National Bank of Canada Earnings Call Insights: Credit Line Outlook and New Mortgage Platform

National Bank of Canada (NA) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Credit Line Outlook

Sumit Malhotra – Macquarie Capital Markets Canada: First question is in regards to credit quality and the outlook there. Certainly your credit metrics have been very accommodating, so any increase that we see is from a low base, but I wanted to kind of take your temperature, whether this is for Louis or Bill, we’ve seen some choppier employment trends, probably thinking back over the last couple of months, given the PCL guidance remaining unchanged for the next couple of quarters. It doesn’t sound like you’re overly worried, but can you give us maybe some flavor for what you’re seeing on the ground and why those numbers on the implement side may or may not be something we should worry about in terms of credit?

Louis Vachon – President and CEO: Sumit, it’s Louis. I’ll take the first crack at it, then I’ll pass the baton. I’ll let Bill pick up the damage after that. First of all, you’ve heard my speech before on Quebec being a no boom no bust economy. I think that still remains very much relevant. In that context, we’ve had as you know, lower loan losses for at least 10 years, lower than national average. As you know, our growth has been over the last few years, very much more on secured lending as opposed unsecured lending. The other thing too in Quebec you have significantly lower house prices. So, that means that people to purchase a home, particularly outside of Montreal do not have to borrow as much to acquire a home, also there are less home owners in Quebec. We still have more renters. So when you look at all that, when we look at our numbers and I think it’s been validated, I think (indiscernible) really just came out recently with a survey and looked at the average debt to income ratio and their numbers for 2012 show Quebec at 1.1 average debt income ratio and national average at 1.36. So generally I think Quebec consumers are less indebted than national average and also we have a lower – less debt and lower house prices. So I think the odds are quite high that we are talking probabilities here. I am not talking to world uncertainty. But I think looking from what we see in our portfolio right now and even looking forward for the next few years I think the odds are – continue to be quite high, that our loan portfolio will continue to outperform the industry average going forward. Bill?

William Bonnell – EVP, Risk Management: Sure. I will add to that on that Louis talked about the economic view. I will just say that when we look at our portfolio the key quality indicators remain – they look very, very solid. So when I look at mortgages I see that our (weakened) scores and probably the default measures have actually improved year-on-year and we are stable quarter-over-quarter. Delinquencies, when you exclude the acquired portfolios are lower quarter-on-quarter and stable year-over-year. Our LTVs remain in the mid-50s for the non-insured mortgages and clients have continued to fix their rates, protect themselves from the higher rates. Other indicators we look at in terms of credit card losses and delinquencies continue to decline and improve. So we when looking at the metrics from our portfolio we are very comfortable maintaining for the next couple of quarters, maintaining our guidance at 20 to 30 weeks…

Ghislain Parent – CFO and EVP, Finance and Treasury: Lastly Sumit on the commercial side, in Quebec we see very good credit metrics. In fact, also we see Commercial deposits growing faster than Commercial loans. So, that’s not the type of environment that could suggest a major credit blow up is imminent, quite the opposite actually.

Louis Vachon – President and CEO: We remained – we are watching economic numbers closely and keeping an eye on that and certainly, there has been a lot of volatility in those job numbers as you will have seen, but we certainly are watching it closely.

Sumit Malhotra – Macquarie Capital Markets Canada: I know, you usually give us your forecast for loan losses on a two quarter basis, but if I kind of put those comments together, it doesn’t seem like you are going to – it doesn’t sound like you are going to be surprising us for the material uptick in that guidance in the interim, is that a fair statement, Bill?

William Bonnell – EVP, Risk Management: Sure. Our crystal ball is not perfect. When I look over the next couple of quarters, I’m comfortable with that guidance.

Sumit Malhotra – Macquarie Capital Markets Canada: Last question is probably going to come back to Louis. We spoke a few weeks ago on the call for the acquisition and a couple of us brought up the leverage ratio. We spoke with some on your counterparts yesterday and one of them gave us some color that it’s likely we can assume that there will be the Basel level, the Aussie buffer and then a market buffer on top of that that the banks will manage to. You had indicated to us back at the beginning of the month that you felt if you needed to shed some capital market assets in order to comply with leverage that that wouldn’t be a problem. When I look at how strong the capital markets businesses is for the Bank, can you give some comfort that this balance sheet reduction can be done without having any kind of material impact on the earnings power of that unit and that that might actually lead over to Ricardo as well?

Louis Vachon – President and CEO: I’ll take it and then we’ll see whether Ricardo wants that and I think – so, first of all, we don’t have any insights or special insight as to what’s going to happen on the leverage ratio, but I do stand by my statement that should there be some increase in leverage ratio and I’m not talking, going to five or six, I think, if we’re talking one additional turn that the regulators and again it’s completely hypothetically and we’ve had no confirmation of anything but should they ask us to go from somewhere above three to somewhere above four. I don’t expect that to be constraining for us on a strategic front, and I certainly don’t expect that to be impacting our earnings materially. If we look, everyone is doing some scenario analysis as you may suspect. With the talk with the leverage ratio in the U.S., for instance the repo market has shrunk about 35%. You’ve seen the articles on this, just one example, shrinking our repo business, Ricardo, what’s the impact on our earnings going forward?

Ricardo Pascoe – Co-President and Co-CEO, National Bank Financial, EVP, Financial Markets: If we were to reduce our repo business by about 35%, the impact on financial market earnings would only be about 1.5% of sector earnings.

Louis Vachon – President and CEO: Yeah, so I think, between some shrinkage of the other repo business, some mitigation strategy based on the new definition and lastly, some in DCC issues. I think we could easily handle the type of scenario, which I’ve discussed. Now, as you know, I would urge caution particularly with any kind of headlines, what I would call bank bashing headlines coming from the U.S. on leverage ratio, when you look at often, when you look at the actual definition, they’re not as stringent and they’re a lot more accommodating for banks than a headline would suggest. So, that’s certainly one factor. The other thing too, that, there are a lot of technical factors. For instance, as you know there is in discussion in Europe right now whether repos if they are cleared by a central counterparty, whether this should be excluded from the leverage ratio calculation. Now should we have that treatment right there, I mean that’s – essentially that takes care of a good portion of the issue for us. So that’s why I think – and the 1.5% scenario that Ricardo has quoted is assuming the same scripts. So you may suspect that if the market shrunk by 35% that somewhere the spreads may widen a little bit and that would reduce even further the impact on the balance sheet. So we’re monitoring that very carefully. But again I don’t think we have pink glasses on when we say that I think that should there be some increase in leverage ratio we can handle that.

New Mortgage Platform

John Reucassel – BMO Capital Markets: Louis, just in your opening comments you talked about the new mortgage platform in Quebec, the increased cross on the approved efficiencies. So, could you articulate some better cross-selling, give us some concrete data or some idea? Then I guess the efficiency ratio is this quarter at the lowest that I’ve seen for National Bank, is this a sustainable number or was there something unusual in this quarter?

Louis Vachon – President and CEO: I will take the second part first. I will let Jean maybe answer the other part regarding the mortgage platform. I think clearly as Jean and just now I have mentioned we have worked a lot on expenses and we will continue to work on expenses. That being said, I think the low efficiency ratio on Financial Markets was somewhat price discipline and comp discipline. Clearly, as you know, Ricardo has worked extremely hard to control expenses and the new environment in Financial Markets has favored lower comp ratios. That being said, the mix of business, this particular quarter was also quite favorable. So, the range in terms of efficiency ratio for the Financial Markets, Ricardo, going forward, what would you expect is a normal range?

Ricardo Pascoe – Co-President and Co-CEO, National Bank Financial, EVP, Financial Markets: Well, our target is really to keep it in the mid-to-high 40s. If you look this quarter was 44, but year-to-date, we’re about 47, that’s probably a better indication where we are in the mid-term and we want to continue to drive it down towards the 45, but that’s a little bit further out.

Louis Vachon – President and CEO: So, on the mortgage platform…

Helene Baril – Senior Director, IR: So, everything is actually being deployed in Quebec and results are showing that in fact, we are heading towards the target in terms of cross-selling and also in terms of time-saving for the whole process. So we are not at target as we are speaking currently, but I’m absolutely confident that by the end of this year, this fiscal year that we will be able to generate all the benefits that we’ve anticipated when we deployed for – going for into the next year.

John Reucassel – BMO Capital Markets: So, is this – the cross-sell is this anything like, this is creditor insurance or just other things other than creditor insurance?

Helene Baril – Senior Director, IR: In fact, the benefits are 70% – actually 50%, 50% to 60% on time-saving in the process and then another 20% on cross-selling activities and the cross-selling activities, our products are in fact, credit cards, our lines of credits and insurance. We are trending really well on all three of them and we are also trending well on the time reduction for both operations and also the time saved with the customer face to face in all of our branches, and we’re experiencing even a higher uptick with our mobile sales force even after two weeks of deployment.

John Reucassel – BMO Capital Markets: Then just back to the efficiency ratio. Thank you for the details on the financial statement. What about in Personal & Commercial segment? Is this an interesting new kind of low 50 that we should be looking at or there’s some anomaly in this quarter?

Helene Baril – Senior Director, IR: No, there aren’t any anomalies, and we’ve been managing expenses in this low growth environment ever since the Bank has been created. So, this is nothing new. What we’ve experienced in the last quarter is, the volume that we’ve experienced in mortgages have actually not been to what we had last year. So obviously, there are some savings done in operations and also in our sales force where we’re actually not – we’re not eliminating positions, we’re actually not – maybe not filling the positions as fast as we should and we want to be kept nimble and be responsive to any market uptick going in the future.