National Bank of Canada's (NTIOF) CEO Louis Vachon on Q3 2014 Results - Earnings Call Transcript

Aug.27.14 | About: National Bank (NTIOF)

National Bank of Canada (OTCPK:NTIOF) Q3 2014 Earnings Conference Call August 27, 2014 1:00 PM ET

Executives

Hélène Baril – Senior Director-Investor Relations

Jean Dagenais – Senior Vice-President, Finance, Taxation, and Investor Relations

Louis Vachon – President and Chief Executive Officer

Ghislain Parent – Chief Financial Officer and Executive Vice-President, Finance and Treasury

William Bonnell – Executive Vice-President, Risk Management

Diane Giard – Executive Vice-President, Personal and Commercial Banking

Luc Paiement – Co-President and Co-Chief Executive Officer, National Bank Financial; Executive Vice-President, Wealth Management

Ricardo Pascoe – Executive Vice-President, Financial Markets

Analysts

Robert Sedran – CIBC World Markets, Inc.

Mario C. Mendonca – TD Securities

Darko Mihelic – RBC Capital Markets

Gabriel Dechaine – Canaccord Genuity Corp.

Doug Young – Desjardins Capital Markets

Peter Routledge – National Bank Financial

Sumit Malhotra – Scotiabank Global Banking and Markets

Meny Grauman – Cormark Securities Inc.

Sohrab Movahedi – BMO Capital Markets

Steve Theriault – Bank of America Merrill Lynch

Operator

Good afternoon, ladies and gentlemen, and welcome to National Bank of Canada Third Quarter 2014 Results Conference Call.

I would now like to turn the meeting over to Ms. Hélène Baril, Senior Director, Investor Relations. Please go ahead, Ms. Baril.

Hélène Baril

Thank you. Good afternoon and thank you for joining National Bank’s third quarter 2014 results conference call. In a few moments, Louis Vachon, President and CEO will start the call with his opening remarks; then Ghislain Parent, CFO and Executive Vice President, Finance and Treasury will present the overall Bank performance, as well as the capital management review; his comments will be followed by the presentation of Bill Bonnell, Executive Vice President, Risk Management who will cover the Bank’s risk management section. Following his comments Jean Dagenais, Senior Vice President, Finance, Taxation, and Investor Relations will cover the business unit results. Then we will take your questions.

Please note that Diane Giard, Executive Vice President, P&C Banking; Ricardo Pascoe, Executive Vice President, Financial Markets; and Luc Paiement, Executive Vice President, Wealth Management will also be on hand to answer your questions.

Please also note that all documents referred to in today’s conference call can be found on our website at nbc.ca in the Investor Relations section. I would also like to remind you that a caution regarding forward-looking statements applies to our presentation and comments. over to you, Mr. Vachon.

Louis Vachon

Thanks, Hélène. Good afternoon and thank you for joining us today. In the third quarter of 2014, National Bank delivered record net income of $427 million on an adjusted basis, up 40% compared to Q3 2013. Adjusted earnings per share amounted to $1.20, up 12% year-over-year, credit quality remains solid with provision for credit losses of $49 million, up or 19 basis points.

Return on equity stood at 19.4% and the common equity Tier 1 ratio under Basel III was 9.1%. On a year-over-year basis, all three business units contributed to earnings growth with P&C reaching record level this quarter with solid volume growth and stable margin.

As for Wealth Management, results were in line with expectations with good organic growth and a contribution from recent acquisitions. Financial Markets delivered a great performance, benefitting from its solid pan-Canadian presence present and broad revenue diversification.

For the coming quarters, we expect the P&C segment to continue delivering good result as the Quebec economy is showing more positive signs. Over the last few months, the business climate has improved and economic activities increasingly driven by the private sector, where job creation is staging a comeback.

The 40,000 gain, private sector job gain reported in July was the best showing in three years. A revival in international trade on the back of a more competitive Canadian dollar and increased U.S. demand has resulted in Quebec’s exports, surging 7% in the three-month period ending June 2014, while the national average was up 5%.International trade is expected to contribute to GDP growth for fifth consecutive quarter, the best sequence in six years for the province.

All in all, we see Quebec real GDP expanding 1.9% in 2014, up from 1.1% in 2013. The outlook for the Quebec economy is being enhanced by the government’s commitment, the structural reforms in order to ensure sustainability of balance budgets. Tax reform and program review are set to be initiated in 2015 with the objective by making the promise more competitive, and that will allow a greater contribution from the private sector in economic development.

Furthermore, the ongoing strong merger and acquisition cycle should benefit the Financial Markets and the Commercial Banking segments as demand for loans, advisory services and risk management solutions increases from large corporate, as well as smaller commercial accounts. As of Q3 2014, CET1 stood at 9.1%. We target a Basel III ratio very close to, or at 9.5% before reactivating the common stock buyback program. In addition we will continue to review our dividend every other quarter.

On that, I will turn things over to Ghislain for the financial and capital review. Ghislain?

Ghislain Parent

Thank you, Louis, and good afternoon everyone. I invite you to turn to slide 5 to review the third quarter results. On an adjusted basis, total revenues amounted to $1.4 billion in the third quarter of 2014, up 11% from the same period last year, due to revenue growth in all three business segments. Net income amounted to $427 million, or $1.20 per share representing a 14% increase from the same period last year and a return on equity of 19.4%.

On a reported basis now, net income totaled $441 million in this quarter, or $1.24 per share, compared to $402 million, or $1.16 per share for the same period last year. During the quarter, the Bank recorded $34 million of net income to reflect the rise in the fair value of the restructured notes of the MAV. This was offset partly by acquisition-related items.

Now on slide 6, for the first nine months of fiscal 2014, adjusted net income showed double-digit growth on a year-over-year basis, reaching $1.2 billion, or $3.34 per share. This good performance is explained by strong revenue growth from all three business lines, good cost control and solid credit quality. Return on equity stood at 18.8%.

Turning to slide 7, in the third quarter, P&C banking and Wealth Management represented 70% of total revenues, while Financial markets stood at 25%. We are now showing Credigy in the chart due to its growing weight in the business mix with net reviews and net income contribution reaching 5% and 6% respectively.

I also want to underline the solid net income contribution in Q3 from Wealth Management, Financial Markets, and P&C banking, up 36%, 21% and 6% respectively. The net loss increase for the other segments was mainly driven by higher variable compensation costs and by expenses incurred for business development.

On Slide 8, for the first nine months of fiscal 2014, P&C Banking and Wealth Management represented 72% of total revenues. All business lines delivered solid revenues and net income increases year-over-year. Wealth management showed a largest net income increase at 40%, followed by Financial Markets and P&C banking, up 12% and 5% respectively.

Turning to slide 9, in Q3 2014, operating expenses reached $866 million, up 8% from the same quarter last year, essentially from higher variable compensation related to increased business activities across all segments. For the first nine months of 2014, operating expenses were up 4% year-over-year. On a net asset basis, National Bank posted a strong positive operating leverage of 3% in the first nine months of 2014. And our efficiency ratio improved by 140 basis points from last year to 58.6%. We continue to be strongly committed to maintain a tight control of our expenses and a positive operating leverage for 2014.

On slide 10 now, year-over-year lending activities remain strong with volume increasing by 8%, P&C and Wealth Management loans grew by 6%, while the commercial and corporate loans increased by 11%. on the funding side, deposits and BA sold were up 8% from the same period last year. Retail deposits from P&C and Wealth Management, as well as commercial and corporate deposits grew by 6%, securitization increased by 19% due mainly to cover bond issues since the beginning of this fiscal year.

Turning to slide 11, Base III core equity Tier 1 ratio reached 9.1%, up 42 basis points on a sequential basis, mainly due to net income. Risk-weighted assets stood at $64.7 billion at the end of July, a slight increase of 0.7% sequentially. This increase is mainly due to rise in corporate landing and client-driven derivatives, partially offset by decrease in market risk and retail models review. To conclude, we are very pleased with our results this quarter and we will continue to manage capital by keeping a sound and prudent balance between organic growth, acquisitions, and retuning capital to shareholders.

On this, I’ll turn the call over to Bill for the risk review.

William Bonnell

Thank you, Ghislain, and good afternoon, everyone. I invite you to turn to slide 13. Our credit portfolio composition remained unchanged from the third quarter of last year with personal banking and wealth management loans accounting for 67% of the portfolio. The commercial and corporate books represented 25% and 8% respectively. Our geographical mix also remained stable with two-thirds of their loan book based in Quebec, 19% in Ontario, and 15% in the other provinces.

The wholesale portfolio continues to be well diversified across sectors with no industry representing more than 16%. The retail portfolio mix shows that insured mortgages remained the largest asset in the book accounting for 34% of the portfolio. HELOCs and uninsured mortgages represent 26% and 18% respectively. The average loan-to-value for HELOCs and uninsured mortgages was approximately 58%. A geographical breakdown of the residential mortgage portfolio is provided on page 19 of the supplementary pack, where we can see that the largest share in the portfolio remains in Quebec, and mortgages in Toronto and Vancouver represented only 13% and 2% respectively.

Now please turn to slide 14. Credit quality remained strong with PCLs at $49 million or 19 basis points this quarter, compared to $48 million or 20 basis points in the same period last year. Retail banking PCLs amounted to $39 million or 28 basis points in line with the last four quarters. PCLs in the commercial portfolio accounted for $9 million or 13 basis points, down 2 basis points from last year. Looking ahead, financial conditions remain supportive of the stable credit environment and we maintain our target of 20 to 30 basis points for provisions over the next two quarters.

On Slide 15, we see that gross impairments amounted to $411 million slightly lower than last quarter. Impaired loan formations for the retail book were $20 million in line with the previous four quarters. Commercial formations were $2 million and we had no impaired loan formations in the corporate book. In the appendices you will find highlights of our market risk exposure. We registered only one day with net trading losses in the quarter with no trading VAR breaches.

In summary, we were pleased with the performance of the portfolio this quarter. And on that, I’ll turn things over to Jean Dagenais for the business review.

Jean Dagenais

Thank you, Bill, and good afternoon. I invite you to turn to slide 17 for the review of the personal and commercial banking segment. Revenues reached $696 million in the third quarter of 2014, up 5% on a year-over-year basis. Personal banking revenues amounted to $323 million, up 5% year-over-year mainly due to strong volume growth.

Commercial banking revenues reached $253 million, up 3% due to growth in loan and deposit volume and credit fees. On a year-over-year basis, credit card revenues generated double-digit growth at $91 million, as a result of initiative to promote card utilization. Insurance revenues amounted to $29 million flat from the same period last year.

Operating expenses were up by 4% from last year, resulting in the positive operating leverage of 1%. Provision for credit losses amounted to $48 million. Therefore, P&Cs net income reached a record level of $190 million up 6% from a year-ago.

Looking at the P&C key metrics for Q3 2014, loans and BAs continued to grow at a solid pace, up 6% on a year-over-year basis. The volume from deposits also showed good momentum rising by 6% compared to Q3 2013. Net interest margin remained unchanged sequentially at 2.24% and was stable over the last four quarters.

Finally, the efficiency ratio was at 55.7%, an improvement of 50 basis points from Q3 2013. Overall, the P&C segment continued to deliver strong volume growth, stable margins, solid credit quality, and good cost control.

Please turn now to slide 18 for the Wealth Management review. Revenues in the third quarter of 2014 amounted to $335 million, representing an increase of 15%, compared to Q3 2013, due to increases for all types of revenues, including the contribution from TD Waterhouse Institutional Services.

Fee-based revenues amounted to $170 million, up 17% from last year, while transaction and other revenues were at $86 million, up 10% year-over-year. Net interest income amounted to $79 million, up 16% from Q3 2013. On a year-over-year basis, operating leverage was at 7%, net income amounted to $75 million, up 36% from the corresponding quarter in 2013.

Looking at the Wealth Management key metrics for the quarter, loans and BA reached $8.3 billion, representing a 7% increase from last year, while deposit increased by 11% and totaled $24 billion. Assets under administration stood at $289 million, up $81 million, or 39% from last year, driven by the TD Waterhouse Institutional Services acquisition and good momentum in the corresponding network division. Assets under management increased by 23% to $48 billion, from solid mutual fund sales as well as stock market appreciation.

Now, I’d invite you to turn to slide 19, for the Financial Markets review. Financial market delivered solid revenue growth of 17% year-over-year, reaching a record level of $445 million, driven by higher time driven trading activity, which amounted to $191 million, up $15 million from last year, mainly from fixed income.

We also delivered a very strong performance in investment banking with an active new issue calendar and pickup in m&a impacting financial market fees, which grew by 38% to $94 million, while banking services rose by 16% to $64 million.

The Other segment was up $34 million year-over-year benefiting from a stronger contribution from Credigy. Operating expense growth was mainly due to variable compensation in line with revenue growth. For Q3 2014, financial markets delivered a record net income of $187 million, up 21% from the corresponding quarter of 2013.

Looking at the financial markets key metrics for Q3 2014, the CVA/DVA was a negative $10.8 million, linked to the strong client driven transactions, while we recorded a frustrating loss of $4.6 million. Finally, the efficiency ratio stood at 42.2%.

That concludes my remarks. I’ll turn the call over to the operator for the question period.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) The first question is from Robert Sedran from CIBC. Please go ahead. Your line is open.

Robert Sedran – CIBC World Markets, Inc.

Hi, good afternoon. Jean, on the Credigy, if I’m reading in the materials, I think it was some combination of general business growth, and possibly asset disposals as well. and I’m curious if you can give us a little bit more color in terms of how revenue emerges from Credigy like how lumpy the revenue tends to be and how that broke down this quarter?

Jean Dagenais

Okay. well, first, usually the revenue comes from collecting receivables that we buy portfolio and we collect the receivable, from time-to-time there is good opportunity and you can – probably can sell the portfolio instead of just collecting the amounts. So but usually the majority of the revenues are relatively stable and comes from the regular collection.

Louis Vachon

Ricardo, anything else to add?

Ricardo Pascoe

Yes. well it’s Ricardo. as Jean said, the strategy of the business is really buying portfolios, and then collecting, or liquidating to realize a steady growth. but once in a while, some of it will come and show surprise for portfolio that maybe exceeds our net present value expectation of collections. And when happens, we’ll sell portfolios opportunistically, we’ve done it already two or three times before and it’s not part of the final account, but it could happen again, in the future opportunistically. This particular portfolio we sold was actually in the Caribbean, unsecured assets in the Caribbean. so also our expectation for those assets was much lower than the buyer and we’d rather get a profit from that region of the world right now, so we took it.

Robert Sedran – CIBC World Markets, Inc.

So if I look at the delta between, if I look on slide 19 on other $97 million versus $66 million. is that a gain, or is there other stuff, or can you quantify that gain for us?

Ricardo Pascoe

Most of that is the sales portfolio.

Robert Sedran – CIBC World Markets, Inc.

Most of that is that sale. And Jean, in the consolidated financials that will be in the other line. is that correct?

Jean Dagenais

That’s correct. and you see about the same size of variation in that line.

Robert Sedran – CIBC World Markets, Inc.

Okay. And just one other quick question I think it’s another geography question. when I see a strong underwriting quarter like this, should I see an uptick in revenues in non-interest revenues in the wealth segment as well, and if not, why not?

Louis Vachon

Luc, we do get some benefit from underwriting, if there is more of an underwriting.

Luc Paiement

Sure. we had a good quarter on the issuance side. the distribution portion of the fees come to wealth.

Robert Sedran – CIBC World Markets, Inc.

So if I look sequentially at revenues in wealth, Luc, I don’t really see that benefit necessarily, is it just a question of other things being softer to offset on a sequential basis, because it was a very strong underwriting quarter?

Luc Paiement

Yes. the transactional business has been a bit slower in the quarter. so either the discount brokerage transaction, or even the full-service brokerage, the number of transaction and the price realization has been a bit under pressure, but got in part compensated by new issue business. So…

Robert Sedran – CIBC World Markets, Inc.

Okay. so the new issue business is in again, looking at that slide, it’s in the fee-based line, not the transaction and others?

Luc Paiement

No. it’s in the transaction.

Robert Sedran – CIBC World Markets, Inc.

Sorry, the underwriting – the underwriting revenue shows up in the transaction line?

Luc Paiement

That’s right.

Robert Sedran – CIBC World Markets, Inc.

Okay. Okay, thank you.

Operator

Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.

Mario C. Mendonca – TD Securities

Sorry, just a quick detailed question, card services revenue this quarter, a lot higher than we’ve seen it in the past. Was there anything in particular that happened there?

Diane Giard

It’s Diane, here. We had a very good success with several marketing campaigns and this had a positive impact on all revenue streams. so interchange revenues, annual fees and foreign exchange were all up because of the volumes.

Mario C. Mendonca – TD Securities

So all volume-related then?

Diane Giard

Yes.

Mario C. Mendonca – TD Securities

and then another sort of detailed question. Underwriting this quarter, obviously very good. We’re seeing this across the Group. Was there any particular transaction that may have accounted for, say, 10% to 15% of the total in the quarter?

Unidentified Company Representative

No. It was really just a steady flow of deals, a real pickup in the underwriting the underwriting calendar, but nothing – no, we didn’t – our target market is really, as you know, mid-market, $3 billion market cap and less.

Mario C. Mendonca – TD Securities

Yes, that’s why I asked the question. So nothing major then. Thank you.

Unidentified Company Representative

There was no $30 million M&A type thing, Mario…

Mario C. Mendonca – TD Securities

That’s exactly what I was asking. Thank you.

Unidentified Company Representative

Yes. There was nothing like that.

Mario C. Mendonca – TD Securities

Thanks.

Operator

Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead. your line is open.

Darko Mihelic – RBC Capital Markets

Hi, thank you. I wanted to actually just go back to the personal and commercial banking and all those marketing programs. I wonder if you can describe them in a little more detail for us, because as I look at the revenue growth quarter-over-quarter, it certainly doesn't match the balance of this growth. So it was particularly with credit card; I think it was mentioned that you had some initiatives to encourage card use. Could you maybe describe that for us and why we think that your customers will continue to use these cards at such high levels going forward?

Diane Giard

As I said before, I think there was this initiative for us to actually encourage usage, but there was also many initiatives to sell more cards and then sell additional cards externally, so to new clients, but also in cross-selling to our existing clients. As you know, the mortgage platform allows us to cross-sell at this particular interaction. and that has actually increased our ability to cross-sell then, and we’ve had terrific success in cross-selling to existing clients. But also our external campaigns have paid off. and as I said before, if you look at the metrics that we follow, the purchase volume has gone up. and so that obviously, has a push on – an uptick on interchange revenues. it also increases the annual revenues and lastly, foreign exchange revenues that we do as people spend outside of the country.

Darko Mihelic – RBC Capital Markets

and just a follow-up to that. I guess with these campaigns, typically – at least a lot of credit card campaigns often offer, I guess, loyalty reward programs upfront, which is sort of contra revenue. Is it the absence of those that we’re seeing now as well? So in other words, where we see in these campaigns in the earlier part of the year, clients are now – you’ve sold a lot of cards. They’re using the cards and you no longer have those large sort of payments made for one-time, I guess, loyalty reward programs.

Diane Giard

I’m not seeing anything that – what we – in terms of cards, again usage, the more cards you have the more spend you have. And if we look relative to our peers, there is more spend with our cards. And because we do sell a number of Platinum cards and World Elite, so the high-ticket cards, which helps us with the wealth clients where people spend more money. As far as the balance are concerned, again, the balance, the average balance per client may fall down, but because we have a higher number of card users, then the portfolio increases and generates more revenues.

Darko Mihelic – RBC Capital Markets

Okay. And then just lastly, is there any sort of seasonality here, any of these metrics, for Q3?

Diane Giard

In Q3, no. Not to – no.

Darko Mihelic – RBC Capital Markets

Okay. thanks very much.

Operator

Thank you. The next question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

Gabriel Dechaine – Canaccord Genuity Corp.

Good afternoon. Actually I have got a seasonality question as well. I guess cards would have been part of this; but if I go back over several years, Q3 non-interest income in personal and commercial looks like there is always a bit of a spike there. Is there anything that happens in particular in Q3 that causes that?

Diane Giard

Commercial fees has actually gone up and as you know we do a lot of renewals in Q3 and that may have an impact on seasonality. And that’s what we’ve experienced in this particular quarter. We did see an increase in volume for renewal as well as getting new credits on the books, and we see an uptick for commercial credit.

Gabriel Dechaine – Canaccord Genuity Corp.

Okay. So you would have had the normal seasonal thing, plus more activity, plus the cards. And than I guess that reduced just that number.

Diane Giard

Yes.

Gabriel Dechaine – Canaccord Genuity Corp.

Okay. Just a little question on the Wealth business here. The year-over-year growth has been phenomenal and a lot of that having to do with the acquisition. But if I look on a year-to-date basis, we are kind of in that $75 million, $76 million and it’s been pretty flat earnings for the first three quarters. And I’m wondering what – and we went through a whole deal of it on your Investor Day, but what’s in the cards for 2015 to maintain that momentum in that business, is there any pricing – are there any pricing actions you’re planning on taking in some of your businesses?

Unidentified Company Representative

We’re working or starting to work on the budget for next year. So we’ll be more precise soon on that, but they are still growing, in all of our business lines there is growth or get acquisition for next year, but we’re going to be coming with stuff at discount brokerage just about everywhere then their sale of mutual fund is starting to pick up and they have good momentum there. So it’s going to be all organic and you should be – you’ll see growth in there. Cornet, the NBCN business, we just conclude 100% of the assets have been transferred from the TV platform to ours, and we got 99% or some of the assets. So now we’re going to go Phase 2, is to cross sell and do more with these assets. Every line of business has a business plan with growth for 2015 and I would – the growth will be interesting.

Gabriel Dechaine – Canaccord Genuity Corp.

Okay. Thanks for that. And then, just my last one or actually last one on margin. We’ve seen in national and other banks after 2013 challenging NIM performance and Canadian retail banking. The most part margins have been pretty stable. And I think there is some anticipation that we start to see margins pickup potentially in 2015 and 2016 like what – how realistic is that outlook. Are we too optimistic possibly? Is the mix of asset growth and deposit growth becoming more conducive to margins increasing? Is competitive intensity lessening? Maybe share your thoughts on that please.

Louis Vachon

Gabriel, it’s Louis. I think the biggest issue or surprise frankly for the industry, in fact for the whole financial market has been the fact that rates actually lower. We had told people that Canada would grow 3% or 4%, the U.S. would grow 3% or 4%, the stock market would be up 15% in Canada, but rates would be 50 basis points lower. At the beginning of the year and I think anybody would have believed you, but that’s exactly what we’re facing today. I think the issue is – I think we’re working very hard to maintain margins, I think stable margins is probably the more likely scenario we see for now. For an increase in margins you would have to see higher interest rates and steeper yield curve than what you have got today. So I would say the lower interest rates we’ve had and the flattening of the yield curve over the last few months and interest rates in North America has made it, I think, harder for the industry to increase margins.

Gabriel Dechaine – Canaccord Genuity Corp.

Okay, thanks. Actually just one more; I lied. I missed the comment on the buyback. Are we still – like it's 9.25% core Tier 1, so are we looking maybe at the first half of 2015? Or still on the second half?

Louis Vachon

I said very close to or at 9.5%, so I am at 9.44%, we maybe tempted to start the buyback. In terms of timing, I think Q2, Q3 2015 on a normal basis should be when we would have that discussion again more seriously. Of course, that depends what happens with ABCP holdings, MAVs. If some of these assets can get after balance sheet and it could be sooner than that, but we’ll have to see.

Gabriel Dechaine – Canaccord Genuity Corp.

Okay.

Operator

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Your line is open.

Doug Young – Desjardins Capital Markets

Hi, good afternoon. Just a point of clarification on the Credigy; sorry if I missed it, I think there was a reference to something around the $97 million; and I don't know if it was the delta between the $97 million and the $63 million of other was 100% as a result of that – the sale of the portfolio. Sorry. Can you just clarify what that number was?

Unidentified Company Representative

It’s – most of the sequential growth in revenues from Credigy came from the sale of the portfolio quarter.

Doug Young – Desjardins Capital Markets

Okay, so 100% is sequential. Okay. Then just on the Wealth Management side, I just noticed that there was a tick-up in the efficiency ratio in non-interest expense. Just curious what that related to, whether that was – it seems like there is an increase in stock compensation or variable compensation across the sector. Just wondering if that was the driver, or if there was something else in the Wealth expenses this quarter?

Unidentified Company Representative

No, it’s mostly many small adjustments, one time adjustments here and there that did that. And we should get back under 69% next quarter. Nothing to read, nothing major to read with that number this quarter.

Doug Young – Desjardins Capital Markets

Nothing major. So – and under 69% is the target essentially?

Unidentified Company Representative

As I said at the Investors Day, yes.

Doug Young – Desjardins Capital Markets

Okay. Then just lastly, the other line, there was a sizable loss in the quarter. I think in the prepared remarks it was mentioned that it was due to the variable compensation and I am not sure what else. I am just wondering if you can give a little bit more color of what really drove the sizable loss in the other division.

Unidentified Company Representative

Well, essentially it was related to a variable compensation. Since the nine months results are better than we had budgeted, we had to readjust the internal program for the whole employees – the total employees of the Bank. So, so this is the more important amount in there.

Doug Young – Desjardins Capital Markets

And can you quantify what that would have been? Obviously this isn't the normal run rate for the other division. It is tough to model it out. Just wondering what we should be thinking about for that division.

Unidentified Company Representative

For the other division you mean?

Doug Young – Desjardins Capital Markets

Yeah.

Unidentified Company Representative

It was between $15 million and $20 million more expensive.

Doug Young – Desjardins Capital Markets

Okay. Great, thank you.

Operator

Thank you. The next question is from Peter Routledge from National Bank Financial. Please go ahead.

Peter Routledge – National Bank Financial

Hi, thanks. Louis, you refer to the master asset vehicle gains. Can you just give an outlook over the next two to six quarters, what you see coming from that portfolio?

Louis Vachon

Sure, Sure. Ghislain will answer that question.

Ghislain Parent

Peter, this is a Ghislain here. So essentially the positive impact that we expect in the MAV portfolio in the coming, I would say four to eight quarters, essentially it will come from two things. The first one is the remaining value increase and so we should – it should be spread over the next 18 months, I’d say. And the second thing is also the withdrawal of the assets from the balance sheet, so it’s going to reduce our risk weighted assets. So we expect this to attend, by the end of 2015 and probably first half of 2016. And so the impact of both items should be around 30 basis points. So it will increase our CET1 ratio by at least 30 basis points.

Peter Routledge – National Bank Financial

Okay, so actually if you could crystallize today I know you can’t, it would be 30 bps?

Ghislain Parent

Exactly, at least 30 bps, that’s a conservative estimate.

Peter Routledge – National Bank Financial

Yes, okay. Okay. Ghislain, one last question. The Other segment, removing the TEB adjustment, it seems like the net interest income drag was a bit higher this quarter. Is there anything unusual in that?

Ghislain Parent

It’s only treasury activities maybe a bit less than we had last quarter.

Peter Routledge – National Bank Financial

Okay, so just the contribution is less?

Ghislain Parent

Yes.

Peter Routledge – National Bank Financial

Okay. All right, that's it. Thank you very much.

Operator

Thank you. The next question is from Sumit Malhotra from Scotiabank. Please go ahead.

Sumit Malhotra – Scotiabank Global Banking and Markets

Thanks. Good afternoon. First question is for Ricardo, going back to Credigy. If I just think about the numbers this quarter, perhaps, compared to what you talked to us about at the Investor Day last year, the net income before tax number, if my math is right, looks like this quarter's result would have been essentially on par with what you did all of 2013. You have been very clear that this is a business that can be lumpy. But when I think about the targets or forecast you had given us for where this business could go out to 2017, do you believe that it is running ahead of schedule? Or was there – was it just a very specific issue this quarter that resulted in the gain?

Ricardo Pascoe

I think both. It is running ahead of our plan, or what we shared to you on Investor Day. This quarter was exceptional, so don't extrapolate this quarter for the next few. But overall, Credigy, just the fact that we split the contribution this quarter, we didn't think we were going to do that for at least a few more quarters, so that shows that that is really running ahead of our plan.

Sumit Malhotra – Scotiabank Global Banking and Markets

Well, that is something I was thinking about. Because I know you had talked about this in your view being a, let's call it, a higher multiple or a more stable component of the capital markets aggregate result; and I think you had expressed a view that if it got large enough perhaps it would be time to introduce it on its own. Do you feel that we are nearing that stage, with the business running ahead of schedule as you state?

Ricardo Pascoe

I’ll let Louis answer that.

Luc Paiement

Yes. I think the – I think Sumit we had at least 5% minimum of income contribution, I think it was the target. So that’s why at least in some of the documents you saw today we started reporting and it’s very close to that 5% in terms of having a fourth reported segment. So at least, is a step in the right direction. We are going to officially do that I think, we’ll probably review that at the end of Q3 – Q4 sorry and Q1 and see how we report our income for 2015, so we’ll have to see if the trend continues over the next few quarter on that particular segment. As I said, we remain optimistic. The other thing too we like about the business is that, as you can see, that segment is higher this quarter than it was a year ago; but a year ago we had $19 million of securities gains and we had none. So we have been preaching about diversification of sources of diversification of income and revenues within the capital markets business, and I think we have had another good example with investment gains being low and profiting weaker this quarter; and we have had some other businesses coming into step in. So the way we like to see it is really the diversification of all these businesses. And the fact that they are not perfectly correlated, I think that what gives pretty good results.

Sumit Malhotra – Scotiabank Global Banking and Markets

Let's stay in that business for a moment. Another part of the business that has been successful, even though the balance was down a little bit this quarter, has been your corporate lending initiative, which has grown quite quickly over the last few years. We've seen that from a few of the other banks, who have been quite candid in saying that corporate loan growth has played a big role in helping to broaden out investment banking opportunities and perhaps other components of fee income. Ricardo, I have a feeling your investment banking business is more Canadian-centric. Do you feel the loan book has played a big role in the expansion of the underwriting advisory fees? Or is it more specific to what is happening in equity markets?

Ricardo Pascoe

It has been a big part of our strategy, is to make sure that we focus our lending business to where we can drive ancillary revenues. Definitely driving new issue business and M&A, but also significantly driving a lot of hedging business. A lot of the trading revenues that you see from the derivatives business are really driven from our presence now from the loan side.

Luc Paiement

And if I may add, Sumit I mean that’s why I made the comments about the M&A, the merger and acquisition cycle in my opening remarks. Because that is – every day there is an announcement of major deals. And again, as you know, we don't have a global franchise, but we have a Canadian franchise; and there has been a significant pickup in M&A activity, given the fact you have had low growth. You have a low growth environment, but at the same time, you have corporates that are loaded with cash and pretty friendly capital markets. So what you have seen is a strong increase in transactions.

But it’s not only impacting positively our corporate and investment banking business. It is also having an impact in commercial, because you know we have discussed this for many years, but we have talked about demographics forcing many owners of small and medium businesses to look at their future. And we see that trend continue to accelerate. That certainly played even last quarter, when you look at our commercial numbers, Commercial Banking business, it did play a positive role on that front. So that M&A activity I think is fueling growth in commercial, corporate, and investment banking which is above and beyond what you would expect normally by just looking at the economic growth numbers in terms of GDP.

As long as that trend continues, and your guess is good as mine, but it looks, as you know in the previous past, every time you have had an M&A cycle it usually lasts a number of years. It is not a quarter or two quarter phenomena. It usually lasts a number of years, so everything else being equal, we are clearly not extrapolating the third quarter capital markets activity every quarter. But if the M&A cycle continues, that certainly creates a pretty positive environment.

Sumit Malhotra – Scotiabank Global Banking and Markets

And you were kind enough to leave out the fact that Canada is an income tax haven now. So that can only help going forward too, right?

Unidentified Company Representative

No, we are a doughnut haven. We are not – like I said, it all about the doughnut, not about the money.

Sumit Malhotra – Scotiabank Global Banking and Markets

Just kidding about that. Last question on a more serious note is for Bill Bonnell. Just wanted to make sure I understood slide 11 correctly on the change in the capital ratio in the quarter. So the RWA component, change in RWA at 7 basis points, so it was up 1% quarter-over-quarter, relatively low. I’m sure the sale of the MAV notes plays a part here in keeping RWA well contained. But just wanted to check with you as to whether there was any other moving parts in RWA, outside of just the normal-course movements in the balance sheet.

William Bonnell

Yes, thank you. I think as Ghislain mentioned, there was an impact from a decrease in market risk capital, the stress VaR being a bit lower. And there was also a regular model update that accounted for 9 bps. As you know, we review our models regularly and from time to time we also implement new models for portfolios that are currently using a standardized approach. These changes and these reviews can cause a positive or a negative impact on capital; and this quarter it was a positive impact of 9 bps.

Sumit Malhotra – Scotiabank Global Banking and Markets

Thanks for your time.

Operator

Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead.

Meny Grauman – Cormark Securities Inc.

Afternoon. Wanted to ask a question about market share trends in P&C specifically and in Quebec. It looks, if you look at the loan growth specific on the mortgage side, very good results relative to what we are seeing at some other peers. Wondering where you are getting that market share gains from. Are there certain players that it is more weighted towards?

Diane Giard

We do leverage our three distribution channels. And we managed very well the balance between margins and volumes. And so we are not just after gaining market share, but we do it reasonably and maintaining our margins. In Quebec, it went well. And we are also diversified, as you know. We are also lending outside of Quebec. So both have actually done really well in the past quarter, and it is trending as expected. On the retail side, we see growth decelerating slightly and commercial growth accelerating.

Meny Grauman – Cormark Securities Inc.

In terms of – in the Quebec market, is there a particular player that is losing share when you look at the environment? Or like in terms of the market dynamics, is there something that’s changing there? Or is it just sort of normal course and there is not really one specific thing to point to?

Diane Giard

Well, you know, we have – there is a main player of credit union here that’s well established, and this being our main competitor. And we do play head to head again this major competitor. And again, as I said, we are not doing things foolishly and I'm not just after gaining market share. I will do it at a reasonable price; and sometimes we just let deals go, and that may affect our market share. And then let them gain market share if they want to do it by buying the market. And sometimes we are ahead of them; sometimes they are ahead of us. But we are managing our margins very, very rigorously.

Meny Grauman – Cormark Securities Inc.

Thank you very much.

Operator

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi – BMO Capital Markets

Good afternoon. Just a couple of cleanup questions. I am sorry if I have to go back to this, going back to an earlier question Darko asked about the initiatives to promote card utilization. I think a lot of the color you provided talk to the number of cards being issued. But I missed what was driving higher utilizations.

Diane Giard

What we – again, we had marketing campaigns that were – some campaigns were targeting external markets and non-clients, other campaigns and third-party partners that we have. And then we have cross-sell abilities that have improved within our own branches and so forth. And also we do have an offer with our Wealth management clients that have been promoted through the quarter. And all that increased volume has implication, or has a positive impact on three revenue streams in non-interest revenues.

It is interchange revenue, annual fee revenues and also foreign exchange revenues. And so this has on top of having interest income, as one would expect from balances that are carried on the card.

Louis Vachon

One visible example is we – if you’ve been to the Montreal Airport, the Dorval Airport, for the last 12 months, we’ve had with World Elite MasterCard, we’ve opened up a lounge in the international section of the Montreal Dorval airport. So if you are a MasterCard national bank holder, you have free access to a very nice travelers lounge at the airport. Something in the past, we’ve never done, we’ve not invested a lot in upscale credit card marketing for platinum and World Elite types.

So I am very happy to see increased income because we certainly saw the increase income, because we certainly saw the increase in expense of that lounge for last 12 months. So it’s one of the examples and the focus we’ve had has not been on smaller, less wealthy holders of cards that will increase their credit card balance. All our focus over the last few years, most of our focus, has been on premium, platinum and World Elite cards. so we’re quite happy to see that finally paying off.

Sohrab Movahedi – BMO Capital Markets

Okay. Just a couple of other cleanup items, you talked a little bit about the outlook for Financial Markets and the importance of the corporate lending book to that. How RWA-intensive is corporate lending for National?

Louis Vachon

The way it is for the larger – the larger the corporate deals, the less intensive it is, in a sense. And I can give the example of a deal that was announced yesterday. A lot of deals on terms of the corporate loans, many of them are bridge to equity, or bridge to debt. So the larger accounts, as you know have access to capital markets. You keep – the typical deal now for even BB or BBB higher is, you use the balance sheet to do a bridge for the loan.

usually, a good portion of loan – the bridge loan is taken out very quickly, either by an equity new issue, either simultaneously to the announcement, or shortly thereafter, and then usually, their bond issues that come after that. and then what you are left with is either, a margin, an operating line of credit or a term loan. But a lot of the fee income, a lot of the income is generated by capital markets takeout. and then on the top of that, with higher leverage on the balance sheet, they’re usually more interest rate, active interest rate management of that debt. And that generates income also in terms of risk management.

So when you look at all that, you look at the average – and we have not invented this, I mean the whole Street does it the same way. You end up with a stream of different types of revenues, which for the average risk-weighted asset is pretty damn high.

Sohrab Movahedi – BMO Capital Markets

Right. And Louis, I mean just the fact that you tend to focus more on the mid-market space.

Louis Vachon

Yes.

Sohrab Movahedi – BMO Capital Markets

does the math change materially from an RWA-intensity perspective?

Louis Vachon

No, because our definition of – I mean still today I think many of – most of our midsize accounts have access to the equity markets, most of them are listed. Some will have access to the debt market, others won’t. And those that don’t and what we do is we end up syndicating the loan facility. And therefore, that’s how you keep also the risk-weighted assets and the risk under control in these types of situations. So generally, compared to what the business was 20 years ago, you have more developed capital markets, more developed debt markets, more developed syndicated loan markets than you did 20 years ago.

Sohrab Movahedi – BMO Capital Markets

Okay. Just one last question, just trying to get a sense of, really the sustainability of the trading revenue. Your daily trading VaR chart shows that there was one outsized day. Does that contribute to that particularly strong quarter, and if I just visually look at that and remove it? I mean is that indicative of the types of revenues you would expect over the next little while from your trading activities?

Louis Vachon

No, no.

Ricardo Pascoe

No, I think, clearly it was an outstanding quarter from a trading revenue point of view, and maybe slightly about trend. but if you look at that same chart, yes, you know it was the one day, the one outsized day, but there were seven days of the month where we have trading revenues of over $8 million. So what you see I think is again, the effect of driving all the hedging business through our lending capital market activities are resulting in really substantial transactions now on a much more regular basis.

Sohrab Movahedi – BMO Capital Markets

Okay. Thank you very much.

Operator

Thank you. The next question is from the Steve Theriault from Bank of America Merrill Lynch. Please go ahead.

Steve Theriault – Bank of America Merrill Lynch

Good afternoon. Just a couple of questions. First, for Ricardo, I was a bit surprised to see prop trading negative this quarter. I typically thought of that revenue line as generally pretty positively correlated to the market. So can we get just a little more detail on what went on this quarter?

Ricardo Pascoe

Sure, Steve. It actually hasn’t been a great environment for prop trading if you are focusing on non-directional trading, if you are doing relative value. Some of the things that we have exposure to, we’ve been long volatility for a while, and that hasn’t been working well. And we have some relative value equity portfolios that had exposure to European banks and we had the events in Portugal that affected us on the sector. So it’s really more isolated since like that.

Steve Theriault – Bank of America Merrill Lynch

Has there been any tendency on your part to want to reduce capital, or I guess, expand it for that matter, in the prop trading, or you are fine with the status quo?

Ricardo Pascoe

We have less capital deployed right now and we had historically and as long as we continue to see it as a non-great environment for the kind of returns that we want, we probably will not significantly increase the capital deployed there.

Steve Theriault – Bank of America Merrill Lynch

Less historically: less relative to last year, or less relative to several years ago?

Ricardo Pascoe

Well, even last year. Yes.

Steve Theriault – Bank of America Merrill Lynch

Yes, okay. And then I just had one more. Not to beat a dead horse on credit cards, but I just want to make sure I’m perfectly clear for Diane. You mentioned a lot of marketing initiatives and a number of things; but I just want to make sure. Are there – were there any increases to fee structures of any kind in the cards business, and I saw that at one of your competitors this quarter, so I was just curious as to if there was any changes in pricing at all?

Diane Giard

Nothing. no, nothing in this quarter.

Louis Vachon

But we have something announced that will impact in next year, right?

Diane Giard

That’s right, next year. In terms of rate, the interest rate, which would affect the – which would have affected this year, we’ve increased the interest rate, which would affect the interest revenue, but not the non-interest revenue.

Steve Theriault – Bank of America Merrill Lynch

Got you, yes. That would be effective November or January?

Diane Giard

We did that – we did some of that this year and there is also something that we will do in the course of next year that will affect people that are in collection. and it will be basically just a risk adjustment for interest rates, which will be effective next year.

Louis Vachon

Effective November 1, right?

Diane Giard

Right.

Louis Vachon

Yes, so that will be effective November 1, Steve.

Steve Theriault – Bank of America Merrill Lynch

Okay. thanks so much.

Louis Vachon

Yes.

Diane Giard

Thank you.

Operator

Thank you. The next question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

Gabriel Dechaine – Canaccord Genuity Corp.

I am going to beat two dead horses here. The Credigy, is this $30 million revenue pickup, is there an expense associated with that, or would that be the pretax amount that really we should be looking at?

Louis Vachon

I wish there were no expenses. Ricardo?

Ricardo Pascoe

No, there was the – I think the figures are $23 million revenues and $18 million pretax.

Gabriel Dechaine – Canaccord Genuity Corp.

Sorry, $18 million pretax?

Ricardo Pascoe

Correct.

Gabriel Dechaine – Canaccord Genuity Corp.

Okay. Okay. And then the cards, just to go back to this annual fee stuff for example. Like a lot of banks are waiving annual fees to gain market share, so what you are saying is you have been able to pick up share without waiving annual fees? Or was this the result of some promotions you had on last year that people are actually renewing the card this year and paying the fee?

Diane Giard

No, actually our marketing campaigns are actually on offering a lesser of interest rate, on the interest rate on the new cards. and we make the transfer – facilitate the transfer.

Gabriel Dechaine – Canaccord Genuity Corp.

Okay.

Diane Giard

We’ve been able to see a pickup year-over-year in terms of annual fees, this quarter as well as year-over-year, cumulative.

Gabriel Dechaine – Canaccord Genuity Corp.

So you have a – sorry, low transfer, a low…

Diane Giard

Lower transfer fees and interest rates, and favorable interest rates for people that do carry balances.

Gabriel Dechaine – Canaccord Genuity Corp.

Okay. But is that the stuff that you are hiking the rates on next year?

Diane Giard

No.

Louis Vachon

No.

Diane Giard

No, no, no, no…

Louis Vachon

That’s for other non-performing or subperforming accounts.

Gabriel Dechaine – Canaccord Genuity Corp.

Is that going to be a big item potentially for revenue?

Diane Giard

No, I don’t think that will be significant and don’t thin you should model it.

Gabriel Dechaine – Canaccord Genuity Corp.

All right. Thank you very much.

Operator

Thank you. The last question is from Darko Mihelic from RBC Capital Markets. Please go ahead. your line is open.

Darko Mihelic – RBC Capital Markets

Thank you. Maybe a last question, for me anyway, for Louis. You mentioned the buyback, pinning it to very close to 9.5%. My question is, is there any other regulatory ratio or anything else that would be a constraint on the buyback or anything we should think about as we head into the new year that may or may not?

Louis Vachon

No. that’s the only one I think we are very comfortable with our leverage ratio. and so that’s the only one that’s really the 9.5, everything else in line, Darko.

Darko Mihelic – RBC Capital Markets

Okay, that sounds great. Thanks very much, guys.

Louis Vachon

You’re welcome.

Operator

Thank you. There are no further questions registered at this time, I would now like to turn the meeting back to Mr. Vachon.

Louis Vachon

Thank you, all and we’ll talk to you next quarter. Thank you very much for your time. Bye-bye.

Operator

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

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