First, ABA saw higher provisions as expected as the remaining deferrals expired. And second, the Corporate Banking portfolio had new provisions on 2 files compared to a net recovery last quarter. Retail provisions rose modestly and remained well below pre-pandemic levels. We took $29 million or 6 basis points of performing provisions in the fourth quarter, driven primarily by a deterioration in our macroeconomic scenarios, portfolio growth and migration.
Looking forward, uncertainty remains high as the economy continues to face compound risks, including the impact of inflation and rising interest rates, geopolitical tensions and ongoing supply chain disruptions. Considering these factors, we expect delinquencies and provisions to continue rising throughout the next year from the cyclical trough levels of 2022. The speed of this increase will largely be influenced by the path of inflation and interest rates. We should also expect more dispersion in credit performance across portfolios, driven by differences in product type, geographic mix and vintage.
Given current uncertainties, we're very pleased with our defensive position. We believe our risk profile with an underweight and unsecured consumer, a Canadian focus and an overweight in the Quebec region, in addition to our prudent level of credit allowances, positions us well in this current environment. As a reminder, Quebec benefits from a highly diversified economy, more affordable housing, lower consumer leverage, a high proportion of dual-income households, more stable energy prices and a relatively strong fiscal position.
Considering this defensive positioning and the macro context in our outlook for credit performance in 2023, we expect that impaired provisions should return to our pre-pandemic range of 15 to 25 basis points. And with the current trends we are seeing, we'd expect to be in the bottom half of that range. Performing provisions will be driven by changes to the macroeconomic outlook, portfolio growth and credit migration.
Turning to Slide 15. Total allowances for credit losses increased to over $1.1 billion, which is almost 50% above the pre-pandemic level. Performing allowances increased by 4% to $890 million in the fourth quarter taking our coverage of last 12 months impaired PCLs to 6.4x and coverage of our pre-pandemic run rate of impaired PCLs to 2.8x. Our impaired allowance increased slightly in the quarter and provides a strong 41% coverage of gross impaired loans. We continue to believe it prudent to hold these significant level of credit allowances.
Now on Slide 16. Gross impaired loans increased quarter-over-quarter to $812 million or 39 basis points, driven primarily by 2 new formations in financial markets versus a net repayment last quarter and higher Canadian dollar formations in ABA. In constant currency terms, ABA's formations were stable quarter-to-quarter. As I mentioned in previous quarters, we expected the expiry of moratoriums at ABA to generate an increased impaired formations and that these should peak by the end of 2022. The actual performance so far has matched these expectations and we remain very comfortable with the level of provisions and the collateral backing these loans. We expect ABA formations to decline in the year ahead.
Slide 17 provides details on our RESL portfolio. The geographic and product mix has remained stable with Quebec accounting for 54% and insured mortgages accounting for 29% of the total RESL portfolio. Average LTVs increased slightly in the quarter, reflecting a decline in house prices and stood at 53% for uninsured mortgages and at 48% for our HELOC portfolio. Credit metrics for the portfolio demonstrate continued strong performance with 90-day plus delinquencies of the uninsured mortgages, only 1 basis point higher than the cyclical low reached last quarter.
On Slide 18, we provide some additional details on our mortgages. I'd like to remind you that our variable rate mortgages, which account for 33% of the portfolio have payments that adjust up or down with variations of interest rates. We believe this provides our borrowers with an opportunity to adjust their budgets accordingly while maintaining a reasonable loan amortization.
Details on our fixed rate mortgages maturing in the next 12 months show that the average LTV for the uninsured portion is just 40% and about 3/4 have remaining amortization of less than 25 years. These metrics demonstrate the capacity and flexibility these borrowers have to deal with higher interest rates at maturity. In the appendices, you'll find further information on our loan portfolio and market risks.
In conclusion, we are pleased with the credit performance again this quarter and remain very comfortable with our defensive positioning, our resilient mix and our prudent level of allowances.
With that, I'll turn it back to the operator for the Q&A.
[Operator Instructions] The first question is from Meny Grauman from Scotiabank.
Marie Chantal, you referenced some pressure in Q1 '23 for pretax pre-provision growth and I think, operating leverage. And I'm just wondering if you're signaling something in particular or is it just math from -- as we compare Q1 '23 to Q1 '22? So I just wanted to check on that first.
Yes. Thank you for the question. That's exactly if we compare Q1 '23 to Q1 '22, we did have some adjustment that we had actually disclosed in terms of tax adjustments for $20 million, if I recall correctly, in Q1. So that will definitely be an item that will create some pressure.
Okay. And then I wanted to ask about the margin in the P&C business up 8 basis points sequentially. In the context of the broader group, it definitely seems high. It's a nice problem to have, but given National Bank's loan-to-deposit ratio, I would have thought that you would be seeing more pressure on your margin in your P&C business. I'm just wondering, how do we understand this margin expansion, which seems like it's at the higher end of the group, I guess, we'll see as more results come in, but it seems to be at the higher end of the group. So I'm just wondering about that. And then I have a few follow-ups on margins, but just generally start there.
Yes. Thank you for the question, it's Lucie. So I can't speak for the peers, but so the -- what we see happening is that the increase definitely in deposit front were a nice tailwind for us, and it was partly offset by asset spreads. The tailwind in deposit spreads, a big proportion of that came from noninterest sensitive deposits, which really represents the lion's share of the deposit spread increase. And this quarter, we've also had a positive business mix impact with the deposit growth outpacing loan growth. We also had fixed term deposit benefiting from higher margin as the portfolio renewed and demand deposit bearing interest benefited also from deposit beta. So basically, that's the story for the sequential improvement.
Can you talk about what you're seeing in terms of mortgage spreads. A peer this morning talked about pressure there. And I'm wondering what you're seeing in the mortgage product specifically?
Right. So definitely the market continued to be extremely competitive in the context of rising rates. The important increase in cost of funding that we had in Q4 was only partially reflected in the customer pricing. And what I could add also to -- maybe to give you some color, customers are kind of anticipating also that rates may decrease somewhere in '23 or in '24. So we've seen more interest for shorter term this quarter. So the new business is definitely tighter, and we expect to continue to navigate in this environment until the first half of 2023. And just to finish on that, in that context, it's even more important for us to stay disciplined with balancing volume growth and our pricing discipline and risk.
Understood. And then just a final one for me. Just if you could comment on -- we've heard other banks talk about the prime BA spread compression and the impact that, that's having on their margin this quarter. If you could comment on that specifically for National Bank.
This is Jean. Just to say that we are -- our fund transfer pricing is not based on the prime BA in the prime CDOR, it's based on the OIS curve. So it doesn't have the same time of impact because the rate of our customer moves at the same time as our funding costs.
The next question is from Doug Young from Desjardins Capital Markets.
Just to continue on with the NIM discussion in P&C Banking. I guess, Jean, is with the fund transfer pricing and the actions in treasury, are you capturing some of the NIM expansion within the division, but some of that is offset from hedging or fund transfer pricing activity at the corporate level, other level? Or is that indicative -- is that a fair way to think of it?
Business line are matched to maturity according to the term of the deposit. So the fund transfer pricing is like constant for the business line and its treasury that manages the interest rate risk or the liquidity risk. So the movement in treasury will depend on how they do manage those risks.
Is it a full pass-through of the cost versus the asset yield from -- at the treasury right through to the division?
A full pass-through according to the methodology and the appropriate rate according to the terms of the loan and deposit of the business line.
Okay. Just going on to Credigy, pretax, pre-provision earnings, I think, was down about 20%. There was a mention, and we can see it in the results, there was a mark on the assets in NII. Can you kind of break out what that mark is related to? Can you give a little bit more specific? And I think it was mentioned that you're expecting double-digit asset growth Credigy through fiscal '23. I mean is -- should we be assuming something similar for pretax pre-provision? Or is there some additional expenses that would slow down the pretax pre-provision growth versus the asset growth?
Doug, this is Ghislain. So to answer your second question, I think that you should anticipate the same trend for PTPP as for revenues in 2023. And regarding your first question, for most of our business, we hold investments to maturity. But in some cases, IFRS accounting rules, we require that we carry hold to maturity portfolios at fair value due to the nature of the underlying assets. And the most common example is the book of reverse mortgages where payments are not required until there's a maturity event such as the sale of the house.
So to assess those portfolios, we use a discount rate base model. And essentially, you probably saw what happened to this discount rate in fiscal 2022. It went up by more than 5%, so it's comprised of 2 items, the risk-free rates, but also the liquidity premium. And essentially, this is a huge, huge increase on the discount rate in 2022. And that explains the minus $28 million in Q4 and a minus $50 million for the fiscal year. So looking forward, we might experience some further pressure in fiscal 2023, depending on the path of interest rates, but we expect those impacts to be more modest compared to fiscal 2022. So I hope it helps to understand.
Yes, that's helpful. And then just lastly, I was hoping to get a little bit more detail on the RWA growth or that 41 basis point hit to the CET1 ratio from RWA growth. Like can you break that down in terms of -- I assume it's all credit risk-weighted assets? Or was there any movements in operation risk or market-related risk, can you give a little more detail?
Doug, it's Marie Chantal. So in terms of the mix, it was mostly related to credit risk this quarter, as you can see on the slide, $3.1 billion, very minimal for operational risk and market risk.
So it was just simply all volume growth?
Mostly, yes.
The next question is from Paul Holden from CIBC.
First question is just related to the share buyback. So I appreciate that it's generally a good use of capital. But I'm just -- you suggested that share buybacks would resume soon. Just wondering like why now? Like your stock has held up relatively well versus peers, not trading at that big evaluation discount like why start buying back stock more aggressively now?
Paul, this is Laurent. I don't think I used the word aggressively. But I mean, we renew our NCIB every year, and it's part of our capital management buybacks. Look, the strategy hasn't changed. They are a complement. They are not part of our growth plan to buy back our shares. So our focus remains on organic growth, business growth. And there is uncertainty still in the market. So we're still in that mindset that we have to be prudent, given the macroeconomic environment, same with our provisions. So our goal is to make sure that we have flexibility in our capital management, but in no way that we -- our intention is to aggressively buy back our shares at this point in time.
Got it.
That helps you?
It does. It does.
Good.
Second question is with respect to commercial loan growth. Still good this quarter. The 2 peers that have reported to date have put up exceptional commercial loan growth. And so you've been slowing, it looks like you're growing a little bit less than the market. Just wondering if that's intentional if it is, if there's any particular color you can provide there?
No, I think -- thank you for the question. I think we're very proud of the growth we've had. And you've got to look at it more than on a quarterly basis. Our volume growth has been strong over -- consistently over the last 2 years. And obviously, we remain prudent in light of the uncertain environment as well. So we're very pleased with where we're positioned in terms of growth.
Okay. And then one final one from me. So it was pointed out earlier in the call that deposit growth outpacing loan growth released a bit this quarter. I think that's another divergence versus what we're going to see in the industry. So just wondering what it is you're doing that's driving that excess deposit growth?
Well, I can start and Stephane can complement. Actually, we've been working for many years on our customer acquisition strategy. And I think, like Laurent said in his script, we had a record year in 2022. And we see that this client strategy as being a medium, long-term impact, but we're starting to see really the benefit of that kicking in and we saw it in 2022. On the other side, there is definitely more attractiveness for fixed-term deposits in the current rate environment. And our customers have been responsive to the appealness of let's say the fixed-term deposits. Stephane, if you want to add?
I'd just say that for one, liquidity has been stronger than what we would have anticipated at the beginning of the year and remains very strong amongst Canadian businesses. And also, I won't detail our specific strategies. But obviously, in light of the good asset growth we had the last 2 years, we have been working hard on narrowing new clients on the deposit side.
The next question is from Gabriel Dechaine from National Bank.
Question for Jean. The hedging losses in the other segments, if I look at the run rate of NII prior to the last couple of quarters, we're looking maybe at a delta of $20 million to $30 million. Is that the ballpark figure? And when did they roll, I guess, if that's applicable?
Marie Chantal mentioned it, the run rate for the other revenue or negative revenue would be about the average of Q3 and Q4, which includes the impact of that hedging. The hedging was done several quarters ago. It's only the continuation of that, and it will taper down over the next '23 and it will be less of a factor on a comparative basis after the second half -- in the second half of 2023.
Okay. And then on Credigy, you mentioned that the -- if you hold on the maturity of the loans that are paid off, you recoup the losses. Is it correct to assume that the duration profile of this loan book is pretty short versus mortgages maybe not. I'm just wondering when we could expect to see those reversals?
Yes. Thank you, Gabriel. This is Ghislain. So you're right. This is the negative impact that we saw in 2022 the portfolio was temporary. Since first, our intention is to hold these portfolios until maturity and also because the portfolios are still a very good credit quality. So to answer -- I'm sorry, I think that I forgot your question.
Duration.
Duration, yes. It's okay. I'm sorry. So I just want to give you 2 indicators for this portfolio. First of all, this book at fair value, it represents around 8% of the total assets of Credigy. So 8% down. And the duration is approximately 5 years on those portfolios.
Okay. Perfect. And then as far as the outlook, the loan growth looking to be in the double digits next year. Where you -- Credigy is pretty nimble. It goes from performing to -- sorry, not performing, but secured to unsecured. Where are you seeing the opportunities arise the former or the latter?
The former, I would say, so it's more secured business. We have increased our secured business activities over the years, and this will continue into 2023.
And last question, sorry for hogging the thought here, but from my understanding the Wealth. Is there -- we do spend a lot of time talking about the NIM in the banking segment, obviously, but it's a big driver in Wealth. I'm just wondering if there's any dynamics like customer substitution or like whether from noninterest paying, if it's fixed term or betas that we should be aware of because it has been a very helpful tailwind for your business.
Thank you, Gabriel. So first of all, we don't manage NIMs. NIMs are a bit irrelevant for Wealth Management. We try to optimize net interest income. And there's been no -- very little actually switches, to answer one of your sub-questions, very little. We estimate that less than 10% of our GIC sales come at the expense of mutual fund sales. So when you look at IFIC numbers, for example, we're #1 for year-over-year AUM growth rate and throughout 2022, we've been #1. So no, this is -- the explanation is something that we've talked in the past, the NII optimization strategy has been put in place before the pandemic with a dedicated team. So it's a couple of years in the work, and it's -- we're seeing now the results of everything we've put in place over the years and mainly driven by client acquisition.
The next question is from Mario Mendonca from TD Securities.
Bill, can I go to you for a few questions. The financial market sector, you referred to 2 files where the gross impaired loan formations were elevated. Could you talk about what segments those were in? The best I could gather, it looks like what you referred to as your education segment. Could you speak to that first?
Mario, I'd be happy to talk about that. I think we called them out in a slide. It's a health care and mining sector, 2 unrelated sectors.
I'm sorry, I missed that. Sorry.
So I would call them, Mario, and I call those 2 idiosyncratic provisions, nothing that's reflecting a trend in any one sector.
Yes. And the -- as you said, they're unrelated. I guess that's what I was going for.
By geography and by sector.
Can you speak to mortgages now? Normally, I don't worry too much about mortgage losses, but there was 7 basis points in mortgage losses this quarter. It's a high number. It's not something I'm really used to seeing. Was there some kind of adjustment in the quarter that would have taken it to 7 basis points? Maybe you could speak to that.
Yes, I think you're talking about 7 basis points of late-stage delinquencies. I don't think...
I'm referring to impaired PCLs and mortgages.
It's okay. Yes. So if you look at the -- I can't remember what table it is in the MD&A. But in the slides, in some sections, you'll see mortgages by business units, so Canadian P&C. But in many of the sectors, the descriptions in the SFI, it's more of a regulatory treatment of products. So the link that you're seeing is with ABA, increased formations. So that's something to call out, depending on what section of the SFIs you're looking at, it's either -- it includes ABA or when we're talking about P&C, you're looking at the Canadian domestic. Now the performance in Canadian domestic mortgages has been exceptional.
Yes. So we're not looking at actually 7 basis points of losses in domestic mortgages then?
No.
You would put that at what, like 2 or 3 or something at most?
0, 1.
Okay. So then I'm co-mingling something and getting there. So let's go straight then to ABA. You talked about how gross impaired loan formation would -- should be trending down from here. You didn't really speak to the PCL though. Would you also expect PCLs to start trending back to where they were?
I would expect PCLs to follow the formations and trend down next year, yes.
Okay. And then because those are relatively straightforward. If I could just go to the -- that entire segment, the U.S. the one with ABA and Credigy. It's difficult to understand why that margin moves why it doesn't. It's a little more volatile than I'm used to seeing it. This is an interest margin. What are we seeing over the last couple of quarters? It's trended down. I think last quarter, you talked about mix. Is it mark-to-market adjustments that go through that NII? What am I seeing there? Why is that trending down over the last couple of quarters?
Maybe -- maybe I'll start off and then pass it to, Ghislain, but the -- I think when you're thinking about margins, if you remember earlier in 2022, Mario, we talked about holding the reins in Credigy because we saw -- we forecast that there would be better opportunities coming in the future, and we're wanting to make sure that we had dry powder. So that directly would have a business mix impact on the margins that you would have seen in Credigy.
And in terms of the other aspect of margins, I think Ghislain talked about the -- where the team is seeing very good risk-adjusted rewards in secured very high-quality assets. So while margins or opportunity spreads have increased in the unsecured and other higher-risk assets, the Credigy team is still being very disciplined as you can expect from the team, and really focusing the near term on the very, very good risk-adjusted assets in the secured space.
So the -- managing -- the Credigy team doesn't manage gross margins. It's very much risk-adjusted returns and very disciplined through all cycles in that aspect. And maybe I'll pass it over to Ghislain, if you have anything to add.
Well, Mario, this is Ghislain. So I think that Bill answers most of your questions on Credigy. And for ABA, well, I just want to point out that for Credigy, the margin has been accretive to the bank consistently above 5% and we expect margin to stay above 5% in 2023 for Credigy. And for ABA, margins have been consistently above 6% and this is what we see also for 2023. So competition on deposits is expected to be the main NIM driver for ABA in the coming quarters.
So it's trended down a little bit, but you're -- it doesn't sound like something you're that concerned about. It sounds like it's more conscious decisions around mix.
Yes. For Credigy, it's mix and also cost of fund. And for ABA, essentially, it's more competition in the country, more competition for deposits.
The next question is from Lemar Persaud from Cormark Securities.
I first want to start off and circle back around on Credigy for Doug-based question other that, you could see a situation in 2023, where we see good volume growth, but then mark-to-market losses to continue. However, because of product maturity, that's why it still makes sense to grow that business notwithstanding some of the reported earnings pressure up until maturity. Is that kind of the right way to think about it at the top of the house?
Yes, yes. As I mentioned, I mean, we could see some other negative mark-to-market in 2023, but not to the extent that what we saw in 2022, I would be very, very surprised. And for the rest, look at the asset growth, we've been very satisfied with the asset growth. In U.S. dollar, it's 6% quarter-over-quarter, 9% year-over-year. And as Laurent mentioned, we see double-digit growth in 2023. So everything -- well, the current environment -- the current economic environment is very good for Credigy and we will benefit from it in 2023.
Okay. Great. That's helpful. And then I want to go over to -- back to the NIM discussion, but I want to take a look at the all-bank level. So it seems like liquidity has rose a fair bit this quarter, specifically with regards to the repo balances and that certainly put some pressure on the all-bank margins. Can you talk to us about what higher repo this quarter? And what I'm referring to specifically is the $26.5 billion on your balance sheet relative to call it the mid-teens average over 2022. Anything unusual on that?
Can you repeat, because I was not following, sorry?
Just before Denis answers, just as you know that the all-bank NIM we're showing is the non-trading all-bank NIM, and all those assets are part of the trading activity with customers, and they're not included in the all-bank NIM.
Okay. Maybe I'll follow up offline on that one but thanks for the time.
The next question is from Joo Ho Kim from Credit Suisse.
I want to follow up, this was already discussed. But just on the other segment, I think you had mentioned the top line pressure could remain into 2023. Can you guide us to how we should think about PTPP earnings or how they should shape out as we move through the quarter, so next year?
Yes. So as I mentioned -- thank you for the question. As I mentioned, in terms of guidance for 2023, first of all, Q4, as I said, is our low point. And what you could expect is similar levels to what we observed in the second half of 2022 in terms of revenues. In terms of expenses, it could -- it's going to depend. So there's a couple of multiple factors, but mostly the variation will come from revenues.
Got it. And just one last one for me. I wanted to go back to the earlier discussion on deposit growth strategy. Over the last several years, and I do see strong deposit growth, especially on the demand and order side for you guys relative to peers. And just wondering how you view sort of further customer acquisition strategy in that specific deposit bucket just given the rising rates and the impact that's having on customers' preference and the move into the fixed term deposits here?
Yes. It's Lucie, I'll start. So definitely, we see attractiveness in growing the fixed term deposits in 2023. We see probably a little above mid-single digits. So it will remain an attractive product from a customer perspective. In terms of -- I think you asked something about migration coming from the current accounts. So we've seen a little bit of that starting in Q4. We've seen some migration from current account to fixed term deposits, which is basically somehow expected in the context. It's difficult to say if that migration will continue in the coming months and also with the same -- to the same extent. But on a sequential basis, that migration did not have a material impact on our NIM expansion. Does that answer your questions?
It does.
The next question is from Sohrab Movahedi from BMO.
Can I just pick up where we left off there? I mean you talked about the revenue impact in the Corporate segment. But if you just cut to the chase and think about the earnings drag when you think about the second half of 2022, do you think it's going to be a similar type of quarterly drag in 2023?
Yes. It will.
Okay. That's very helpful. Just to make it crystal clear, I suppose. I wanted to ask 2 follow-ups, I think one for Martin. Martin, I think you've got a target on your back to grow earnings double digits. Do you think that's going to be top line driven? Or is it going to be expense driven?
Well, first of all, I like the target on the back. And we keep it, we cherish it and definitely revenue, Sohrab, we focus on revenue. And second is positive operating leverage. And when you look at 2023, if you just annualize the 350 basis point interest rate increase that we've had and the sensitivity, we're pretty confident in achieving double-digit earnings growth next year.
Perfect. And maybe one for Bill on -- I appreciate the color you provided, and we know the ABA is a bit more of a secured book. But I think you've also indicated or I think that is Laurent has in conversations with me that ABA is also trying to go a little bit larger ticket sizes as far as maybe doing more commercial lending and the like. And I'm just curious just to get a sense of how -- what is the average kind of -- like the loan growth is there. I'm just trying to understand, is it still kind of -- is it becoming a little bit more concentrated that loan growth? Or is it still pretty dispersed?
No, maybe Ghislain can take that one.
Sohrab, it's less than 5% of the portfolio for the moment. And we -- over time, maybe we would increase it around 10% of the portfolio, but we are not there yet. And we will not be there at the end of 2023, considering the economic environment. We want to stay prudent with the same, I would say, business strategy as in previous years.
Maybe I'll try my question a little bit differently then. You mentioned, Bill, there were 2 files, idiosyncratic events and financial markets. What would you handicap the likelihood of having a headline like that in a coming quarter at National Bank as far as ABA is concerned. We have 2 surprises in ABA that's kind of is worth calling out.
As Ghislain said, the focus -- the business focus has remained the same. As the economy has grown, our customers have grown and some of those have grown into a little larger scale customers, but as Ghislain mentioned, the growth in those larger scale ones will be prudent. And when we're talking larger scale in this context for ABA, the average ticket size is, Ghislain?
The maximum ticket is $10 million.
So it's not something where we would expect 2 files to be -- to hit your radar screens, Sohrab. It's still very, very small.
Yes, Sohrab, keep in mind that 95% of the portfolio is small loans. The average is around USD 60,000. So the 5%, of course, there will be larger loans, but nothing over $10 million.
I appreciate it. And then just one clarification question. On Credigy, the double-digit asset growth, I assume that's on constant currency.
In Canadian. It's in Canadian.
Double-digit. So you're talking about double-digit asset growth in Canadian dollars. Does that include an FX tailwind? Or does it -- or not?
I don't think that the FX is, Jean?
The FX is expected. The rate Canadian dollar to weaken and strengthened by the end of 2023. So overall, if you look at the 2 end period, it's neutral.
The last question will be from Darko Mihelic from RBC Capital Markets.
Before I ask, Jean, congratulations on your retirement. You've helped me immensely over my career with a number of numbers questions. So I'll miss you, but best of luck. My question is very straightforward. I just want to know a little bit about the trading that occurred in the quarter. I noticed in the deck, there was a fairly large loss in 1 day, which is a bit peculiar for your bank. I just want to understand kind of what caused the loss? Was it proprietary? Help me just conceptually think about that and how I should think about trading going forward?
Yes. Thank you, Darko, for the question. It's Denis. If you remind and if you look at that day specific day, it's September 26, and just after the release of the U.K. government about the fiscal package, it was none that was not expected by the community. And suddenly, you had a lot of movement on the 1 day, which was the 26th. And we are carrying some residuals position that we have from the client activities and it affected our mark-to-market that day, but we crystallized some of those losses that day. But in the coming days, as you can see, there was some money coming back. Then overall, it was not that bad. But the dislocation of the market that day affected us specifically for that. But it's very unusual for us to see that type of transaction. And it's before you have a position in North America, a position in Europe and sometimes you have dislocation between the 2, and this is what happened basically.
So just to be clear, are you -- I mean, is it normal for you to be trading significant amounts of Gilt or other European bonds.
No, that was not all related to that. Some of it was, but there was also in other currency and other products that was also in North America because there was quite a lot of action that day, and it was very dislocated. And for us, it affected us.
This concludes today's question-and-answer session and the conference call. I would like to turn the meeting back over to Mr. Ferreira.
Thank you. I'd like to say, again, thank you to Jean Dagenais. He's been with us for 32 years and has provided us with fantastic services over the years, and thank you. Happy retirement. Thank you all on the call, and we'll see you at Q1 next year. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.