National Bank of Canada

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 Ruddy, Senior Vice President and Head of Investor Relations. Please go ahead, Marianne.

Merci. Welcome, everyone. We'll begin the call with remarks from Laurent Ferreira, President and CEO, Marie-Chantal Gingras, CFO, and Jean-Sébastien Cizé, Chief Risk Officer. Our business heads are also present for the Q&A session, including Lucie Blanchet, Personal Banking, Judith Menard, Commercial and Private Banking, Michael Denham, CWB Integrations, Nancy Paquette, Wealth Management, Etienne Dubuc, Capital Markets, and Bill Bonner, International. Before we begin, please refer to slide 2 of our presentation for forward-looking statements and non-gap measures. Management will refer to adjusted results unless otherwise noted. I will now pass the call to Laurent.

Merci, Marianne, and thank you, everyone, for joining us. This morning, we reported earnings per share of $2.82 for the fourth quarter of 2025 and $11.28 for the year. We delivered strong financial performance in 2025 while also completing the largest acquisition in our history. we met all of our medium-term financial objectives, generating return on equity of 15.3%, EPS growth of 9%, and a dividend payout ratio of 40.7%, supporting a 7% increase in our common share dividend in 2025. This was backed by resilient credit performance and strong capital levels amid a complex macro backdrop. The geopolitical and geoeconomic situation that has defined 2025 will continue to shape business confidence and investments in 2026. Trade tensions with the U.S. are affecting all provinces, causing job losses in certain sectors and a slowdown in the labor market. Meanwhile, inflation is proving sticky, with the path of monetary policy and interest rates uncertain. We are nonetheless encouraged by increased government focus on the economy. As reflected in the federal budget, which included tax cuts, investment in housing and infrastructure, and measures to stimulate business investment. This should support consumer consumption and resilience. We positively view the latest developments regarding nation-building projects to regain our economic sovereignty as an energy superpower. We are also encouraged by government action in support of our steel and softwood lumber industries. The private sector and provincial governments must also play a role in revitalizing our manufacturing sectors, strengthening supply chains, and building strategic development projects. With our increased national presence, the Bank intends to grow and deploy capital to help fuel Canada's economy. Our acquisition of Canadian Western Bank in early 2025 marked a historic milestone for the bank, positioning us for accelerated growth. The onboarding of new colleagues was our priority following closing. As a unified team, we have since migrated over 65,000 clients to our platform and rebranded all branches. With these integration steps now behind us, we look forward to what comes next. Cost and funding synergies are being realized at an accelerated pace, and we expect to meet our target more than a year ahead of plan. This morning, we also introduced a significant target of between $200 and $250 million in revenue synergies to be realized over the next three years. On capital, we plan on converting approximately two-thirds of the CWB loan books to the advanced method in late 2026, with additional portfolios to be converted at a later stage. We expect this to add a total of 50 to 75 basis points to our CE2-1 ratio, including the benefits already realized in 2025. Earlier this week, we entered into definitive agreements to acquire Laurentian Bank's retail and SME banking portfolios, following their decision to exit the sector. We will also acquire their syndicated loan portfolio. It's a natural fit given our strong presence in Quebec, enabling us to serve even more local customers and communities. This transaction also aligns with our growth and capital deployment We look forward to welcoming Laurentian's retail, SME, and syndicated loan clients. They will benefit from our leading digital capabilities, our broader branch network, products and services offering, and financial advisory and business banking teams.

On capital, we ended the year with a CET1 ratio of 13.75%.

Our strong earnings power and the anticipated AIRB migration benefits provide ample room to pursue growth. Our commitment to disciplined capital deployment is well illustrated by our superior ROE, and we remain firm in this commitment. We have a clear path to reach the mid-range of our medium-term ROE objective of 15% to 20% while maintaining strong capital levels. Our priority is to accelerate organic growth and operational efficiency. We also intend to grow dividends at sustainable levels. In this regard, we announced a 5% quarterly dividend increase this morning, effective Q1 2026. This will be completed by share buybacks, which we started in September, and select tuck-ins in our P&C and wealth businesses. A CET1 ratio converging around 13% represents an optimal capital level to operate at in the current environment and by the end of 2027. For 2026, we are targeting EPS growth within our medium-term objective of 5% to 10% and positive operating leverage. This positions us well to once again achieve an ROE around 15%. By 2027, we're targeting an ROE of 17% plus as we reap the benefits of cost, funding and revenue synergies from CWB, growth in all sectors, continuous efficiency improvements across the bank and returning capital to shareholders.

Turning now to the performance of our business segments.

P&C Banking generated net income of $336 million in the fourth quarter after recording a $62 million pre-tax impairment charge on intangible assets and higher impaired credit losses on the CWB portfolio. Excluding CWB, Q4 P&C revenues were up 5% year-over-year, and we continue to grow our balance sheet. Personal mortgages grew 8% year-over-year with continued momentum in originations. Our commercial loan flow grew 12% year-over-year, reflecting broad-based growth across our industries and continued opportunities in insured residential real estate. Looking forward to 2026 and including CWB, we expect to grow personal mortgages in the mid-single-digit range and commercial loans in the high single C continued growth in client and financing activity. For global markets, we are expecting normalized contribution from trading with fewer market dislocations in 2025. Sorry, than in 2025. Having said that, our franchise is growing. We expect steady opportunities in our rates and credit business, and we also expect demand for equity structured products remain solid. CreditG delivered net income of $42 million in the fourth quarter. Average assets were up 8% with investment volumes picking up in the second half of the year, generating 5% average asset growth for 2025. We will continue to execute new investments with discipline in 2026 in what remains a competitive market. At ABA Bank, Net income increased 8% year-over-year in the fourth quarter, reflecting balance sheet growth and a build in performing PCLs. Revenues were up 16% over the same period as ABA continued to grow its balance sheet, with deposits up 19% and loans up 9%. We anticipate similar loan growth levels for next year at ABA. A few weeks ago, we announced that Lucie Blanchet is transitioning to a strategic advisory role and that Julie Levesque is taking over as head of personal banking, effective January 1st. I'd like to take this opportunity to recognize Lucie for her many contributions over the last 23 years, including making the bank a leader in client experience. I look forward to continuing to count on her counsel in her new role. I also want to congratulate Julie on her appointment. A member of the senior leadership team since 2020, Julie is the ideal candidate for the role, bringing her track record as head of operations and technology to evolve our retail banking model, increase efficiency, and accelerate our growth. In conclusion, while the economic environment remains complex, the bank answers 2026 from a position of financial strength and with a clear strategy. With our increased national presence, diversified business makes strong capital position and credit profile, we have the tools to generate continued growth and superior returns. Our goal is to be a strong and reliable banking partner for Canadians from coast to coast, an employer of choice for our people, and to deliver sustainable value for our shareholders. I will now pass the call to Marie-Chantal.

Thank you, Laurent, and good morning, everyone. My comments will begin on slide 11. The bank delivered strong results in 2025. Revenues grew 25%. PTCP increased 32%. and we achieved positive operating leverage every quarter. Our performance reflected particular strength in capital markets and in wealth management. The CWB transaction added $878 million to revenues and $440 million to expenses. Excluding CWB, revenues increased 17% and PTPP was up 23%. We capped the year with strong performance in the fourth quarter. Revenues increased 28% year-over-year, and PTPP grew 33%. Operating leverage was positive at 4.4%. When excluding CWB, revenues grew 18% year-over-year, expenses were up 14%, and PTPP rose 21%. Expenses were mainly driven by higher technology and compensation costs, with variable compensation accounting for over half of the increase consistent with our strong performance. Of note, Q4 technology expenses in the P&C segment included a $62 million impairment of intangible assets, representing an after-tax impact of 11 cents per share. Moving to slide 12, NII excluding trading grew 3% sequentially, driven by solid growth on both sides of the balance sheet. The All Bank NIM excluding trading was 2.19%, down three basis points from the prior quarter, primarily reflecting business mix. The PNC NIM was stable sequentially. Looking ahead, we expect the P&C NIM to gradually trend upward in 2026 on the back of improving loan spread, with the all-bank non-trading NIM improving slightly in the second half of the year. As always, many factors could impact the total bank NIM, including business mix. Turning now to slide 13. We continue to deliver solid balance sheet growth driven by strong momentum across the bank. Total loans reach $303 billion, up 3% sequentially. Deposits total $318 billion, that is up $15 billion, or 5% sequentially, reflecting higher demand deposits in wealth management and ADA. as well as strong momentum in commercial banking deposits. Now moving to capital on slide 14. We ended the quarter with a CT1 ratio of 13.75%, supported by capital generation of 35 basis points. Solid RWA growth consumed 40 basis points of capital in line with balance sheet growth. Share buybacks during the quarter reduced the CT1 ratio by 11 basis points. Since September, we have bought back 2.1 million shares, or approximately 27% of our current program. Slide 50 provides a roadmap to the AIRB conversion of several CWB portfolios. We are pursuing a phased implementation with the largest benefits expected in Q4 2026 subject to regulatory approvals. In 2026, we will submit models for approval covering general commercial, commercial real estate, and rental portfolios, which together represent approximately two-thirds of acquired assets or about $20 billion of standardized credit risk RWA. The models still under review for migration in 2027 and beyond include the equipment finance and optimum mortgage portfolios. The total conversion is expected to free up 50 to 75 basis points of CP1, with the year-end capital level already reflecting the benefit of 5 basis points. We expect the next phase to release 35 to 55 basis points in Q4 2026 and the remainder in fiscal 2027 and onward. Turning to slide 16, with our strong execution, we are realizing cost and funding synergies ahead of plan. Since closing, we have delivered synergies of $116 million and we will achieve our Q1 2026 target of $135 million by the end of the month. Building on this momentum, we now expect to fully realize the $270 million target by the end of fiscal 2026, achieving this milestone in less than two years, more than a year ahead of our initial three-year plan. On slide 17, we introduce CWB revenue synergies. We are now providing a full suite of products and services to clients, generating opportunities for incremental NII and fee income. As we are focusing on post-integration servicing through the first half of the year, we will initially earn monthly ancillary revenues and we'll see NII growth accelerating towards the second half of the year. With these drivers, we expect to deliver pre-tax revenue synergies of approximately $50 million in fiscal 2026, growing to between $200 and $250 million by the end of fiscal 2020. Now looking ahead to 2026. Let me provide additional color on our financial outlook following Laurent's remarks. We expect adjusted EPS growth to be within our 5% to 10% medium-term objective, translating into an ROE of approximately 15%. This will be supported by positive operating leverage for the full year, recalling that comparison will be challenging against last year's strong first half. we expect continued momentum across our business segments, while the improvement we saw in the other segment in the second half of the year should be maintained. Accordingly, we anticipate a PPPP loss ranging between $225 million and $275 million in the other segment for 2026, with quarterly revenues and expenses at a lower level than in Q4. Impaired PCLs are expected to be in line with last year's range of 25 to 35 basis points for the full year. And finally, we plan to continue repurchasing shares and have flexibility to increase the size of the program. As for the recently announced transaction with Laurentian Bank, it is expected to be accretive to adjusted EPS by 1.5%. to 2% in the first year following closing of the resale portfolio and marginally accretive to adjusted ROE before any revenue synergies. The transaction is also expected to reduce our CT1 ratio by 25 to 30 basis points, of which approximately five basis points relate to the syndicated loan portfolio. the regulatory capital treatment is expected to be under the standardized approach at each closing. Also, please note that the transaction is not expected to have a material impact on our fiscal 2026 outlook. To conclude, we are pleased with the strong performance, effective execution, and strategic progress achieved in 2025. Going forward, our balanced investment and growth strategy positions us well to meet evolving client needs in an increasingly digital banking environment. Supported by robust capital, we are poised to accelerate organic growth while enhancing efficiency by optimizing our operations and advancing our technology. Furthermore, our strong execution enables us to capture revenue synergies that will underpin sustainable growth and profitability. I will now turn the call over to Jean-Sebastien.

Merci Marie-Chantal, and good morning everyone. I'll start on Flight 19, looking at our credit performance over the past year. Throughout 2025, the Canadian economy continued to soften, marked by slower growth, rising unemployment, and tariff uncertainty. In response, the Bank of Canada cut interest rates to support economic activity. In this environment, the performance of our credit portfolios remained resilient, benefiting from our defensive positioning, discipline risk management, and food and provisioning. Total provisions for credit losses for the full year were 45 basis points. Excluding the initial provision on performing loans related to the CWB transaction, total PCLs were 36 basis points, And performing provisions were 8 basis points, as we prudently built additional allowances in every quarter. As expected, the impaired PCLs were 28 basis points for the full year, in line with our guidance. Now, turning to the fourth quarter results. Total PCLs were $244 million, or 33 basis points, an increase of 5 basis points compared to the last quarter. we added four basis points of performing provisions in Q4, primarily driven by model calibration and portfolio growth. PCL on impaired loans were $211 million, or 28 basis points, up seven basis points quarter-by-quarter, and four basis points year-over-year. Personal banking provisions were $9 million higher sequentially, mainly driven by consumer credit. commercial banking provisions increased quarter-by-quarter by $22 million, primarily driven by three files. At ADA, impaired provisions increased to $25 million U.S.

due to new formations during the quarter and model calibration.

Turning to slide 20, our total allowances for credit losses were $2.4 billion, representing 5.5 times coverage of our net charge-offs. Our performing allowances were $1.6 billion, demonstrating a strong performing ACL coverage ratio of two times. We have been building allowances for the past 14 quarters and remain comfortable with our prudent provisioning levels. Turning to slide 21, our gross impaired loan ratio was 109 basis points, excluding USSF&I Deals were 81 basis points. Net formation increased by 3 basis points compared to last quarter, mainly driven by one file in capital markets. At ADA, while net formations increased quarter-per-quarter, they remained below the Q4 2020 form peak. On slide 22 and 23, we highlight our Canadian RESL portfolios. Approximately 85% of the portfolio has been repriced, absorbing the impact of higher interest rates. Upcoming renewals continue to show a significantly reduced payment shock compared to a year ago, and our variable rate mortgage portfolio has been benefiting from the lower interest rates. On slide 35, we provide additional information on our financial services loans. Our largest exposure within the industry is from U.S.S.F.N.I., Main Energy. Excluding U.S.S.F.N.I., our non-bank financials represent less than 2% of our total loan portfolio. Looking ahead to 2026, we anticipate economic growth to be slow, yet positive, amid persistent trade uncertainties. The unemployment rate is expected to remain relatively steady, but elevated. while the lower interest rates should provide some support for consumer spending and the housing market.

Accordingly, we remain cautious in our outlook.

Turning to our domestic portfolio, we expect further increases in delinquencies in retail, while our wholesale book remains subject to periodic lumpiness. At Credigy, as in prior years, we expect provisions to be primarily driven by growth, mix, and a normal seasoning of portfolios. At 88, with the local economy continuing to operate below potential, we expect impaired VCLs to remain elevated. At the total bank level, we expect impaired VCLs to remain within the range of 25 to 35 basis points for the full year 2026, with trends similar to what we observed this year. In conclusion, we are pleased with the credit performance in 2025. As market dynamics continue to evolve, our defensive qualities, resilient business mix, and prudent allowances position us well entering 2026. With that, I will now turn the call back to the operator for the Q&A.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star 1. Your first question comes from the line of John Aitken with Jefferies. Please go ahead.

Thanks for the opportunity to ask a question. In terms of the success that we've had in terms of the expense images, the $270 million that you're expecting to achieved by the end of next year. Given the fact that the timetable has moved up, is there any chance that you're actually going to be able to exceed the $270 million? And if that is to happen, would we – can we expect additional guidance?

Hi, John. It's Amanda Chantal. Thanks for the question. So, we're very happy today to announce that we are accelerating the realization of cost and funding synergies. As you know, we've closed the transaction – not even a year ago, very happy with the client migration. So it's a bit too early for us to comment on the magnitude. So on the pace, very happy, delivering top 10 funding synergies a year ahead of initial plan. And we'll, as we did all year long, keep you posted, Stay tuned in 2026 for an update on magnitude.

Thank you very much, Stella. And just one other add-on, if I may. When we look at your regulatory capital ratio, the relief that CWD is going to get, then the drawdown from the Laurentian acquisition, but my sense is that all of this is basically going to happen in Q4 2026 or later. Laurent, you talked about wanting to invest in organic growth, but when we take a look at where your CET1 ratio has been going about, can we expect, at least in the near to midterm, ongoing and maybe even more aggressive buybacks if we're going to manage the CET1 ratio down closer to 13% like you had targeted by the end of 2026?

This is Laurent. Thank you for your question. On capital deployment, the strategy is to deliver premium ROE. So that's the focus of the team. And we added additional information and guidance on ROE for 26 and 27. And so the focus for the next couple of years is on that. And there are four components on our path to 17% plus. in 2027. So the first one is the impact of CWB. So I think we've provided enough information on costs, funding synergies. We have revenue synergies coming up. The impact also of CWB itself on the banks. So that's the first thing. Second thing is organic growth across all segments and continued efficiency, particularly in TNC, which we think we are going to be able to deliver over the next couple of years. And then, yes, capital management, which is primarily, you know, deliver sustainable dividend increases complemented with buybacks, and obviously we're going to take into account here the impact of AIRB transition. And finally, also strategic tuck-ins, like in P&C and wealth, like you saw this week with the acquisition of Laurentian Banks Retail and SME business. I think that's a good example of how we view you know, capital deployment over the years. So, you know, buyback are a compliment. So, you know, we're not here to engineer higher ROE. They are a compliment to our strategy. Understood. Thank you, Mark. I will read you.

Your next question comes from the line of Matthew Lee with Canaccord Genuity. Please go ahead.

Hi, guys. Thanks for taking my question. On the CWB revenue synergies, how should we be thinking about the breakup of that $250 million by business line? And then how much of that expectation is sort of low-hanging fruit versus maybe more aspirational targets?

Thanks, Matthew. It's not that I'll start with the first portion of the answer to your question, and I'll let you maybe complement. As I said in my remarks, we're now providing a full suite of products and services to clients, so really unlocking new opportunities for incremental NII and fee-based revenue streams. So the revenue synergy trajectory implies that non-interest income will represent a larger share of total revenues in 2026, with a gradual shift towards a greater proportion of NII towards 2027. At full target, we anticipate that roughly two-thirds of the revenue synergies will come from NII. For fiscal 26, as I said, we estimate that $50 million will be generated in revenue synergies and progressing nicely in 2027. It's still premature to provide a specific target for 2027, but we're very confident in achieving the range that we've provided. Now, from maybe a segment perspective, when you look at the full target revenue synergies, we estimate that roughly two-thirds of those will be realized within the commercial segment, underscoring their key role in driving revenue synergies. So maybe I'll let Judith maybe comment on the second part of your question and possibilities for 2026.

Excellent, Chantal. So I'll just give you a little bit more colors for commercial for 2026, what we have done concretely to get to these numbers. So first, we have set up a team focused specifically on driving revenue synergy and have governance and tracking of key KPIs in place to ensure we're ensuring momentum. So formal products and sales training programs have been implemented for CWB employees, covering our comprehensive total bag solutions. And lastly, I would say that, and Deb, I'm really happy about that, we have physically relocated some of our top capital market team members to Western Canada to support growth in the region, especially on the derivative product side, which is really the focus next year.

Okay, that's helpful. And then maybe, you know, I think about CWB and commercial banking in general, it's fairly relationship-driven. How much of your revenue targets depend on retaining key commercial bankers? And what have you seen so far in terms of the ability to retain the people you've integrated into the business?

Well, in terms of employee retention, I will say that right now, everybody recognizes this is a significant change So we're really prioritizing positive integration experience of our employee retention, and most importantly, on the people in front of client. We've been meeting frontline employees, joint teams, and person head of our migrations. And retention trends are consistent with historical norms for both CWB and NBC, and we're very pleased about that. And this is particularly important considering, so we have a very big focus of relationship manager retention right now, and we're very pleased with the retention as we speak.

I appreciate it. Thanks.

Your next question comes from the line of Steven Boland with Raymond James. Please go ahead.

Oh, good morning. Thanks for taking my questions. The first one on ABA. And I'm just wondering if these two things are related. You talk about model calibration relating to impaired, but also that, you know, when I look at the LTV in that portfolio, it's gone from in the 40s into the 50s LTV. And I'm just wondering if it's related. It seems like a big move or maybe it's five basis points or 10 basis points, but it just seems on the LTV, it seems like a big move for one quarter.

Yeah, so thank you, Stephen, for your questions. If it's okay with you, I'll separate it in two questions, and I'll start with the second one on the LTVs. So we did see a decrease in collateral values, which is completely expected given the economic softness, and the LTVs did go up to the 50s. And before that, they were in the high 40s. We're not seeing a material decline in collateral value. It's mostly gradual. But real estate markets have been soft. for some time. It's important to know that we don't have exposure to high-rise condos or developers or hotels, which are the most impacted asset class. And you'll also see this score that we continue to build performing provisions and our impaired provision levels remain high. So that's for the ELTVs. Now for the model calibration, so you've heard us talk about model calibration at the bike level for a long period of time. And you have seen higher impaired PCL at ABA. And there's three components to those higher impaired PCLs. First, the economy continues to perform the lowest potential. We are in a credit cycle. Second, there was an impact of the tariff uncertainty in Q2 and Q3. So there's always a lack between the uncertainty and the impact on our portfolio. So it really hit the formations this quarter. But we're happy because in end of July, we saw the tariff rate get set at 19%, which was a positive development. For the calibration of model, if you recall, for IFRS 9, it's a point-in-time model and not a through-the-cycle model for capital. So it's normal that as we see defaults rise, we need to calibrate the models up. So it's basically an additional level of conservatism.

That's great. Sorry. Just in your P&C segment, I believe, I think about eight basis points of the PCLs came from the Canadian Western portfolio. I'm just wondering what portfolios, can you give any description on that?

So when you look at our retail portfolio in general, it's really mostly consumer credit. So there was... A bit of auto loans, a bit of credit cards, a bit of mortgages, and a little bit of direct loan, but really nothing to call out.

Okay. I'll read through. Thanks.

Your next question comes from the line of Doug Young with Desjardins. Please go ahead.

Hi. Good morning. Maybe sticking with the P&C segment. I know there's a $62 million intangible impairment, but even if you back that out, it seems like expenses were a little bit higher than normal this quarter. And then I think, Laurent, you talked a bit about efficiency improvements coming particularly from Canadian P&C banking. So I'm hoping you can address what happened in the quarter, if there's anything to call out. And then how do you foresee outside of CWB, where else do efficiency improvements come in the banking side?

Yes, thank you. It's Lucy. I'll take that question. So obviously, a big increase in the expense comes from the CWB, the intangible asset. We talked about it. And on the technology side, we see a 17% increase from the previous year. And it's on purpose in the sense that we continue to invest to sustain our long-term performance. So we purposely decided to continue, and in some areas, to accelerate our investment, align with our strategic priorities. So that's a reflection. The expense growth this year is a reflection of that. And we are selective in where we invest, and we try to generate benefits on, you know, both on the top line and the expense. So, for example, we're currently in a major upgrade of our technological environment in the contact center. And that will bring much more improvement in the customer experience, but also reduce call and handling time. So that's a very concrete example. We're also investing in a complete ramp-up of our credit card ecosystem to support. As you know, we are under-penetrated in that business, and it's a high ROV business. So when we look ahead, we believe that these investments will continue to pay off. And the third big bucket, I would say, is really leveraging our transversal capabilities. As a retail business is a big user of any technological components, we believe that we can reuse much of these investments also in the other business lines to be able to contribute overall to the reduction of expenses. So that's some of the examples. So we do definitely see opportunities.

And maybe, so just maybe to kind of simplify this, like if I take the P&C banking expenses, take up the $62 million, is that a reasonable run rate from which to expect expenses to grow next year? Or was there something abnormal and you should see a bit of a normalization? Exactly.

Yes, that's exactly that. So when we look ahead for 2026, we do see much more normalizations. And also, you have to take into consideration that in 2025, we also increased our marketing expenses. We've redone a rebranding exercise. We're still in the process of doing that. And so, see a little bit of that also in 26.

Okay. And then, second question. I think, Ra, when you talked about uses of capital, you talked about an acceleration of operational efficiencies. Can you dig into what that means? Is there... you know, systems that could be written off or maybe you can just kind of flesh that out.

Um, it's still a very high level. Uh, you know, I, I touched on, on this, uh, publicly in the past, uh, couple of conferences, uh, but we do see potential, um, for, um, improvement in our PNC business. Um, The market is evolving rapidly as well. Big retail and small business banking environment will continue to be challenged. I mean, fintechs, challenger banks are now reaching scale and they are a growing part of the Canadian banking model. And we, you know, with the latest budget, we clearly see openness from the government on banking competition in areas of payments, digital assets, stable coins and open banking. And you throw in the AI on top of that. So one of the things that we're working on right now is the mindset of the team. They take all these trends very seriously. And there's a couple of things that we're looking at right now. So the first thing is the cost structure analysis and evaluate our competitiveness going forward. That's something that we're working on. A little early to start... going through what are those components, but it's something that we're starting to do work on. The speed of digital adoption also, and our mobile strategy. And the other thing that I touched on is, as we move ahead, you know, our openness towards more partnership in technology. A lot of tech is better done elsewhere than within banks, so partnership and technology, and also distribution or other products. So it's not just cost, but it's also business model that we're thinking about. So this is a focus of the team, but it's a little early to go to where we think... the impacts are going to be, but you'll be kept updated on all these.

So it doesn't sound like there's a big charge as a way of use of capital. This seems more strategic oriented, is that?

Yes, correct.

And then if I could speak one just last clarification in on the Laurentian Bank portfolio acquisition. The way that we should think about this, you are just absorbing the loans and the deposits. zero cost, and the cost to you in terms of the set one impact is simply the amount of capital you have to back this. So this is a portfolio acquisition that basically comes with zero cost. Is that the right way to think about it?

Yes, Doug, that's absolutely it. Appreciate the time. Thank you.

Your next question comes from the line of Paul Holden with CIBC. Please go ahead.

Thank you. Good morning. Maybe you can drill down into the PCL guidance a little bit of 25 to 35. So effectively suggesting no change versus 25. But if I look at, you know, economic projections for Canada specifically, it does suggest some improvement versus 25. So are there particular areas that you're concerned about trending the wrong way or are you just being conservative in your guidance?

Thank you for your question, Paul, and I'm afraid I'm going to give you a long answer for this one because there's a lot of puts and takes on this one. But you're right. We're calling that 2026 will be kind of a transition year and look similar to 2025. And when you look at 2025, looking at each quarter, so we had a 32-beef-impaired, 32-beef-impaired, 21 deep impaired, 28 deep impaired. So a lot of volatility between the different quarters, and we expect that to continue. When you look at the credit landscape, there's some positives. So under retail, we are seeing that the customers are showing resilience. As we mentioned in our slide, about 85% of our reso portfolio has been repriced, and also the delinquency is still low. And for wholesale, there are some also positive trends. The downgrade rates are stabilizing. Clients have more time to prepare for possible tariffs, but there's still the renegotiation of USMCA that is hanging. But we do need to stay cautious, and I'll explain to you why. First, in retail, we saw that unemployment has increased, but mostly for younger age cohorts. But the future driver of outcomes will be unemployment for the 25 to 54 age cohort, which could still continue to increase. And we're also looking at layoff rates, which today have still remained below historical averages. We still expect the unsecured borrowers who are renters to be the most affected here. And that's why we're keeping a strong ACL coverage ratio on credit cards at close to 8%. The REZL has remained very resilient, but we are seeing pockets of softness. where supply outpaces demand and where you're seeing specific industry issues. But you can also see some deterioration in the regions if the unemployment grows in those specific regions. And for wholesale, that's a tough one. We should expect lumpiness, especially in industries where collateral and enterprise values have remained under pressure, and there's a couple of them. And there's still, obviously, tariff-related risks. So in this environment, we're remaining prudent, and that's why we're continuing for the past 14 quarters to build performing provisions to get ready for 2026.

So what was noticeably absent from your answer was any reference to ABA in Cambodia and any reference to the elevated losses in the CWB book, and I'm assuming that's intentional, no particular... concerns on those two areas beyond what you've already discussed for the quarter?

Yeah. So, for ABA, I mentioned it. I think I answered it. We expect it to remain elevated for the year. And for CWB, we call it on our slide, but it's really a couple of deals. It's lumpiness, and it's normal given the wholesale composition of that book, but it's definitely not a trend.

Okay. Okay. That's helpful. Thank you. Second question. Maybe for Laurent, just wondering how you think National Bank is positioned to benefit from the federal budget and particularly thinking about the planned infrastructure build-out. And one of the concerns around that is it's going to take time for these things to actually manifest. but if you have any thoughts around when you might potentially benefit as well. It could just be a 2027 story. Is this built into your 2027 ROE expectation and capital deployment in any way?

Thank you for your question, and obviously we are encouraged with the focus from our government on the economy, on nation-building projects and all that, but we are at the mercy of executions. in this case. So, we're ready to deploy capital anytime, but it could take some time. And, you know, could the impact, could we see some toward the end of 2026? I'm hopeful. In the meantime, you know, we're definitely supporting any initiative and staying close to our partners across the country to make sure that we're going to be there. And you're right. Our We are well positioned in terms of expertise and capital position to benefit from, you know, expanding growth in infrastructure across the country.

Okay. I will leave it there. Thank you. Thank you.

Your next question comes from the line of Mario Mendonca with TD Securities. Please go ahead.

Good morning. Can we go back to CWB and ABA?

I mean, these are clearly issues that are top of mind for investors this morning. First on CWB, so you report that there's $63 million in in impaired PCL, 69 basis points there. That obviously stands out.

Can you talk to what particular segments are showing the stress and why you're content to suggest that this is not a trend? Sure, Mario. So I'll call out two specific files. So one was previously impaired. Basically, it's a real estate file, well-known real estate files. And it went from a with tenant to non-tenant, so obviously we get go-dark values, so that had a good effect on the value. And the second one is a retail trade or a health company. We're still being paid in this file, but we are not believing that we will be fully repaid in time, so we proactively impaired the file and took an according provision to this. And the reason why I'm confident for this is if you look at the two previous quarters, they were more in line with the results of National Bank than this one. That's helpful. And then on ABA, so the gross impaired loans now have essentially hit a billion dollars. It's up from maybe $200 million just a couple of years ago. And you're clear with us that the LTVs are moving higher. Where I'm going with this is, although the LTVs have gone higher, they're still really low at 50%, or call it 55%, let's say. Why are there write-offs? Like the $15 million we saw this quarter, these elevated levels, why are they increasing if the LTVs are that low? Why would there be losses at all? I guess what I'm getting at is when you recover the property out of foreclosure, what are you learning about the LTVs when you get them back? Yes. So there's a couple of components to that answer. First, it's not the first quarter where we're taking write-offs on this portfolio. And the write-offs that you're seeing are tied to aged, impaired accounts with higher LTDs. The 50 reporting years were performing accounts, and it's an average, but there are some that are higher than others. And all of them had already been provisioned. As you know, the recuperation time because of legal delays in Cambodia has been long. We have been mentioning that in the past, but we're continuing to take prudent provisions and writing them off as they age with higher LTVs. And in any given quarter, this quarter, for example, can you speak to how many properties were recovered where you actually got access to the property and had a look at it? Is it like a single digit number, like five, or is it more like 60? No, it's a higher number than that because it's a portfolio with average loan size of $65,000, so it's significantly higher than that. But it's still a long process. And as we've mentioned before, there's always two ways about it. The first one is to go the legal way, and the second one is to go on amicable settlement, and that's what we try to push for. And that's why in the past quarters you had seen a reduction in formations because we had more settlements and more return to upgrades. And when you say significantly more, I think you meant significantly more than five. Is that right?

Yes.

Yes. Okay. Okay. Thank you for your indulgence. Appreciate it.

Thank you, Mario.

Your next question comes from the line of Darko Mihalic with RBC Capital Markets. Please go ahead.

Hi. Maybe just a clarification first on the benefits of converting CWB's portfolio to ARB. Why such a wide range?

Thanks, Tago. It's Marie-Chantal. So, we've explained in the past couple of quarters the process we're going through for converting those portfolios to ARB. So, first, it's going as planned, so we're very happy about the execution. We're still expecting to be able to release the capital gains in Q4 2026. As this progress is ongoing, there are still some analysis and uncertainty around model calibration. So we're doing the fit-for-use for every model related to the portfolios that we're submitting. So you saw on our slide that we're talking about the general commercial, commercial real estate, and the RESL. So it's really part of the process that we're doing with the regulators in order to confirm the gain that we'll get from the advanced method.

So if I resume it very simply, still some model calibration that we're working on. Okay. Maybe I'll follow up with you later on that. Another question with respect to CAP.

is when I look at slide 14, one of the things that stands out for me is the high level of consumption of capital, let's call it organically, the 40 basis points of RWA.

That is higher than what you're generating. And given your outlook,

for loan growth into 2026. Is it fair to say that that's kind of like the quarterly sort of assumption is that you will deploy organically capital over and above what you generate in any given quarter for the next foreseeable four quarters?

So, thanks, Arco.

Capital consumption from RWA this quarter, so 40 basis points is a little bit higher than what our historical rate is. We're usually around 30-ish basis points. It's coming, so maybe I'll explain to you in different items. It's coming mostly from book size this quarter, more than book quality, mainly from the book size actually. And it's really well diversified between the different segments, whether it's corporate banking, retail, commercial, ABA. So really reflective of the balance sheet growth that we're seeing this quarter in terms of diversified growth from our loans, Q over Q.

Okay, so if it's really well diversified and not too far out of the norm, is it still correct to think that in 26 you will deploy more capital than you generate? Is that what you're budgeting for?

Well, we're always very happy to deploy capital because this is our first priority, right, in terms of our capital strategy. So when you look at next year, I think reverting back to our historical growth of around 30 basis points would probably be a good range.

Okay. Thank you. And maybe just one last question, if I may.

Your discussion on the exposure to private credit, you were quick to point out excluding credit G. I just want to understand why did you exclude credit G? Does credit G play in private credit? So maybe I'll give you a little bit more information on Credigy, and we can have Etienne compliment. So, yeah, it is a part of what they do, but we're very comfortable with it because they've been in this space for over 20 years, and they've shown consistent discipline in both underwriting, perfection of security, which is key, and portfolio monitoring. And you've seen in the past years they haven't. gone for growth in the expense of quality. And you need to remember also that the underlying collateral of credit G are smaller loans with an average size of $225,000. So it's not what you're seeing with the bigger cockroaches. Okay. And where did the other 2% come from then? Because my understanding was the private credit market is essentially in the U.S. It doesn't think your cap markets business will reach far into the U.S., but maybe, Etan, you can speak to how you have that exposure. Yeah, so just to rephrase to make sure we're talking about the same thing. So we have all our exposure in financial services. Around half of that is U.S. FFNI, which is mostly credit G. And of those $9 billion remaining, $6 billion are non-bank financials, so not necessarily private credit, which is less than 2% of our book. And on the NBFI population, 90% are Canadian, and we have a nominal exposure to U.S. private credit funds. So the rest of the NBFIs would be insurance companies, pension funds, investment funds, some equipment financing facilities.

Okay, that's very useful. Thank you for that. Appreciate it.

Your next question comes from the line of Jill Shea with UBS. Please go ahead.

Good morning. Thanks for taking the question. Marie Chantel, you mentioned the PNC margin would trend upward in 2026, and then you mentioned also that the All Bank NIM would go slightly higher in the second half of 2026. Could you just tease that out for us? What's the expectation of the All Bank NIM in the first half and just any dynamics there? And then just a second piece to the question would be on CWB growth ramping in 2026 or the low rental loans and deposits that you acquired. Will either of those be impactful to the NIM path as we think about 2026?

All right. Thanks, Jill. I'll start with the all-bank NIM, and then I'll pass it over to Lucy for some comments on the PNC. So as I said in my remarks, we are expecting the – all bank NIM excluding trading to remain relatively stable from the Q4 level in the first half of the year and expecting a slight increase towards the end of 2026, mainly driven by the upside that we're seeing on the PNC NIM. So I'll let Lucy give you some of the drivers there. And on the PNC NIM, overall across the different asset class, including commercial, we see better repricing conditions of the loan portfolio. As we look ahead also, we see less pressure coming from the repricing of the fixed-term portfolio compared to the context that we had in the last two years, and that is going to start as of Q1 2026. So the situation will start to taper there. And on the business mix, which is an important driver, We see a deposit growth closer to our loan growth in 2026, so that would help on the business mix and help on the margin side.

Very helpful. And maybe just switching to the Laurentia Bank loans that you acquired, you mentioned that it is coming over on a standardized approach. Just a quick clarification, could you potentially shift those over to advanced approaches and lessen that 25 to 35 or 25 to 30 basis points you outlined on CET1?

Yes, thanks, Jill. So, you're right that closing, we will be transferring those portfolios on the standardized approach. Transition toward the AIRB method will have to be evaluated after closing. So nothing material in the short term regarding the potential conversion to ARB. Potentially a couple of basis points related to the client overlap in the syndicated portfolio, but all of that is subject to regulatory approval. So, yes, this is something that we'll look into as we are integrating, preparing for the integration of those portfolios.

Okay. Thanks very much.

Your next question comes from the line of Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Okay. Thank you for squeezing me in. I don't know if it's for Mary Chantal or Laurent, but I wanted to get a little bit more detail beyond just the words that you have on slide nine as to how you arrive at the 17%. So, for starters, are you assuming a 13% CET1 ratio?

So, yes, that's what we are targeting for the end of 2027, working around a 13% CT1 ratio. So nothing very different from what we've been discussing in the past couple of quarters.

Yeah. Mary Chantel, what sort of PCL ratio would you need to have to be able to give that 17% on 13% CT1?

I think it's within the guidance that we provide.

So, within, I mean, if your PCLs aren't improving, is this improvement in ROEs simply because of your CET1 coming down?

No, it's not that. And I don't know if you caught my answer earlier, because I did talk about it. how we are viewing capital deployment over the next couple of years, given our target of 17% plus ROE in 2027. The first thing is CWB as a whole, cost, funding, revenue synergies that are gonna impact. I think we've got the disclosure on those numbers. Then there's organic growth. I talked also a little bit about continued efficiency in our P&C business. As we view buybacks, they are a complement. They are part of the overall capital deployment over the next two years. Our calculation right now is is that we're targeting, as Maricel said, roughly 13% of CET1 towards the end of 2027. Look, things can change. I mean, we could see opportunities, you know, like we announced this week, right, the acquisition of the portfolios of Laurentian Bank are going to impact our CET1 by approximately 25 basis points. So, We want to remain flexible. We want to have buffers. But our numbers are showing, and the way we're going to be deploying capital over the next two years, that we're going to be able to achieve premium ROE in 2027, 17 plus, with a CET1 target of 13% towards the end of the year.

Okay, I don't quite – where do you think your dividend payout ratio is going to be for that 17%, R.O.E.?

Look, our focus is not payout ratio. Our focus is sustainable dividend increases. And if you look historically, we are top of the range in terms of our dividend growth.

But our aim is to be in the low 40s.

I mean, Laurent, I think for you and Mary Chantal, I think it would be helpful if you gave us a bit more numeric examples as to how you get to that 17%. I appreciate the concepts, but I think at least I, for one, am having a bit of a difficult time trying to triangulate to that 17%.

I understand, and we'll try to get to a place where you feel better about our story.

Your next question comes from the line of Ibrahim Poonawalla with Bank of America. Please go ahead.

I just had a follow-up question around your outlook for loan growth and the messaging on credit. Correct me if I'm wrong. I think you expect commercial loan growth, high single digits next year. My understanding is the government actions may not really play a role next year. So how should we think about that level of loan growth? What are the drivers relative to, I think you laid out a relatively cautious outlook on credit unemployment for the first half of next year?

Thanks. So thanks for the question, Ibrahim. It's Judith. So we, as Elhan said, we expect to grow commercial loan in the high single-digit range. Starting from Q4 balance, just to be clear, including of CWB, would a gradual ramp up as we expect to start growing the CWB portfolio in the second half of the year. Of course, the current economic environment and tariff risk is particular, brings a level of uncertainty, but we continue to stay close to our clients to navigate this. If you want to have just a little bit more details of where we see growth, So it will be driven by a greater focus on our general commercial business, both large and mid-market, predominantly in Ontario and Western Canada, as well as continued growth in our insured real estate portfolio.

Understood. And then I guess just a separate question on Canadian Western. You're done with the integration. The synergies on the cost side are running ahead of schedule. Just talk about opportunities to invest and double up on that franchise now that you have that distribution. Like, what are the plans in terms of investing and hiring there, which I assume would probably feed into operational efficiency growth as we think about the ROE?

Thanks. Thanks, Ibrahim. This is Madhushan Tansal.

I'll take a first pass at your question. So, as you saw from our disclosure, our real focus is really on revenue synergy. So we are very happy with the first phase of the potential for growth that we saw coming from CWB. So for us, execution was key in generating those costs and funding synergies, and it really allowed us to generate those a year earlier than we had anticipated. And when you look at the different... aspects of why we're delivering those earlier. It's really execution on integrating processes from CWB into national bank processes. So we've been already demonstrating that there's efficiency and opportunities there in generating those custom funding synergies. So that's the first part. And as you know, CWB for us was really a growth strategy. So the most important aspect of it is really generating the revenue synergies that we've disclosed this morning that we expect will be at full target between $200 and $250 million. So those are the real two biggest drivers that we see. As we've been doing at National Bank, being consistently very disciplined in managing expenses, this will also be the case with the overall combined banks.

Got it. I was just wondering in terms of, are you going to ramp up hiring of bankers now that this is behind you with Invest in Canada, any additional franchise investments to kind of monetize the acquisition beyond the revenue synergies you've laid out?

So, Abraham, it's Judith. So, in terms of growing our commercial book sales, Right now, we are really obsessed by talent, I would say. So we want, as I said at the beginning, we want to keep the top talent we have in CWB. And in integrating the bank, and just to give you a little bit more of what's happening in the field right now, so we are the post-migration reality. So equipping teams to go to market, training on a comprehensive value proposition, and supporting clients in driving their business forward through the full range of products and services. So this is for us an opportunity to really make sure that our talent is well-equipped to continue supporting the clients in the CWB acquisition, but as well also in our core banking in Canada. So there's a lot of focus right now on training and making sure we are really close to the talent. So that's our focus right now.

Thank you very much.

We have time for one more question, and that question comes from the line of Mike Rizvinovic with Scotiabank. Please go ahead.

Good afternoon. I want to go back to Laurent on your 17 ROE target, and I understand you'll give us more color, I guess, at some point in the near term on how you get there, but can you slice it out for us a little bit? Give us a little bit of context on where you see that added earnings power across your segments. Is it going to be largely... financial markets driven, wealth management, P&C banking, or sort of evenly split, but where should we see that torque materialize?

Very good question. Obviously, we think all of our businesses have torque, but I do see an acceleration in P&C and wealth over the next several years. The acquisition of CWB was very strategic. You see the upside on cost, funding, and revenue. But you also see our franchise growing across Canada, our ability to attract talent and grow faster. So, you know, we think all of our businesses continue to have potential to grow, but I do see more coming from our PNC and our wealth business over the next couple of years.

Okay, that's helpful. And then in terms of the buyback program, I think you referred to it as complementary, right? is there a possibility that that could become a bigger complement to your earnings? Are you going to maybe consider a higher share buyback if, in fact, you can't draw your capital down toward that 13% target, and maybe some of the tuck-in M&A that you're expecting could come up doesn't come up? Would you consider a bigger NCIB?

Yes, of course we would. I mean, it remains, you know, we call it a complement. It's opportunistic at the same time, the same way we look at tuck-ins. So, of course, if we think that it's better to buy back for our shareholders, that's what we're going to do.

Got it. Thanks, McCullers.

And that concludes our question and answer session. I will now turn it back to Laurent for closing comments.

Thank you, Operator. First, I want to thank Lucy for her leadership in personal banking over the years. She shared with me that she's going to miss all of you I need to call everyone. So thank you for all those years, Lucy. As we head into the holiday season, I wish to sincerely thank our employees for their dedication, our shareholders for their continued confidence, and our clients for their loyalty and trust. On behalf of the National Bank team, we wish you all the best for the holidays and the new year. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.