National Bank of Canada

TSX:NA

Earnings Call Analysis

National Bank Exceeds Expectations with Strong Growth and Strategic Outlook

In the fourth quarter, National Bank reported a solid earnings per share of $2.58, with a 10% increase in revenue backed by disciplined cost management. The bank achieved a 13.7% CET1 ratio and plans to raise its dividend by $0.04 from Q1 2025. With a robust commercial loan growth of 14%, expectations are set for mid-single-digit EPS growth in 2025, driven by the acquisition of Canadian Western Bank. However, the economic outlook suggests slower growth and increasing provisions for credit losses, expected to range between 25-30 basis points for the year ahead.

Strong Financial Performance in 2024

In the fourth quarter of 2024, the National Bank reported earnings per share (EPS) of $2.58, contributing to an annual EPS growth of 10% and a total of $10.39 for the year. The bank achieved a return on equity (ROE) of 17% and maintained a Common Equity Tier 1 (CET1) ratio of 13.7%, reflecting solid capital management. Additionally, the common share dividend was increased by nearly 9% in 2024, and a further hike of $0.04 will take effect in the first quarter of 2025.

Macroeconomic Context and Growth Strategies

Looking ahead, the Canadian economy is expected to experience slower growth in the first half of 2025, influenced by high interest rates and uncertainties in consumer spending and business investment. The National Bank plans to counter these challenges by pursuing disciplined credit management and cost control, focusing on organic growth and the strategic acquisition of Canadian Western Bank (CWB), which is anticipated to be a key driver for future domestic growth.

Segment Performance Insights

The Personal & Commercial (P&C) Banking segment reported a solid performance with earnings up 5% year-over-year, driven by strong balance sheet growth despite an evolving credit cycle. Commercial loan growth for Q4 was robust at 14%, reflecting strength in the insured residential real estate sector. Conversely, growth in personal mortgages rose by 3% year-over-year and is expected to continue at this pace. Wealth Management and Financial Markets also posted notable performances, with Wealth Management seeing 12% net earnings growth, supported by strong deposit volumes and asset appreciation.

Credit Performance and Provisions for Losses

Despite a challenging economic landscape, the bank's credit performance remained resilient. In 2024, provisions for credit losses (PCL) reached 24 basis points, slightly up from 18 basis points a year prior. This reflects a cautious approach in a softening economy, with total PCLs for the fourth quarter amounting to $162 million, indicating a minor increase quarter-over-quarter. The bank anticipates a PCL range of 25 to 30 basis points for the entirety of 2025 as it prepares for potential increases in delinquencies.

Future Guidance and Strategic Focus

For 2025, the bank aims for mid-single-digit EPS growth, riding on strong execution in its operational activities. Specifically, commercial loan growth is projected in the low teens, while personal loan growth is estimated to remain consistent with 2024's performance. Notably, the impact of new Pillar 2 tax rules is expected to increase the effective tax rate by approximately 1% to 2%, emphasizing the need for strategic cost management in the years ahead.

Integration of CWB and Long-Term Aspirations

The impending acquisition of CWB is seen as pivotal for the National Bank's growth trajectory. The transaction is progressing through necessary regulatory approvals, with a target completion date set for early 2025. It is anticipated that while CWB's integration may initially lower the bank's ROE, synergies and capital optimization over the next 2 to 4 years will restore the ROE to competitive levels. The bank intends to continue focusing on organic growth, with future opportunities contingent on successful integration of CWB's operations.

Earnings Call Transcript 2024-Q4

[Operator]

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

[Marianne Ratte, executive]

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

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

I will now turn the call over to Laurent.

[Laurent Ferreira, executive]

Merci, Marianne, and thank you, everyone, for joining us. This morning, National Bank reported earnings per share of $2.58 for the last quarter of 2024 and $10.39 for the full year. With disciplined execution, strong organic growth and resilient credit performance in a complex environment, the bank met all of its medium-term financial objectives for 2024. We delivered EPS growth of 10%, ROE of 17% and a CET1 ratio of 13.7%. We increased our common share dividend by close to 9% in 2024. And this morning, we announced a $0.04 increase to our quarterly dividend effective Q1 2025.

Our proposed acquisition of Canadian Western Bank will be a key pillar in our domestic growth in 2025 and for the years to come. We look forward to bringing together 2 strong teams and highly complementary platforms to accelerate our growth.

The approval process is progressing well. CWB common shareholders approved the transaction in early September and all approvals to complete the reorganization of CWB Tier 1 capital were obtained late November.

On the regulatory front, we received clearance from the Competition Bureau in late September and the Federal Department of Finance completed its public consultation in November.

We have also completed and submitted regulatory documentation to OSFI as part of the application review process. After OSFI completes its review, the final step will be the decision of the Minister of Finance.

Before turning to our business segments, let me make a few comments on the broader macroeconomic context in Canada. We expect the Canadian economy to experience slower growth in the first half of 2025 as interest rates remain restrictive. The labor market, consumer spending, business investment and the credit environment will continue to reflect this softness. Canadian economy will also face uncertainties with regards to the path of monetary policy and a possible divergence between the Bank of Canada and the Fed as well as trade policies in North America. These will potentially have an impact on the term structure of interest rates, Canadian dollar and Canadian businesses.

Turning now to the performance of our segments. P&C Banking generated a solid performance in the quarter and throughout the year, with 2024 earnings up 5%. Franchise benefited from strong balance sheet growth, partly offset by an evolving credit cycle. Growth in personal mortgages picked up over the course of 2024 and in Q4, up 3% year-over-year. We expect momentum in our client channels to continue at the current pace.

Commercial loan growth was robust, up 14% for Q4 and 13% for the year, reflecting strength in insured residential real estate and broad-based growth across our industries and geographies. We expect commercial loan growth to be in the low teens next year before factoring in CWB.

Wealth Management delivered 12% net earnings growth in 2024 with a strong performance in all businesses. This included strong deposit growth volumes and asset growth supported by significant market appreciation and continued client acquisition momentum. Our Wealth Management franchise is well-positioned for continued growth next year.

Financial Markets capped off the year generating net income of $306 million in Q4. Global Markets delivered a strong performance from equities driven by good market activity and structured products origination. Corporate and Investment Banking results were strong in DCM and Corporate Banking, offset by lower fees in M&A and ECL. For the full year, financial markets grew net earnings by 18%, leveraging our expertise in select areas while maintaining a disciplined risk management approach.

Looking at 2025, the impact of Pillar 2 on our European activities and a credit environment that remains challenging are expected to temper net income growth for this segment, particularly against a record year. However, our strategy remains unchanged, and we continue to target net income growth in 2025.

Credigy had a strong year, with net income growth of 10%. And investment volumes exceeding USD 3 billion resulted in an average asset growth of 14% for the year. In 2025, we expect to generate investment volumes and average asset growth in line with 2024. The U.S. market remains competitive, and the team will maintain its usual discipline as it pursues opportunities with attractive risk-reward profile.

Shifting to ABA Bank. The local economy is operating below potential, and tourism spend remains lower, which impacts the businesses we serve there. However, the economic long-term fundamentals remain highly attractive, including favorable demographics, the diversification of the economy and strong GDP growth potential. Against this backdrop, ABA continues to grow its balance sheet with loans up 11% year-over-year in Q4. It also continues to grow its client base, up 29% year-over-year, translating into deposit growth of 19%. This reflects ABA's unique strengths, including its digital payments, and cash management capabilities.

2024 was a year of significant progress in the execution of our growth strategy. I wish to recognize our employees and the senior leadership team for their contributions, our growing number of customers for their trust and our shareholders for their continued support.

Looking ahead to 2025, the economy continues to remain uncertain and complex. In this context, our approach and our discipline in credit capital and cost management remains unchanged. As we pursue the growth of our bank, long-term value for our stakeholders is our most important priority.

Marie Chantal, over to you.

[Marie Gingras, executive]

Thank you, Laurent, and good morning, everyone. My comments will begin on Slide 8.

In 2024, the bank achieved record revenue, pretax pre-provision earnings and net income each representing double-digit growth year-over-year. All business segments contributed significantly to the strong performance. We maintained our cost discipline across the bank and expenses were in line with our growth. We were pleased with the overall efficiency of our businesses. Operating leverage was positive in every quarter this year.

Fourth quarter results were solid. Revenues increased by 10% and with continued cost discipline, PTPP grew by 11%. Operating leverage was positive at 1.5%. Wealth Management generated particularly strong revenue and PTPP growth up 14% and 16%, respectively, year-over-year. P&C as well as ABA and Credigy delivered solid balance sheet growth.

Expenses were up 8% year-over-year. This was primarily driven by total compensation, which also increased by 10%. As well, technology costs and professional fees were higher year-over-year in support of our business growth and our investments.

Now turning to Slide 9. Nontrading NII in Q4 was up 6% sequentially or 4%, excluding the remaining impact of the conversion of BAs to CORRA loans. This increase was mainly driven by solid asset growth in P&C, Credit GNABA, improved NII from corporate activities and a favorable impact of $12 million in Credigy's fair value portfolios. The all-bank NIM, excluding trading, was 2.26%, up 4 basis points quarter-over-quarter. The overperformance of Credigy's fair value portfolios accounted for about half of this increase. As expected, the P&C NIM was relatively stable quarter-over-quarter at 2.30%.

Turning to Slide 10, which highlights the continued broad-based growth on both sides of our balance sheet. Loans were up 8% year-over-year and 1.5% quarter-over-quarter. Deposits, excluding wholesale funding, grew 9% year-over-year and 3% quarter-over-quarter. Personal demand deposits increased by $2 billion, up 5% sequentially, while non-retail deposits grew 4% quarter-over-quarter. Deposit trends are evolving as short-term interest rates are declining. Within Personal Banking, growth in term deposits has been slowing while demand deposits have been growing at a solid pace over the past 2 quarters. Furthermore, our customers' appetite for investment solution has been strong, given the favorable market performance in 2024, and this resulted in solid growth.

Now turning to capital on Slide 11. We ended the year with a robust CET1 ratio at 13.7%, up 25 basis points sequentially. Fourth quarter earnings net of dividends contributed 37 basis points to our ratio, again, underscoring our internal capital generation capacity. Excluding FX, growth in risk-weighted assets accounted for 17 basis points of CET1, driven by organic growth in our business.

Before offering some comments on our outlook for 2025, I would like to mention that effective November 1, we will be discontinuing the presentation of revenues on a taxable equivalent basis. The TEB presentation is less relevant following the introduction of the Pillar 2 tax rules in Q1 2025 and of Bill C-59 regarding the taxation of Canadian dividend earlier this year. The change will have no impact on the net income previously reported.

We will publish results revised on this basis for fiscal '23 and 2024 shortly. As well, please note that comments relating to our outlook excludes the impact of our pending acquisition of CWB.

With that said, operating leverage will be positive next year. We continue to be disciplined around costs and strategic around investments to simplify operations and gain efficiency as we pursue our growth.

Looking at the all-bank nontrading NIM, we expect modest quarterly fluctuations with our P&C NIM remaining relatively stable in 2025 on the back of improving loan margins, mitigated by lower deposit margins as term deposits renew at lower spreads. As for Pillar 2, it will impact the taxation of our activities in Europe within our Financial Markets segment beginning in the first quarter of 2025.

At this stage, the bank estimates that the impact from the implementation of the Pillar 2 rules should increase the effective tax rate, all things being equal, by approximately 1% to 2%. However, the effective tax rate for any particular period may also be impacted by other factors, including changes in our business mix.

Finally, as we take into consideration the interest rate environment, the implementation of Pillar 2 and a credit environment that remains uncertain, we expect mid-single-digit EPS growth in 2025, backed by strong execution.

In conclusion, we are pleased with the bank's performance in Q4 and in 2024 and are excited about the opportunities that lie ahead. With a robust balance sheet and appropriate business model, we are well-positioned entering the new year and as we prepare to welcome the CWB clients and team.

I will now turn the call over to Jean-Sebastien.

[Jean-Sebastien Grise, executive]

Merci, Marie Chantal, and good morning, everyone. I'll start on Slide 13, looking back at our credit performance over the full year. Throughout 2024, the Canadian economy continued to show signs of softness, including slower growth and rising unemployment rate. Against this macro context, the performance of our credit portfolios proved resilient, benefiting from our defensive positioning and disciplined risk management. Total provisions for credit losses for the full year were 24 bps versus 18 bps a year ago. We took 4 bps of performing provisions as we prudently built additional allowances. As expected, impaired PCLs rose in 2024 and reached 20 bps for the full year. This was in line with the guidance we had provided in 2023.

Now turning to the fourth quarter results. Total PCLs were $162 million or 27 bps, an increase of 2 bps compared to the last quarter. The primary drivers of performing provisions this quarter were model calibration and portfolio growth, partially offset by a more favorable macroeconomic scenario impact.

PCLs on impaired loans were $145 million or 24 bps, which was 3 bps higher quarter-over-quarter. Personal and Commercial impaired PCL increased quarter-over-quarter and stood at $55 million and $22 million, respectively. Financial Markets, a $16 million provision was due primarily to a newly impaired account in the manufacturing sector. At Credigy, we saw our normal seasoning portfolios. At ABA, impaired provisions remained elevated as we've seen for several quarters now.

Looking ahead to 2025, we expect the current trend of a rising unemployment rate and slower GDP growth to persist. Interest rates remain restrictive and there remains significant uncertainties in the fore path of economic growth.

In our domestic portfolios, we expect further increases in delinquencies and impaired PCLs, both in our retail and wholesale portfolios. As previously discussed, our wholesale book remains subject to periodic lumpiness.

At Credigy, as in prior years, we expect provisions to be primarily driven by portfolio growth and mix. At ABA, with the local economy operating below potential, we expect impaired PCLs to remain elevated. At the total bank level, we expect impaired PCLs to be in the range of 25 to 30 bps for the full year 2025.

Turning to Slide 14. Our total allowances for credit losses reached $1.6 billion, representing 4.1x coverage of our last 12 months net charge-offs. Our performing allowances grew 1% quarter-over-quarter to reach almost $1.2 billion, representing 2.4x our last 12 months impaired PCLs. Additional metrics on our allowances are provided in Appendix 12. We remain comfortable with the prudent level we've built over the past several quarters.

Turning to Slide 15. Our gross impaired loan ratio increased to 68 bps, up 9 bps quarter-over-quarter. The main driver of higher GILs throughout the year has been ABA due to elevated formations and a longer resolution process. With the current trends we are observing the levels of net formations we have experienced this quarter would likely represent the higher end of what we expect going forward. ABA's gross impaired loans have an average LTV in the 50s at an average size of about USD 80,000.

When a loan becomes impaired, we take prudent Stage 3 provisions that are in excess of our historical net charge-off experience. Over the past few years, we continued to build our impaired allowances, which now reach $155 million. Our coverage of GILs from impaired allowances is strong at 24%, the level we have maintained along with the increases in GILs over the past few years. And finally, about 2/3 of the impaired loans, which were resolved in Q4 and in 2024, experienced no loss.

On Slide 16, we present highlights from our Canadian RESL portfolio. The geographic and product mix remained stable with Quebec accounting for 54% and insured mortgages accounting for 29% of total RESL. Average LTVs for HELOCs and uninsured mortgages remained in the 50s and higher risk uninsured borrowers remained stable at around 50 bps of the total RESL portfolio.

On Slide 17, we provide additional details on our Canadian mortgage portfolio. Of note, 65% of our mortgage portfolio has now been repriced at higher interest rates. And 90-day delinquencies remain below pre-pandemic level. 90-day delinquencies for the entire Canadian retail portfolio can be found in Appendix 11 and the trends discussed on prior calls remain.

In conclusion, we are pleased with the credit performance in 2024. We remain well-positioned given our defensive attributes resilient mix and prudent level of allowances.

And with that, I will turn the call back to the operator for the Q&A.

[Operator]

[Operator Instructions] Our first question is from Meny Grauman from Scotiabank.

[Meny Grauman, analyst]

Just following up a question on CWB approvals. Laurent, just curious if OSFI has completed its review. It wasn't clear from your comments whether it had. I think a while back, you made a comment, a public comment, basically suggesting that everything could be on the Minister of Finance's desk by the end of November. So I just wanted to see if that happened if that's the case.

[Laurent Ferreira, executive]

Meny, it's Laurent. The -- what I said is the documentation was submitted to OSFI. So OSFI has all of the documentations. They are right now conducting their review process and will submit when they are done to the Minister of Finance their recommendation. So we are right now waiting for OSFI to finalize their work. Does that answer your question?

[Meny Grauman, analyst]

Do you have a sense of the time line there? Could it be done...

[Laurent Ferreira, executive]

We're still optimistic. Things are progressing as we expected. We're still optimistic of closing, early 2025 is still the target.

[Meny Grauman, analyst]

Okay. But just to be clear, so OSFI -- to your knowledge, OSFI is still working on it, that's the status right now. Is that right?

[Laurent Ferreira, executive]

Absolutely. Yes, it is. Yes.

[Meny Grauman, analyst]

And then, just wanted to dig into the guidance in the financial markets business for next year, in particular. We're hearing other banks talk about pretty bullish pipeline, looking ahead to next year. So Etienne, just wondering if we can get an update in terms of what you're seeing across the different business units from a pipeline perspective in '25? Maybe starts there.

[Etienne Dubuc, executive]

Yes, Meny, it's Etienne. Thanks for the question. And I think it's important here to just take a step back. When we evaluate the outlook and how we see the franchise evolving in fiscal '25, I think it's important to acknowledge the outperformance in fiscal '24 and the key drivers that positioned us for success. So for '24 net income for financial markets grew by 19% year-over-year, with strength in several businesses.

The three standouts for me were in rate structured products, in securities, finance and in DCM. And that really reflects, well, good -- really good market conditions. You had lots of growth in equities, lots of volatility in rates. The fact we have deep client relationships and these clients needed advice, needed structuring and liquidity through these uncertain market conditions and then it was about our disciplined execution. And as Laurent mentioned earlier, this year will really be about consistency in the strategy, focusing on our niches and tight risk management. So as we look to fiscal '25, the objective is to deliver positive net income growth which we would view as a good outcome for a franchise considering it's against a record fiscal '24. So this objective reflects, first, some headwinds that we'll navigate through.

So first, there's the global minimum tax as Laurent and Marie Chantal mentioned. We could also see a normalization of government borrowing as deficit caused by the pandemic and inflation should stabilize and the fiscal positions of provinces starts improving. And on the lending side, the pipeline is a bit lower than the last 2 years at this time of the year, although I think that's partly a function of the very strong capital markets.

On the other hand, we also see tailwinds. So with the ongoing strength in equity and rates markets, we're in a position to continue to deliver solid volumes on the issuance business, especially if markets keep trending higher as a significant portion of our book continues to be called and rolled into new structures.

On the advisory side, we expect corporate issuers to take advantage of constructive markets. The debt primary markets remain very attractive for them. And also in funding markets with markets at record highs, especially in equities, and tightness in dealers balance sheet, we continue to see good client activity and a lot of our opportunities, especially in equity financing.

We do see financing levels being more volatile than usual, but staying at elevated level and they will stay at elevated levels unless there's a significant equity selloff. So I think this would translate into good but lumpy results. And also currently, implied volatilities are very low, especially in Canada. If they remain low, that's probably a good environment for M&A and equity in new issue activity. On the other hand, an increase would benefit our structured products trading and our intermediation business. And these are businesses where we continue to leverage our trading and manufacturing technology to be the top Canadian market maker and issuer.

So in summary and considering the environment we expect to operate in, I remain optimistic about the franchise's ability to grow earnings beyond the record fiscal '25. And so that's the objective for fiscal '25.

[Meny Grauman, analyst]

Got it. That was very thorough. So I guess if I just summarize, you're saying you'll be able to grow from here, but we have to take into account the strength that we saw in '24, and that's -- that would be hard to repeat for '25. Is that correct?

[Jean-Sebastien Grise, executive]

Well, it's fair to say, Meny, that some of the businesses will need to consolidate the gains that they've made. But yes, I expect overall that we will deliver growth for 2025.

[Operator]

The following question is from John Aiken from Jefferies.

[John Aiken, analyst]

Jean-Sebastien, I wanted to dive in a little bit further in terms of ABA. Now I know you gave us some commentary in terms of the outlook. But when we classify the provisions as elevated, I mean they've almost doubled from Q3 to Q4 and now representing almost about 1/5 of your total provisions. And when you say that you expect it to remain elevated, should we expect to see continued growth in provisions in ABA over the next couple of quarters? Or are we approaching a peak in your estimation?

[Jean-Sebastien Grise, executive]

So John, thank you for your question. And I think if you go to my prepared remarks, I did talk about the level of formations being on the higher end. And what you've seen in the past is quite a correlation between our impaired PCLs and the formations that we had built. So I think that kind of answers your question. We think we're near a peak.

[Operator]

The following question is from Doug Young from Desjardins Capital Markets.

[Doug Young, analyst]

Just sticking with ABA, maybe Laurent. You've had good growth in this business continually. And the question I often get asked, so I'll throw it to you, like how big are you willing to let this business get within National in terms of a percent of earnings? Are you comfortable with it being 15% or 20%? And I know it's about, I think, 11% this quarter, and it goes down once you finish the CWB acquisition. But just trying to get a sense.

[Laurent Ferreira, executive]

So on the strategy side -- thank you for your question, Doug. On the strategy side, for ABA longer term, we're very comfortable with our investment and the focus of ABA and the business we run there within Cambodia. Longer term, clearly, this ABA has done a phenomenal job. And one thing we don't talk enough about is digital payments platform, the cash management platform as well that they're offering. It's one of the reasons why we're performing so well in terms of client acquisition and in terms of deposits.

So we could see possibly one day an opportunity to monetize on the value of that platform. And also outside of Cambodia and in Southeast Asia, there is a possibility one day that ABA could grow outside of Cambodia. What I said, and I'll repeat what I've said publicly is if that is something that we would contemplate one day, we would do it with a local strategic partner with a very strong balance sheet that could help us there. So I don't think in terms of what kind of percentage ABA could take in within the bank. We're very comfortable with the investment as it is. If ever there is a possibility to grow it even more one day, we'll address that at some point in time. And our preference would be to have a strategic partner help us there. Does that help you?

[Doug Young, analyst]

It does. And I'm just curious, this sounds like you've thought about the monetization and expansion. Are you advanced in that side of the strategy? Or is this just something that's far off into the future?

[Laurent Ferreira, executive]

No, it's more medium-term. We're not -- nothing right now that we're discussing.

[Doug Young, analyst]

And you wouldn't want to say like -- I mean, would you be comfortable if the ABA got 15% to 20% of earnings? Or...

[Laurent Ferreira, executive]

I won't stop them from growing and from their performance right now.

[Doug Young, analyst]

Okay. And then just second, Credigy, I think there was mention, there was a fair value impact that benefited the revenue line this quarter. Can you just flesh that out, just quantify what was that? And how much did that represent pre- and post-tax?

[Etienne Dubuc, executive]

Yes, Doug, it's Etienne. So yes, there was a re-underwrite on some portfolios of reverse mortgages. And that had a positive impact, I think, of $12 million on the NII. And then it also had a negative impact on noninterest income. So the positive impact really comes from reassessing the property values behind that, and that has a favorable impact on the collected [ sums. ] And so that increases the IRR of those deals. And then the negative impact on the other side is really linked to the timing of the cash flows, which are then pushed further in time because of the model. And so the NPV of those cash flows becomes lower and so that triggers a negative impact on the noninterest income.

[Doug Young, analyst]

And I assume the positive and negative offset, like there's no earnings -- positive earnings impact because of...

[Etienne Dubuc, executive]

It doesn't totally offset because overall, I mean, these are pretty complex models, but -- and certainly, that we underwrite and the reassessing of these property values as an overall positive impact. But these 2 effects go one against the other.

[Doug Young, analyst]

Okay. And then lastly, thanks for the outlook, Jean-Sebastien, on the impaired PCL. Any thoughts on -- you've done a great job historically building performing loan allowances, thoughts on the evolution of that as impairments roll, should we start to think about some release of these performing ACLs or can you talk a little bit about that?

[Jean-Sebastien Grise, executive]

Sure, I can talk quite at length on that. I think there's too many variables. And what I can tell you is that basically performing provisions are correlated to growth migration, economic scenarios, scenario weights, model calibration and finally, management overlay. So there's a lot of variables there. When you look back at 2025 -- '24, pardon me, what we saw that the major drivers of performing allowances were growth, model calibration and macroeconomic scenarios.

We also have maintained a high weight on our pessimistic scenario, and you can see that in our disclosures in Note 8, if I remember well. And if credit trends and portfolio growth continue, then it would drive an increase in performing PCL which would then be reduced or increased by the other -- the variations of the other drivers that I maintained. But given where we are in the cycle right now, I'm very comfortable with the allowances we have and you can see them in Appendix 12.

[Operator]

Following question is from Matthew Lee from Canaccord Genuity.

[Matthew Lee, analyst]

If I think about your 16.7% adjusted ROE this year. I know it's a great result, but I think about the medium-term objective over 15% to 20%. And just given a bit softer credit next year and maybe a bit of headwinds in financial markets and the addition of CWB, can you maybe talk about what has to happen there to get to the higher end of that range this year kind of in the medium term?

[Laurent Ferreira, executive]

So it's Laurent, I'll take that question. So our medium-term objectives of 15% to 20% remain unchanged. The acquisition of CWB does lower a little bit our ROE in commercial for a period of time. But through the integration synergies, capital optimization and revenue in a window of 2 to 4 years, we expect to bring back the ROE of CWB to the level of our commercial operation within the bank.

So our guidance at this point in time, we're within that range. In terms of premium ROE, which we delivered this year, we expect -- it's definitely our mindset to continue to deliver premium ROE. But we expect, once finalized with the integration, roughly, again, 2 to 4 years to be back in line with what we've delivered this year. Does that answer your question? Hello?

[Matthew Lee, analyst]

Yes, that's good.

[Operator]

Following question is from Paul Holden from CIBC.

[Paul Holden, analyst]

I appreciate all of the outlook and guidance you provided for the upcoming year. And of course, that does exclude CWB, as you noted. Just wondering if you can provide an update on your thoughts around year 1 EPS accretion sort of regardless of when that deal closes?

[Marie Gingras, executive]

It's Marie Chantal. Thanks for the question. For CWB, as Laurent was saying, process is progressing well. Our intention is to give an update on the different financial KPIs upon post-closing. So at the moment, we're still very confident with the synergies figures that we announced back in June, whether it's the cost or funding synergies. So I feel confident with these numbers.

And as I said, post-closing, our intention is to provide you with an update on those synergies and as well as some color on the revenue opportunities that we see coming in from this combined -- those combined banks. And we'll get to that question at that time.

[Paul Holden, analyst]

Okay. Fair enough. I'm going to try one follow-up on that. I mean the cost synergies you've highlighted previously, how quickly might you be able to execute on those? Are those things where system integration can be done quickly, some redundancy on mid-office, back-office done quickly, or these things that would take some time to execute on?

[Marie Gingras, executive]

Yes. Thanks for the follow-up question, very logical. And that's also one of the aspects that will definitely give you some more color as well both closing because it's an important factor. So definitely something on our radar.

[Paul Holden, analyst]

Okay. Okay. Had to try. Laurent, you talked about strong commercial loan growth continuing. I've heard from, I don't know, different angles where there's tariff risk for Canada, so maybe CapEx in Canada slows for time being, just to see where things land. Are you getting any sense that there's any kind of delay in projects? It doesn't sound like it. So maybe you can talk a little bit about how that's factored into your outlook? And what are you seeing on the ground level sort of from your commercial clients?

[Laurent Ferreira, executive]

I think it is a bit early, but generally not a positive for our clients in Canada, our Canadian economy. It brings a level of uncertainty and some confusion at this point in time. Having said that, I tend to believe that it is more a negotiating tactic from the U.S. government. They know very well that our economies are intertwined. And we're going to support our clients. So a lot of our clients have operations in the U.S. and in Canada. So we'll -- depending on what our clients do, we'll be there to help them support them and support their capital investment.

I mean just -- my bigger concern is maybe the Canadian response or the Canadian economy. And if we don't respond quickly, does that have an impact on productivity gap in Canada? So I think the importance to react to an administration that clearly is going to be a very pro-growth, pro-business is going to be important for Canada. But I think our clients are going to adapt and we'll be there to help them and support them.

[Paul Holden, analyst]

Great. I share your concerns.

[Operator]

The following question is from Lemar Persaud from Cormark.

[Lemar Persaud, analyst]

My first question is on credit here. I wonder if you guys can talk to comment earlier where you suggested ABA formation this quarter or at the higher end of what you'd expect moving forward. Is it because you're seeing improvement in tourism in the country, GDP growth? Can you expand on that comment and what gives you the confidence there?

[Jean-Sebastien Grise, executive]

Sure. And Stephane can probably add some more color to this. So as you've seen, we saw a pretty big increase from quarter-to-quarter. And within the quarter, we saw some encouraging signs from month to month last quarter. So that's what we're basing it on. Stephane?

[Stéphane Achard, executive]

The other thing I'd add is we're seeing record announcement of 6 assets investments for Cambodia in 2024. There's huge projects going on. So we have a positive outlook for FDI next year. That's one element. And diversification of the economy. Let's remember, it's one of the highest GDPs in the Asian region. It is slower potential, much like Laurent and Jean-Sebastien have mentioned, but it's a steady recovery. So also we're confident about that, that statement that Jean-Sebastien made.

[Lemar Persaud, analyst]

What specifically is driving the recovery there in the economy?

[Stéphane Achard, executive]

Yes. So there's been several factors. Delocalization of some production facilities from China, from Myanmar that have been moved to Cambodia. So we're seeing manufacturing plants and low-value electrical goods, electronics on the low-value end as well. We're seeing car manufacturers from the Asian zone being established over there. And then there's large construction projects that required a lot of labor coming in as well. So -- and let's remember that as well, the performance of the U.S. economy, Cambodia is -- its biggest export partner is the United States. So the performance of the U.S. economy is also a factor leading to that recovery.

[Lemar Persaud, analyst]

And then just moving on to a different type of question. I think in Laurent's comment -- opening remarks, he offered that commercial loan growth for the year ex-CWB will be in the low teens. I guess, it begs the question, what are your thoughts on the outlook for personal loan growth? Does it feel like commercial loan growth will outperform personal next year?

[Lucie Blanchet, executive]

I'll take this one. It's Lucie. Thank you for the question. It has -- the commercial loan growth has outperformed the personal one in 2024. And that's the way we look at it right now. It should still be a reflection of the same pattern in 2025. So the way we look at it from the retail loan growth perspective, we believe it would be -- the growth would be roughly similar than what we had last year, well, in 2024. Like Laurent said, the guidance around mortgage growth is that we should continue at the current pace that we have right now. And auto loan is also expected to moderate a bit as we adjust also to market conditions.

[Lemar Persaud, analyst]

I appreciate that. And then one more if I could sneak it in here. One of your peers shifted their guidance to providing NII growth guidance. I appreciate that you provided some commentary on margins. Is that something you guys could provide as well?

[Marie Gingras, executive]

I'll take that one. It's Marie Chantal. As you heard in my remarks, we've provided some guidance on the all-bank nontrading NIM. And as of now, providing some guidance on the NII is not something that we are contemplating at this moment.

[Operator]

Following question is from Sohrab Movahedi from BMO.

[Sohrab Movahedi, analyst]

I just wanted to ask just a couple of clarifying questions. Just on the commercial low teens, I think you had said commercial loan growth. Is that going to be in any particular types of business or any particular geographies or sectors? Can you just provide a little bit of color as to where you see that coming from?

[Michael Denham, executive]

Sure. Sohrab, it's Michael, and we've been on the strategy for a while. The two big sources of growth for us are insured real estate partnership with CMHC, that's a big area of demand, population growth, housing prices, et cetera. So that's one. And second is kind of across the board, but really kind of mid-market opportunities in Ontario and Western Canada, where starting position is obviously relatively small. And we've had a nice run of growth and we expect that to continue. So those are the two big drivers of growth that produce that low double-digit guidance we're providing for next year.

[Sohrab Movahedi, analyst]

Okay. Helpful. Just a second question for maybe, I don't know if it's Stephane or if it's Laurent. Just a reminder, ABA's growth has been self-funded? Or have you been providing additional capital or balance sheet resources?

[Stéphane Achard, executive]

So in the first few years, we had to provide capital by way of the venture. That's been fully reimbursed, and it's a self-funded franchise and actually extremely well, self-funded franchise through deposits.

[Sohrab Movahedi, analyst]

Okay. And maybe just one last one for Marie Chantal. I understand the ROE targets. Can you just tell us what sort of capital -- I know obviously, you're in preparation for completion of an acquisition. But hopefully, once the acquisition is done, we fast forward. What sort of capital ratios do you think the bank will be looking to operate at? And then for Laurent, how active you expect to be on buybacks if you are actually in excess of those numbers?

[Marie Gingras, executive]

Yes. Sohrab, thanks for the question. So as you saw, our capital position is strong, ending the year at 13.7%. And so operating above 13% is something that we were comfortable with. That's the first thing maybe I wanted to point out. And obviously, because of the high level of capital position that we are at, we do anticipate to close the transaction at a slightly higher CET1 ratio that what we announced back in June.

Just remember that we are at closing will remain under the standardized method for the CWB portfolio. And as the integration progresses, our intention is to move to the advanced model and doing that very progressively. So I've talked about earlier sharing that we wanted to give you an update on synergies post-closing. We'll also do that on our capital optionality as we are progressing with the transaction. So more likely in the second half of the year than early on. Does that help?

[Sohrab Movahedi, analyst]

That's helpful. But I mean, I guess -- yes, I mean, Laurent, like I guess what I'm trying to kind of understand is if you came into -- I'm just -- I'm going to throw out a number. If you came into $0.5 billion of excess capital, what would be the priority deployment for that?

[Laurent Ferreira, executive]

So the first one is organic growth, and we'll be able to talk about that towards the end of 2025, but we'll lay out a capital plan and possibly share buybacks at that point in time. So stay tuned.

[Operator]

The following question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

Marie Chantal, just a couple of things to clarify. I think you said at the time of the CWB announcement that the CET1 ratio would close, and I could have this number wrong, but I think it was 12.7%. Is that what you offered back then?

[Marie Gingras, executive]

We offered 12.75%.

[Mario Mendonca, analyst]

Okay. So it's close enough. The second thing, the word progressively, I understand what that means on its own, but I don't know what it means in the context of migrating to advanced standardized. Could you be a little bit more clear what does progressively mean in this case?

[Marie Gingras, executive]

Yes. Well, what I mean by that is that we will be gradually integrating the CWB portfolio model per model. So that's why we're saying progressively because it will not be a big bang from going to standardize to the advanced. It will be done as we evaluate the different models and that we get all of the regulatory approvals for all of them. So that's why we're saying it's going to be done progressively.

[Mario Mendonca, analyst]

Would it be fair to suggest that it starts to progressively be accomplished, say, 12 months after close? I don't want to put like a time line on you, but is that a reasonable estimate?

[Marie Gingras, executive]

That could be a reasonable estimate. Yes.

[Mario Mendonca, analyst]

Other area of follow-up. I think you referred to a 1% to 2% increase in the tax rate. I couldn't tell when you said that whether you were talking about financial markets, specifically for the bank.

[Marie Gingras, executive]

The bank. So the impact would be 1% to 2% on the effective tax rate for the bank.

[Mario Mendonca, analyst]

Got it. And then finally, when you were referring to -- and I believe this was in the capital market segment or financial market specifically, when you refer to the global minimum tax, I couldn't tell whether the reference was to slower growth in financial markets because the global minimum tax would lead to higher tax rate financial markets or whether the global minimum tax would lead to certain products being less attractive in financial markets. There's a distinction there, and I'd like to understand it.

[Etienne Dubuc, executive]

Mario, it's Etienne. So the global minimum tax has an impact, and it's mostly an impact on our European operations, where some jurisdictions, the taxation regime was below the global minimum tax and so that will affect really these operations in financial markets. It doesn't really impact our strategy, though. When you look at what the strategy has been in Europe, this will stay the same. This is where we like to deploy a lot of our expertise in short-term secured funding trades. This will continue to be a hub for what we do in that space.

[Mario Mendonca, analyst]

But it does sound to me like some certain structured products in your trading book were advantaged by the tax regime, the way it was pre-GMT. That sounds right -- does that sound right?

[Etienne Dubuc, executive]

It's not structured products. It really trades more like very big short-term liquid trades; things that we do with large banks over there; things like equity swaps, index arbitrage, cross-currency arbitrage, securities lending, the profitability of these trades will be marginally hit by the global minimum tax.

[Operator]

[Operator Instructions] The following question is from Darko Mihelic from RBC Capital Markets.

[Darko Mihelic, analyst]

Can I just pick up right there where you left off Etienne. Are you just suggesting that it's not that volumes are going to go down, it's just that you're going to have a higher tax. Is that the way I should think of it?

[Etienne Dubuc, executive]

Well, that's part of it, Darko. And also, as you know, our business mix can evolve really quickly according to the opportunities we find globally and across asset classes. But I think you nailed it. The nature of our activities will not change. We do these trades because they're really good trades for us. And so it just impacts the marginal profitability for them.

[Darko Mihelic, analyst]

Okay. Understood. I just have another clarification question as well. This one is with respect to Credigy. From the outside looking in, when I see formations up 75% year-over-year, gross impaired loans up 132%. And -- the loan book is actually up, what, 14%, and your provisions for credit losses are up 3x. So from the outside looking in, this does not look like a normal season. This looks more like credit deterioration. I'm just curious if you can maybe give some -- provide a little more color on why we should consider this to be normal seasoning and why it might not get a little worse from here?

[Jean-Sebastien Grise, executive]

Yes. So I think I'll start and then I'll let Etienne continue. So it is seasoning. And if I split your question in two. If you look at the formation, they're really mostly driven by the mix that's changing, so we have more mortgages and mortgages take more time to resolve. So that keeps formations higher and yields higher for longer. In terms of PCLs, it's really normal seasoning of portfolio. There's really nothing that is to see there in terms of individual performance of portfolio that brings any type of worry to me.

[Etienne Dubuc, executive]

And I have nothing to add. I think Jean-Sebastien -- this is Etienne, Darko. Jean-Sebastien covered it very well. It's -- we see it as normal seasoning.

[Darko Mihelic, analyst]

So is it close to peak?

[Jean-Sebastien Grise, executive]

Well, it's very difficult to say with Credigy because it's still driven by portfolio growth and business mix, like I've said in my remarks.

[Darko Mihelic, analyst]

Okay. And just my last question with respect to the mortgages that you have coming due over the next few years. I understand the characteristics of your book and the differences and so on. One thing I'm curious about, though, is how we should think about the behavior of the Quebec mortgage market versus other markets? And not with respect to credit quality, I'm just actually curious about loyalty as to whether or not you have a better outcome on renewal in Quebec versus the rest of Canada?

[Lucie Blanchet, executive]

Yes, it's Lucie. I would say overall that we've performed very well historically in terms of mortgage renewal. It's almost 95% historically. So I wouldn't say there is a difference there with the Quebec market because our approach to renewal is the same. But we've always performed very, very well in terms of renewal. So -- and we expect that to continue in 2025.

Obviously, with the amount of volume we have to renew, we added capacity. We've simplified the customer experience. So we're ready to face the increase in volume. But -- so with that, we don't expect to lower our performance there. Does that answer?

[Darko Mihelic, analyst]

It does. And just as a follow-up to that, with respect to the increased resources on renewal. Is it fair to say that the auto renewal letters that are going out today might be different from in the past in the sense that you may be offering or suggesting a shorter-term mortgage? And more importantly to me, is the auto renewal that are going out with a rate that would be below posted, whereas it might be around posted?

[Lucie Blanchet, executive]

You mean auto renewal -- auto loan book or the auto renewal [ letters ].

[Darko Mihelic, analyst]

So presumably somebody who's coming up for renewal, you'll send them a letter and let them know that they're coming up for renewal. So we call that -- I call it an auto renewal letter, maybe you've made the term as different. And so if I'm a customer of National Bank, and I'm receiving a letter from National suggesting that my mortgage is coming due, here are some options for you. Have those options changed? In other words, are they more competitive than they were versus 3, 4 years ago?

[Lucie Blanchet, executive]

Well, we definitely adapt to the competitiveness of the market and the mortgage market is very competitive. So the important thing is that the renewal time is a very important moment for advice and especially in the current time where the rates are higher, it's a perfect occasion for us to bring that advice there and do much more beyond a letter that we have to send from a regulatory perspective, 90 days before renewal rate. Does that answer?

[Darko Mihelic, analyst]

Yes. I may follow up offline.

[Operator]

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

[Laurent Ferreira, executive]

Thank you, operator, and thank you, everyone, for joining us today. On behalf of the National Bank team, we wish you all the best for the holiday season and look forward to seeing you in 2025.

[Operator]

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