National Bank of Canada

Good morning and welcome to National Bank of Canada's Second Quarter Results Conference Call. I would now like to turn the meeting over to Marianne Rossi. Please go ahead, Marianne.

Thank you and welcome everyone. We will begin the call with remarks from Laurent Ferreira, President and CEO, Marie-Chantal Gingras, CFO, and Jean-Sebastien Griset, Chief Risk Officer. Our business heads are also present for the Q&A session, including Julie Lévesque, Personal Banking, Judith Ménard, Commercial and Private Banking, 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-GAAP 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. In the second quarter, we delivered EPS of $3.23, up 13% year over year. We generated a return on equity of 16.8%, while maintaining a strong CET1 ratio of 13.54%. Despite macroeconomic uncertainty, clients remained active throughout the quarter, and market conditions were favourable. This was reflected in strong growth in both our balance sheet and our fee-based businesses. We also benefited from credit performance, the realization of cost and funding synergies, and momentum in revenue synergies from CWB, as well as share buybacks. On the capital deployment front, we remain active on our NCIP. To date, we have repurchased 8.8 million shares under our program, which was upsized during Q2 2020. to enable the purchase of up to 14.5 million shares. Our strong earnings power and capital position also support an increase in our dividend, with today's announcement of an $0.08 or 6% increase. This brings the quarterly dividend to $1.32 per share. During the quarter, we completed the syndicated loan transaction with Laurentian Bank, and earlier this month, we received clearance from the Competition Bureau for the retail and SME portfolio transaction, which remains on track to close by year end, subject to remaining regulatory approvals. We are committed to operating with strong capital levels and continue to target a CET1 ratio converging towards 13% by year end of 2027. Turning now to our economic outlook. Uncertainty has increased significantly with the war in Iran, which has impacted the global and Canadian economies. We expect the conflict to drive inflation and higher rates as supply chains for critical goods are disrupted and reconfigured. This uncertainty could further impact business investments, which have slowed down over the past couple of years due to tariff-related uncertainty and excessive regulation. But if we look beyond the near term, Canada is well positioned to benefit from ongoing efforts to re-industrialize our economy, undertake major projects, make Canada an energy superpower, modernize our defense sector and create champions, and invest in Arctic infrastructure to support defense, energy, and critical mineral development. On this, I want to acknowledge the leadership shown by the federal and provincial governments to rebuild Canada's economic sovereignty. Structural changes are required to adjust to the evolving economic and geopolitical landscape, and National Bank will be there to support clients and our country's economic priority. Turning now to our business segments, PNC Banking generated net income growth of 18% year-over-year, driven by strong growth in lending activity and mutual funds, as well as credit performance. Operating leverage was positive in the quarter. Personal banking mortgage volumes was up 12% year over year, supported by a resilient housing market and share gains in Quebec. Personal deposits were slightly down sequentially as strong equity markets drove increased client flows into investment solutions and generally higher portfolio levels, contributing to an 8% increase in total personal savings year over year. In commercial banking, deposits were up 7% and commercial loans were up 5% year-over-year. Despite macro uncertainty, clients were active within the National Bank-originated loan portfolio, growing by 11% year-over-year. The CWB legacy book declined by $400 million sequentially, primarily driven by commercial real estate. Our outlook for the year on commercial lending remains positive. while acknowledging that the micro context has shifted with the conflict in the Middle East and with heightened uncertainty around the path of inflation and interest rates. Net income in our wealth management segment increased 18% year-over-year to $277 million supported by growth across the franchise, including strong fee-based and transaction revenues. Asset under administration grew 14% over the same period to reach nearly $940 billion, benefiting from resilient equity markets and strong net sales. Capital markets generated net income of $490 million. This notable performance reflects the strength of our business mix and strong execution. Trading conditions were favorable in the quarter. Our performance in global markets was primarily driven by strong client activity, including in equity-structured products originations, commodities, and rates, as well as higher market-making volumes more broadly. Record results in corporate and investment banking reflected sustained client activity across M&A, corporate banking, and ECM, as well as continued investments in our franchise. CreditG generated net income of $46 million, up 15% year-over-year. Average assets were up 10% over the same period and 1% sequentially, as we continue to benefit from recurring flows from established partnerships. We remain highly disciplined in pursuing new deals given the prevailing competitive market dynamics and pricing conditions. At ABA Bank, net income increased 10% year-over-year, reflecting balance sheet growth and lower PCLs, partly offset by a higher efficiency ratio. Loans were up 12% year over year, while deposits grew 15% over the same period. I will now pass the call to Marie-Chantal.

Thank you, Laurent, and good morning, everyone. We delivered strong results in the second quarter. Revenues increased 7% year over year, driven by solid performance across our segments, and strong balance sheet growth. PTPP grew 5% and our businesses generated an all-bank efficiency ratio of 50.4%. Expenses increased 9.5% year-over-year. Of note, Q2 2026 included $15 million of litigation expenses and Q2 2025 reflected a $22 million reversal of a property tax provision. Excluding these two items, expense growth was 7.4% in line with revenue growth. For the second half of the year, we anticipate expense growth to moderate towards the low single-digit range, positioning us to deliver positive operating leverage. Moving to slide 8, net interest income excluding trading grew 7% year-over-year. Sequentially, it was down about 5%, with fewer days in the quarter accounting for over two-thirds of the decline. Additionally, balance sheet growth was offset by CreditG's prepayment revenue of approximately $12 million recorded in Q1, and higher Treasury NII in the prior quarter. NIM in Q2 was 2.16%, down eight basis points quarter of a quarter. As expected, NII from Treasury was lower sequentially, representing four basis points, largely offset by non-interest income. It also reflected higher prepayment activity last quarter, as well as one basis point decline in P&C NIM as long growth outpaced deposit growth. Looking at next quarter, we expect the P&C NIM to be slightly down from Q2 levels. Deposit margin expansion is expected to be offset by commercial deposit mix. As for the all-bank NIM, we expect it should remain relatively stable next quarter. Turning to slide nine, we continued to grow both sides of the balance sheet. Loans increased 9% year-over-year and 3% quarter-by-quarter, including the addition of the Laurentian Bank syndicated loans of $657 million. Deposits increased by $9 million, or 3% sequentially. Personal demand deposits grew $1.6 billion, or 2%, mainly driven by wealth management. Furthermore, our customers' appetite for investment solution has been strong given the favorable market performance that continued in Q2 and resulted in solid growth. Non-retail deposits grew $7.5 billion, or 4% quarter of a quarter, mainly driven by commercial banking, and corporate and investment banking. Now moving to capital on slide 10. We ended the quarter with a strong CT1 ratio of 13.54%, supported by capital generation of 41 basis points. RWA growth consumed 38 basis points of capital, credit risk of 25 basis points, primarily reflected balance sheet growth with five basis points from the acquisition of the Laurentian Bank's syndicated loan portfolio. Market risk, mainly driven by business growth, consumed nine basis points of capital. Share buybacks during the quarter reduced the CT1 ratio by 32 basis points. Since the launch of our current NCIB, we have repurchased 8.8 million shares, representing approximately 60% of the program. Now turning to slide 11, we are making solid progress on realizing synergies from the acquisition of CWB. So far, we have realized $215 million of cost and funding synergies, and we are on track to reach $270 million by the end of fiscal 2026. Moreover, we are increasing our cost and funding synergies target to $300 million on an annualized basis. We have also realized $33 million of revenue synergies since the beginning of fiscal 2026, mainly driven by fee income. As previously mentioned, revenue synergies should reach approximately $50 million by the end of this fiscal year. We continue to target $200 to $250 million in revenue synergies by the end of fiscal 2028. We delivered strong results across both quarters of the first half, supported by solid underlying performance across our businesses, ongoing cost discipline and realization of CWB synergies with credit remaining within expectations. In addition, we continue to return capital to shareholders through dividend increases and ongoing share repurchase activity. We grew our EPS by 12% year-to-date. While the macroeconomic landscape continues to be uncertain, our outlook for the remainder of the year remains positive. For the second half of 2026, we expect EPS growth to be in line with our performance year to date. We also anticipate expense growth trending towards the low single-digit range, contributing to a positive operating leverage for the remainder of the year. Having generated an ROE of 16.7% year to date, Alongside strong capital markets performance, we remain on track to achieve our ROE target of approximately 16% in fiscal 2026. With that, I will turn the call over to Jean-Sébastien.

Merci Marie-Chantal and good morning everyone. Since our last call, the Canadian economy has grown modestly while the labour market continued to weaken. The conflict in the Middle East is adding another layer of uncertainty by putting pressure on energy prices, inflation and interest rates. That said, strategic trade diversification and accelerated nation-building projects in energy, natural resources and infrastructure should help to support future economic activity. In this complex environment, our resilient portfolio mix, disciplined risk management, and prudent provisioning underpinned our strong credit performance. Now turning to the second quarter results on slide 13. Total PCL were $233 million, including the initial provision on performing loans of $6 million or one basis points related to the Laurentian Bank syndicated loan portfolio. Adjusted total PCL were $227 million or 30 basis points, down two basis points quarter over quarter. We added four basis points of adjusted performing provisions in Q2, mainly reflecting portfolio growth and unfavorable macroeconomic scenarios, which included a higher unemployment rate and more pessimistic outlooks for both equity markets and housing prices. PCL on impaired loans were $192 million, or 26 basis points, down two basis points quarter over quarter. and within our guidance of 25 to 35 basis points for the full year. Personal banking provisions were $2 million higher sequentially, mainly driven by consumer credit. Commercial banking provisions rose $12 million quarter-by-quarter, mainly driven by the real estate and construction sectors. Capital markets reported a $1 million recovery related to one file. At Credigy, provisions decrease by $3 million U.S., resulting from the normal seasoning of residential mortgages and consumer loans. At ABA, impaired provisions were down by $4 million U.S. sequentially to $13 million U.S., reflecting lower formations. Turning to slide 14. Our total allowances for granted losses were $2.6 billion, representing 5.1 times coverage of our net charge-offs. Our performing allowances were $1.7 billion, demonstrating a strong performing ACL coverage ratio of 2.2 times. We have been building allowances for the past 16 quarters and continue to be comfortable with our prudent and defensive provisioning levels. Turning to slide 15. Our gross impaired loan ratio was 114 basis points, up 3 basis points quarter-over-quarter. Laurentian Bank syndicated loans accounted for 40 million or one basis point. GILs excluding USSF&I were 84 basis points, up three basis points sequentially. Net formations were 13 basis points this quarter. Excluding the Laurentian Bank portfolio, net formations were 12 basis points, up five basis points compared to last quarter. In commercial bankings, net formations were 28 basis points and included one file in CRE residential insured. On slide 26, we provide additional information on a few sectors of focus. Of note, we have limited exposures to U.S. non-bank financial, NAV lending, and software. In conclusion, we are pleased with the credit performance in the second quarter and first half of the year and continue to expect impaired provisions to be within the 25 to 35 basis point range for the four fiscal 2026. In the current context of heightened uncertainty and softer labor market conditions, we expect further gradual increases in PCL while our wholesale book remains subject to periodic lumpiness. However, our defensive qualities, resilient business mix and prudent allowances position us well for the remainder of the year. And with that, I will now turn the call back to the operator for the Q&A.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Thank you. Your first question comes from John Aiken with Jefferies. Your line is open.

Good morning. Laura, as we look towards you achieving the target of 30% to the T1 ratio, Can we assume that what we saw in the second quarter is going to be pretty much the blueprint moving forward, where the internally generated capital remains very strong, but it's being fought off by the share repurchases, but also risk-weighted asset growth? I mean, is this something that, I mean, not definitively, but is this something that we should expect moving forward in future quarters?

Thank you for your question. At a high level, yes. You have sometimes a period of volatility which could impact market risk RWA, so that is a factor that we have to take into consideration. But I guess at a very high level, yes, you should expect us to continue executing at these levels.

Great. Thank you. And then, you know, in terms of the risk-weighted asset growth, I don't know if this is for Mayor Chantal or not, but in terms of the expected growth, assuming that the Canadian consumer remains a little bit in trouble, I guess the density on the commercial side is going to cause growth on that side. Is that a reasonable outlook?

John, can you please repeat that question?

Sorry. Yes. In terms of risk-weighted asset growth, Presumably, the outlook is on a bit stronger on commercial and higher density is going to lead to potentially a risk-weighted asset acceleration.

Yeah, in that context, that could be a good assumption.

Fantastic. Thank you. All right, Q. Yeah.

Your next question comes from Matthew Lee with Canaccord Genuity. Your line is open.

Hi, good morning. Thanks for taking my question. Maybe just one on PNC. Loan growth continues to be pretty strong. Deposit trends a little bit more mixed this quarter. As you think about the franchise today, is the pace and mix of core deposit growth influencing economics of new lending or the path of PNC margins? And is that going to be the main source of NIM pressure as you look into Q3 and maybe Q4?

Mathieu?

It's Mathieu Chantal, so maybe I can start with a few points on the NIM going forward and what we're seeing this quarter, and then Julie can take a moment to speak about more of the outlook in terms of loans and deposit growth for the PNC. So for the NIM, let's take a moment just to look at the All Bank NIM, and then I'll go a little bit deeper in the PNC NIM. So the Q2 decline of the All Bank NIM, as I explained in my remarks, is something that we had anticipated for this quarter. So recall that in Q1, we benefited from a particularly strong NII driven by ALM activities. And in Q2, the Treasury performance remained solid, although reported NII was lower sequentially, largely offset in non-interest income due to the accounting of some hedges, which happens from time to time. So on a total revenue basis, that said, Treasury, as I said, had a very strong second quarter. and the overall impact from Treasury on the all-bank NIM represents approximately four basis points sequentially to the all-bank NIM. Additionally, we had some prepayment activity last quarter from Credit G, also impacted the NIM by one basis points Q over Q, which is something that we had also mentioned. Now, when you look at the PNC NIM decline this quarter, improved deposit margins, was offset by volume mix as loan growth outpaced deposit growth. So that's something that we've also shared in the past, and it's something that you're seeing when you look at our loan growth volumes as well as deposit volumes. Looking ahead, we expect the all-bank NIM to remain relatively stable in Q3 from Q2 levels, and we do expect a slight decline on the PNC NIM in Q3, driven by mix Dynamics in commercial deposits partly offset by continued repricing benefits on our core deposits. Also, we expect the Treasury and II to revert toward a midpoint between Q1 and Q2 level. That's a bit of what happened in terms of the NIMS and on the PNC NIMS.

So if I look into – this is Julie. So if we talk about deposits specifically for retail – Deposit outlook remains consistent with the current market trends. The continuation of low interest rates through the end of 2026 limits the relative attractiveness of deposits and continues to drive outflows from GICs. While the market returns are expected to normalize, potentially slowing the pace of migration towards funds, the underlying dynamic is not expected to reverse. As a result, deposit growth is expected to remain flat. Judith, on the commercial side, I don't know if you want to jump in.

So thanks for your question. So deposit growth on the commercial banking side remains a strategic focus, and we're really well positioned to capitalize on a significant opportunity to grow our penetration in cash management product. And just to give you an idea on our cash management and deposit strategy, we have three pillars. The first one, we've been operating our online banking platform It's almost done. Second, we're expanding our treasury management team to deepen client engagement and support deposit growth. This is in process. And third, we're enhancing our deposit solutions through more targeted offerings by client segments in industry. So we're very positive on the outlook on the deposit on the commercial banking side.

Okay, so if I'm taking that together, in the next couple of quarters, we should continue to see loan growth outpacing deposits, and if so, you know, we should still continue to see, you know, PNC banking, NIM, face some pressure.

That's correct, Matthew. Okay. That's helpful. Thanks.

The next question comes from Ibrahim Poonawalla with Bank of America. Your line is open.

Hey, good morning. I guess maybe first question, Laurel, for you around, I think you said, that the uncertainty on the macro side has led to a slowdown in investment spend. And then you went on to outline a lot of good things that could happen in the future. Just give us a sense of, it feels like the Quebec economy is has had a delayed impact in terms of the slowdown. So when you look at just the job picture locally, what's happening just from a credit standpoint, do you think that lagged effect that Quebec may be feeling will show up with somewhat higher PCLs over the coming quarters? How would you frame the year end now in terms of just the economic activity and how that could translate into credit trends?

Ibrahim, thank you for your question. So let's start with Canada in general. A general delayed reaction, labour market suffering a little bit more now across the country, Quebec as well, and the uncertainty also around KUSMA and commercial tensions for our country. Those are all factors, I think, that are impacting growth and investment in businesses. And so it feels like we are a bit in a lull in our country in terms of business investment. And in my prepared remarks, I've said this publicly, we are definitely encouraged by the shift you know, in our government towards a focus on the economy. So to us, that bodes really well going forward. Now, in terms of change, you asked a question about outlook on PCL. It doesn't change your outlook. Maybe I'll ask... Jean-Sebastien, to comment on our outlook regarding PCLs.

Yeah, so we just confirmed our guidance for Total Bank. If you look at the retail book in Quebec versus rest of Canada, so the retail book in Quebec has outperformed for the past several years. So it would be normal to see a little deterioration. I agree with you. You pointed out the higher end employment. However, I would be cautious in not pointing it as a trend, as we've seen a large shift this quarter, but I would wait for a couple of quarters before we see longer-lasting trends before having a conclusion. But the fundamentals of the Quebec markets remain, which is a strong saving rate, more double-income families, and low housing prices. And to add on top of that, I'd remind you that we have a low unsecured proportion in our total portfolio, which is where typically it would shift the first. And the performing of unsecured portfolio in Quebec is particularly good, given the fact that we're over-penetrated in homeowners, which is the place where typically delinquencies and losses are lower.

Got it. Thank you. And As a follow-up on the capital and the buyback discussion earlier, as you think about just – I mean, obviously, you have a lot of excess capital, high ROE, so you're generating a lot. When we think about just is there any level of sensitivity when you look at the stock from price to earnings, price to book, or your internal return on those, just – I'm wondering, or is it more about you want to do X amount of buybacks and keep capital levels at a steady state, and you're, as a result, not particularly sensitive to where the stock's fading at any given point in time? Just would love to hear how you think about it.

That's a great question, Ibrahim. We will adjust from time to time. So if we do see opportunities to increase the pace of our buyback because we think our stock was not performing at the same level as others. For instance, like we saw, there's a period of time in January where our stock was not performing at the same level as others, and we did take advantage of that. So we are a little bit dynamic in the way we manage the buyback. But in terms of change in our strategy, because of our stock price, there's no change in strategy. The only thing that would change our strategy is a big shift in macro. If there's a big shift in macro where, you know, inflation is picking up and interest rates are picking up and we think that, you know, the macro environment will deteriorate, we'll revisit. So that's kind of the philosophy. But, you know, we'll take advantage of... Price swings if we can, but our strategy is pretty steady.

Excellent. Thank you.

Your next question comes from Mike Rizvanovic with Scotiabank. Your line is open.

Hey, good morning. I had a question for Judith. I guess a two-part question. So one, just on the CWB loans coming off, I think $400 million is what you flagged. So it does move the needle on your year-over-year performance, so 11% gets down to five. I guess I'm wondering, like, how much of that is more recent? Like, is this just a normal part of the process of getting out of areas where you maybe are not comfortable on the risk side or for whatever other reason? Are you to the point where it's almost done at this point, or is there more potentially to go there?

Thanks, Mike, for your question. I'll start by saying that, as expected, our sequential commercial loan growth was consistent with the previous several quarters, so there's no surprise on that. I will comment on the legacy National Bank portfolio. Despite macroeconomic uncertainty, clients remained very active throughout the quarter, and we're very happy we've delivered another quarter of double-digit year-over-year growth. So our core, it's really as per our strategy, and this I want to point out, our core commercial banking grew more than real estate, and that's really focused on both mid-market and large client segments across all geographical footprint. So that's the first part. So if we go on the CWB side, so I want to offer three things. First, the performance of the CWB portfolio has been as expected so As mentioned in the last few calls, our teams have been focused on supporting the client experience throughout the conversion, no surprise around that. This focus has supported strong level of client retention with payout volumes remaining below pre-acquisition average. So that would be the first point. The second point is integration activities have created short-term headwinds and capacity for new volume, which has not been sufficient to offset regular payment and payout. This has been particularly pronounced in the commercial real estate portfolio, as Laurent said in his remark, and which contain amortizing commercial mortgages, interim construction financing that pays out as successful project completion. And the third point I want to offer is now the integration impact has clearly moderated and our teams are well positioned to return to generating new volume with early signs of recovery with visible improving pipelines. while we maintain pricing discipline, obviously. So we're positive on the opportunities in front of us to drive growth on the CWB portfolio. And what I would like to say also on the, is it finished, the integration? I would say that where we are right now, conversion and integration is finished, and we're going back to normal state in the next few quarters. That's what I would offer to you.

Okay, so really nothing on the credit side that surprised you more recently? There's nothing related to credit?

No, nothing on the credit side. I'm comfortable with what I see in front of me.

Okay, perfect. And then just quickly on the 11% growth ex-CWB, that's a really robust number. And I'm wondering if you could just sort of delineate between growth in Quebec, your core market, and some of the maybe the low-hanging fruit that you're getting outside of the Quebec market as you expand. Yeah, I guess in Western Canada in particular. Any color on that?

Yes. So on our kind of legacy NBC portfolio, our growth in Western Canada has been really high. And Ontario as well. I want to point out Ontario. But Quebec is also growing at a faster pace. So I would say that just to map it out, Western Canada faster, Ontario and Quebec. That's how I would share that.

Okay. Thank you for the color.

Your next question comes from Sohrab Movahedi with BMO Capital Markets. Your line is open.

Okay, thank you. Can I just pick up there for a second? This growth, is it net new clients or are you increasing lending with existing clients?

So it's mostly net new client. We're also increasing, but we're seeing some momentum with net new client and that's been our focus.

Okay, thanks. Again, you had talked to us about pre-tax, pre-provision. Maybe if I can just get a reminder what you think your segment pre-tax, pre-provision is likely to do this year now that you've got two quarters under your belt.

Yeah. Hi, Saurabh. So, yeah, thanks for the question. So I'd say overall we continue to feel good about the outlook and I feel confident now about our ability to hit the top of the PTPP guidance that we had given for fiscal 26. So we've had, obviously, a really strong performance in both Q1 and Q2 with a lot of great deal activity and very supportive market conditions across several businesses. But also, I think... the franchise is operating from a structurally stronger position today. And you see it in our ability to execute for clients across market cycles with the ability to support increasingly complex financing and capital raising needs and the increasing number of leads and the improving diversification of the revenue mix. So for the balance of the year, our base case is we'll see some more typical seasonal dynamics through the summer months, And the market backdrop that may be a bit less active than what we experienced in the first half, while we still think it will be positive overall. So maybe a bit of more precise color. So we're seeing in structured products, you're going to see less volatility, we feel. But overall, investors are surprisingly resilient and they continue calling products. And that should mean good issuance volumes. And the intermediation businesses, it's really our scale and execution capabilities that continue to position us well, support client flow across different market regimes, and that's reinforced by our leadership in ETFs and options and domestic bond trading. And across our hedging solution businesses, we think we'll see continued activity tied to financing and infrastructure across rates, effects, commodities, although part of the elevated results in Q2 may have been pulled a bit forward from later periods. And at DCM, I think there could get interesting. I mean, borrowing on both the corporate and the government side, there's good financing conditions, there's resilient investor demand, and that, I think, will translate into robust issuance activities. And we continue to see good pipeline in the corporate banking and the investment banking. It's well diversified across sectors, so we think M&A remains strong. And strong markets and strong investor risk appetite, I think, will continue to be a good backdrop for equity in new issues.

Okay, that's very comprehensive. Maybe even... it's incredibly helpful, comprehensive. Maybe, maybe you, you're going to even surprise yourself and, uh, exceed the upper end. Um, one last question, uh, maybe just for you last, I think last quarter, uh, when we talked, when you talked about, um, ROE outlook, you talked about, uh, you know, uh, either side of 16% for, uh, 2026 and, uh, You mentioned 17% or thereabouts in 2027. So I guess I wanted to confirm that that 17% still remains the 2027 kind of yardstick. And can it benefit further based on the work you're doing in the ROE optimization in your PNC bank? Or did you have... Some of that benefit incorporated into the 17% type of number you were talking to us about for 2027.

So, thank you for your question. So, you're correct. Last quarter, we did provide guidance for the year. We upgraded our guidance for the year from 15% to 16% for 2026. And maybe I should correct you, but 2027, we provided a waterfall, and it was 17+. that we guided for 2027. And I think Marie Chantal provided a really good explanation last quarter on the 17 plus and also said that all the work that we're doing right now in terms of the next strategic plan are not included. in our guidance for our uh roe for 2027. so does that does that answer your question sora yeah that's perfect thank you very much uh thanks for taking my question perfect thank you your next question comes from doug young with digital day your line is open hi good morning just maybe starting on the credit side two things new gross impaired loan formations

And I look at it on a gross, not net, but gross loan formation did jump sequentially and I think even year over year. And it looked like write-offs were a little bit elevated. So I'm just, maybe you can talk a little bit about where you're seeing the pressure, like from a product or from a geography perspective on, again, new gross impaired loan formations and write-offs. Thanks for the question, Doug. It's JS. So pretty simple explanation to that. And we called it on the slide. So I'd say the majority of our formations in commercial were actually driven by one file in commercial real estate in Western Canada, and that file is insured. So you've seen us grow in residential insured in the past years, and I think this is one good feature of this growth is when they go wrong, you have some PCL protection on it. So although there is a large gill associated to it, There's no PCL associated to it.

And have you sized out what that was in terms of loan or in terms of formation?

So I can give you a little bit more detail on this. So it's a little bit more than half of the commercial formations were driven by that file.

Okay. And how about the write-offs?

So the write-offs are, you know, can be lumpy, so there's always two sides to write-offs. The retail write-offs are more normal, driven by credit cards and by end-of-cycles for the other portfolios. And then we did arrive to the end of workouts for a couple of larger files in commercial. So when you arrive there, what you do is you de-recognize the loan and you have the correspondent write-offs. So obviously you're seeing a little bit more lumpiness on this this quarter.

Okay. So it doesn't sound like in either of these two that there's anything overly concerning. Is that from your perspective?

Well, I'm happy that the gross impaired loan was related to an insured file, that's for sure. But no, nothing overly concerning. Like if we had removed this file, our gills would actually have been down quarter over quarter. But as I mentioned in my prepared remarks, I don't think we're in an environment where the level of uncertainty has reduced. So we could expect still ebbs and flows for the yield ratios going forward.

Okay, that's clear. And then second, just on credit G, we do our own math and we look at the NIM or margin.

And I look at the margin this quarter and I look at it relative to what an average would have been over the last three years. And it looks like it's down by a decent amount. And I know that You can say from last quarter, there was some prepayment that went through. But even if I look longer term, it looks like it's lower. Is there anything that's changed in the portfolio or that went through this quarter where there would have been a material kind of impact on NII or NIM for margin for credit G?

Hi, Doug. It's Etienne. So you're right to point out a long-term slight decrease in margin. I think it's a function of... We continue to prioritize secured assets, and in Q2, I think two-thirds of our investment volumes were in mortgage portfolios, first lien and second lien, but a lot of first lien. And so that, on a risk-reward basis, we really like it, but that's where we see value right now. If you look at other asset classes like in the unsecured space, we continue to see portfolios trading at prices that don't really reflect our view of the potential risks and performance. Conditions are a bit challenging there, so we'd rather stick to the mortgage space for now, and we'll adapt and as the macro changes or as the situation evolves, we'll pivot as Credigy has many times over its history been able to do. But you're right that margins have been going down a bit, although the risk-reward, we're probably in a great position. And the goal is still to deliver strong asset growth, but never jeopardize the long-term to meet short-term guidance in terms of of margin or asset growth.

I guess what I'm reading in this, and I guess I should have looked at this, but if I looked at a risk-adjusted margin, it actually probably wouldn't be that different because your PCLs would be coming down as this mix shifts, and that speaks to the risk-reward.

Is that a fair comment? Yeah, I think that's how I would look at it also, Doug. Yeah, okay. I appreciate the color. Thank you.

Once again, if you have a question, it is star one on your telephone keypad. Your next question comes from Darko Mihalic with RBC Capital Markets. Your line is open.

Hi, thank you.

I wanted to revisit the net interest margin discussion. Your outlook is very helpful for the next quarter or so. My question is, a little bit more longer term, I suppose, in nature. And it really revolves around the high level of liquidity you're currently covering, you're currently carrying. So I understand you have a 13% common equity fund ratio sort of target in a 27. What would be a more normal LCR level? And is there any kind of a drag here on your margin? How fast would you...

sort of target to get to more normal liquidity levels?

Hi, Darko. Maybe I can start and I'll let Etienne give a bit more insights from a capital markets perspective. So when looking at the LCR before going to the long term, I think it's worthwhile just giving a few insights on on the evolution of the ratio over the past couple of quarters. So the decrease in LCR that you saw this quarter, which is effectively a decrease from the previous quarter, but it really came back to the usual level that we are used to seeing, and that's where we like to operate at National Bank. Nevertheless, the decrease came mainly driven by secured funding and collateral management activities. So it really reflects the transaction mix and timing rather than a change in our strategy, as I mentioned, and how we manage the bank's core liquidity positioning. So the level that you're seeing right now is probably where we like to operate. We like to be in a good position. and sees market opportunities when we see good funding opportunities, and that's what we saw earlier in the year. So maybe Etienne, would you like to add any?

Thanks, Marie-Chantal. So you said it very well. So we pre-funded a lot over the last couple of quarters. The previous couple of quarters, there were some market opportunities that were interesting, and we and it made sense to fund and to deploy this funding in highly liquid securities within capital markets and treasury portfolios. Now that the conditions are normalizing, you're seeing our LCR drift back towards more of its long-term average. I think over the long term, expect us to be in the 140, 150 range, But we really like having it among the highest of the big banks that that will remain part of the strategy.

And so as I think about that, then it's it's clear that this is really a cap markets and there's none of this that's actually sort of being pushed out through FTP into PNC Canada. Would that be a correct assumption?

It is mostly in capital markets and treasury portfolios, but you're right. It's really opportunistic positioning in capital markets that are the bulk of this ratio.

Okay.

Thank you very much for that. That's very helpful. Another question on ABA. Just wanted to sort of revisit your outlook for ABA. It looks like there's a weaker economy. you know, the country itself has sort of lowered its economic outlook. It doesn't seem like you did anything on the performing side from PCLs. So what is your outlook for ABA and, you know, should we just simply consider that the high level of growth, double-digit loans and so on, should continue and really shouldn't expect any difference in PCL levels either?

Hey, Darko, it's Bill. I'll take that, and maybe JS can comment a little later on the PCLs. But for the economic outlook, I described Cambodia has faced a series of challenges over the past years, from the pandemic to the U.S. tariffs, the conflict with Thailand, and now the conflict in Iran. It's weathered those headwinds relatively well, and but expected GDP growth has certainly declined. I think 6% in 2024, 5% in 2025, and expected to be around 4% next year, which remains significantly below its potential growth. And you know, we've talked previously about recovery and tourism being slow. That's The growth in exports is higher than we had expected, particularly to the U.S. Year-to-date, it's up about 39% from last year, and FDI remains strong. So in the challenging context of headwinds in the economy, we're very happy with ABA's performance. It's continued to evolve its market-leading digital banking services, which has led to great growth in the number of clients and in low-cost deposits, which is helpful. And I'd point out, Darko, that the long-term structural tailwinds in Cambodia remain in place. You know, it's still underbanked, young population, FDI remains strong, competitive labor costs supports manufacturing sector and exports. And so we remain pretty positive about the long-term growth potential. Does that answer your question? Maybe I'll pass it to JS for PCL.

Yeah, so on a credit perspective, recall we had two data points on ABA. First is we had guided a while back, and that still holds through, that Q4 2024 would be the higher end of what we expected going forward in terms of formations, and we still think this is true. And we also repeated that we expected the impaired PCL to remain elevated for this year, which is still what we expected. And finally, to your last comment on the build, I think it's important to remember that the starting point is important. And although we built three BIPs this quarter, we built 47 BIPs last quarter, 42 the quarter prior. So we have been building, performing provisions at ABA to make sure we have good downside protection. Okay, thank you for that. Maybe just one last question to wrap up on ABA. If this current pace of growth continues, It is completely self-funding, is that correct?

Yeah, as you've seen, deposit growth has been much higher than loan growth. I will caution when I think about what the impacts will be from the Iran crisis or the Iran conflict. It's mainly impacted the price, not the availability of fuel, and it is consuming a greater portion of household budgets. than in the past. So we would expect deposit saving rates and deposit growth to be lower than in the past, and that will impact it. But in terms of self-funding, yes, it certainly remains to have a strong excess liquidity on the balance sheet and continues to grow deposits very, very strongly.

Great. Thank you very much.

Your next question comes from Paul Holden with CIBC. Your line is open.

Okay, thanks. Good morning. I want to go back to Etienne. You've given some helpful commentary on the outlook for the business for second half of the year. I guess I want to ask you sort of longer term, because this business has become harder to forecast. Never easy, but harder to forecast. just because, you know, you have this underlying growth from your, from client initiatives and growing product offerings, et cetera. And then also very favorable market conditions, right? Which have obviously benefited all banks. So trying to figure out a couple of things. One is like, you know, should we actually be assuming continued growth into next year for this business? Or is that just asking too much at this point? And two, you know, If we think this business at some point has to normalize, which it probably does, what specific market conditions do you think we should be tracking to sort of get a sense of what could result in more normal run rate earnings?

Thank you. Thanks, Paul. It's Etienne. Definitely, we want to keep growing the business and we want to keep it growing at the same pace as the rest of the bank. That's definitely part of the strategy. And we're putting in place a lot of initiatives, both on the global markets and the corporate and IB divisions to continue our growth and really to as we've scaled domestic champions in Canada to slowly port those capabilities in new markets. We've done it successfully both on the CNIB and the global market side. I'm thinking of how we operate in the Delta One space, in the structured product space, and now in the project finance and renewable energy space. We'll definitely continue to do that. As to what to track next, to expect slowdowns, and we've seen that, right? It's when clients get a lot more quiet. I mean, we still are a franchise that depends on client flow, client deals, giving clients advice. And so when the economic cycle reaches a point where there's a lot less activity, look for us to slow down. I mean, some of it may be when there are... impacts on the markets that that that are negative that creates volatility sometimes so because we have a lot of counter cyclical businesses on the trading side that can be cushioned but over the long term uh we need clients to make money uh we need clients to succeed and so uh it this is a franchise that will always track client activity and and client success okay

So to be clear on that, even though your business has outgrown the rest of the bank in the last couple of years, you still think going forward, even at the current levels, you can grow in line with the rest of the bank? That's the messaging here.

That's certainly the goal, yes. Okay. Thank you for that. That's it for me.

This concludes the question and answer session. I'll turn the call to Laurent Ferreira for closing remarks.

Thank you, operator. Second quarter was strong. And on that, I'd like to thank our teams across the country for all their efforts and excellent execution. And while the macroeconomic context remains uncertain, we are really well positioned to support our clients and continue delivering strong earnings growth and ROE. On that, thank you. I wish everyone a great summer.

This concludes today's conference call. Thank you for joining.