National Bank of Canada's (NTIOF) CEO Louis Vachon on Q1 2017 Results - Earnings Call Transcript

| About: National Bank (NTIOF)

National Bank of Canada (OTCPK:NTIOF) Q1 2017 Earnings Conference Call March 1, 2017 1:00 PM ET

Executives

Linda Boulanger - Vice President, Investor Relations

Louis Vachon - President and Chief Executive Officer

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

Bill Bonnell - Executive Vice President, Risk Management

Jean Dagenais - Senior Vice President, Finance

Diane Giard - Executive Vice President, P&C Banking

Martin Gagnon - Executive Vice President, Wealth Management

Denis Girouard - Executive Vice President, Financial Markets

Analysts

Meny Grauman - Cormark Securities

Steve Theriault - Eight Capital

Gabriel Dechaine - National Bank Financial

Sumit Malhotra - Scotia Capital

Nick Stogdill - Credit Suisse

Mario Mendonca - TD Securities

Sohrab Movahedi - BMO Capital Markets

Darko Mihelic - RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen and welcome to National Bank of Canada First Quarter 2017 Results Conference Call. I would now like to turn the meeting over to Ms. Linda Boulanger, Vice President of Investor Relations. Please go ahead, Ms. Boulanger.

Linda Boulanger

Good afternoon, everyone and welcome to the National Bank investor presentation for Q1 2017. My name is Linda Boulanger and I’m Vice President of Investor Relations for the bank.

Presenting to you this afternoon are Louis Vachon, President and CEO; Ghislain Parent, CFO and Executive Vice President, Finance and Treasury; Jean Dagenais, Senior Vice President, Finance; and Bill Bonnell, Executive Vice President, Risk Management. Following their presentation, we will open the call for questions from analysts.

Joining us for your questions are Diane Giard, Executive Vice President, P&C Banking; Martin Gagnon, Executive Vice President, Wealth Management; and Denis Girouard, Executive Vice President, Financial Markets.

Please note that all documents referred to today are available on our website. I would also like to remind you that a caution regarding forward-looking statements applies to our presentation and comments.

With that, let me now turn the meeting over to Louis Vachon.

Louis Vachon

Thank you, Linda and thank you everyone for joining us today. In the first quarter, National Bank achieved very good results with adjusted net income of $502 million, up 18% from last year. Our performance was mainly driven by solid revenue growth and effective cost management across all business segments. This translated into strong operating leverage of 4% and a 210 basis points improvement in our efficiency ratio for the quarter. Return on equity was a solid 18.6%. We ended the quarter with a strong capital position. Our common equity Tier 1 ratio increased to 10.6% compared to 10.1% at the end of fiscal ‘16. Credit quality remains strong in our overall portfolio and we continue to benefit from good economic conditions in Central Canada.

Now, let me share some highlights from our business segments. In the first quarter, our P&C segment had a strong performance with a net income of 18% driven by good volume growth and tight cost control. Numerous efficiency initiatives deployed in 2015 and 2016 are starting to payoff and we are accelerating further deployment in 2017 and beyond. This will translate into continuous optimization and transformation of our cost structure as well as enhancement of our customer experience to better position ourselves for long-term growth.

Wealth management had a very strong performance with net income up 26% driven by strong organic growth, favorable market conditions and cost reductions. Our full service brokerage channel had a particularly strong quarter, reflecting the positive impact of an evolution in the business model. This segment’s success is based on the strength of our client relationships and our distinctive open architecture model. Financial Markets also had a strong quarter with adjusted net income, up 23%. All areas of the business contributed to this performance as we continued to benefit from our diversified business mix and focus on client-driven activities. As mentioned last quarters, we are enhancing our focus on large corporate clients across the country while strengthening our leadership with mid-market clients.

This quarter, we created a fourth reporting segment named U.S. Specialty Finance and International to provide the investment community with greater transparency on our operations outside Canada. This new segment mainly includes Credigy, our U.S. consumer specialty finance subsidiary and ABA Bank in Cambodia and accounted for 7% of our first quarter net income. Both businesses performed according to plan during the quarter and remained well positioned to generate strong growth and solid returns.

While our U.S. and international activities are growing at an attractive pace, National Bank remains primarily focused towards Canada, which is expected to grow at a higher rate this year than compared to last year. The Québec economy, in particular, is showing strong momentum, with very good employment growth, budget surplus and very large investments in infrastructure. For the rest of the year, we will continue to be focused on executing our plants in each business segment as well as executing our transformation. As communicated before, we have a clear roadmap for the deployment of major initiatives to drive significant efficiencies and stimulate tangible business growth opportunities in response to the rapidly changing competitive and technological landscape in our industry.

Now, let me reconfirm our capital deployment strategy. Number one, continue to increase our Tier 1 ratio, which is currently at 10.6%; number two, to invest to stimulate business growth in our core markets; number three, invest to capture significant efficiency gains and generate operating leverage above 1% for 2017; and number four, return capital to our shareholders by maintaining dividend growth. As usual, we will provide an update on our dividend policy next quarter. In addition, over the next few months, we expect to reactivate our share buyback program, so that we are in a position to repurchase common shares once our CET1 ratio is above 10.75%.

To wrap up, I am pleased with our first quarter results. We ended the quarter with a strong capital position, while delivering industry leading returns. Each of our business is growing and the entire organization is focused on efficiency and cost management. We are executing our transformation, which is generating tangible results. I am confident that we have the right strategies in place to continue to deliver long-term value to our shareholders, given our leadership in our core markets, our clear capital deployment strategy and our strong execution capabilities.

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

Ghislain Parent

Thank you, Louis and good afternoon everyone. Please turn to Slide 6, which provides our key financial performance metrics for the quarter. On an adjusted basis, we achieved the strong first quarter with diluted EPS of $1.35, up 15% from a year ago. Revenues were up 12% compared to the same quarter last year, reflecting strong performance in all major business segments. Although expenses were up 8%, actual increase was only 3% when excluding growth in variable compensation related to higher revenues and expenses related to ABA, which were not consolidated in Q1 2016. Adjusted net income amounted to $502 million for the quarter, up 8% from last year. Return on equity was solid at 18.6%. On the reported basis, EPS was strong at $1.34 and doubled from the same quarter last year due to the one-time loss from Maple Bank in 2016.

Turning to Slide 7 for a segment snapshot. Our solid results in Q1 reflect the strength of the diversification of our business model. Our major business segments generated double-digit growth during the quarter. The 18% adjusted net income growth in P&C was driven by revenues up 4%, very good cost management with expenses down 1% and PCL down 16% from last year. Adjusted net income growth of 26% in wealth management and 23% in Financial Markets were driven by higher client activity, favorable market conditions and good cost control.

Turning to Slide 8 for an update on efficiency. Over the last 2 years, the bank recorded two restructuring charges to accelerate the bank’s transformation in order to achieve greater operating efficiency and meet the changing needs of our clients. I am pleased to report that the bank is on track to deliver expected savings of $135 million in fiscal 2017. As reported in the previous quarter, approximately $100 million of those savings are resulting from the charge we recorded in 2016 and $35 million from the one in 2015. On the cost side, many initiatives are already well advanced and are producing tangible results with the following focus: First, reducing our costs by simplifying our structure and product offering and optimizing our branch network; second, transforming our requests through automation and digitization of our processes across the bank. These strategic efforts are contributing to the improvement of the efficiency ratio and will position the bank for long-term growth. For the first quarter, the bank’s efficiency ratio improved by 210 basis points to 56.5%, reflecting strong revenue growth and effective cost management. Management continues to be highly committed to maintain tight control of our expenses. With the execution of our transformation, we are confident that we will continue to improve our efficiency ratio across all segments of the bank. In P&C Banking, for instance, we are on track to meet an efficiency ratio of approximately 54% for fiscal 2017 and 53% for fiscal 2018, well in line with the guidance provided during the P&C Investor Day in 2015.

Turning to Slide 9 for a capital overview, the bank CET1 ratio reached 10.6% at the end of the quarter, up 54 basis points on a sequential basis. The improvement in the CET1 ratio resulted essentially from strong internal capital generation, common share assurance under the stock option plan and the impact of the long-term interest rate increase on the pension plan liability. In addition, during the first quarter, the restructuring notes of the MAV conduits have been fully repaid, which had a positive impact of 9 basis points to our CET1 ratio. This final repayment marks the end of the successful restructuring of ABCPs in Canada under the Montreal accounts. Those elements are probably offset by higher risk-weighted assets, which reduced our CET1 ratio by 26 basis points, mainly as a result of business activities, higher market risk and partly offset by lower currency risk. We are satisfied with the 54 basis points improvement to our capital position during the first quarter and we continue to be focused on increasing our capital ratios.

All that, I am turning the call back to Jean for the business segments review.

Jean Dagenais

Good afternoon, everyone. Turning to Slide 11 to review the Personal and Commercial Banking segment, revenues were $755 million in the first quarter of 2017, up $31 million or 4% from the same period last year due to volume growth and stable earnings. Personal Banking revenues at $349 million were up $7 million year-over-year due to strong loan and deposit growth of 6% each. Commercial Banking revenues actually the oil and gas book were up 3% year-over-year at $252 million due to a 5% increase in loan balances, excluding the oil and gas portfolio and a 19% increase in deposits. Revenue from the oil and gas sector were down 26% to $14 million due to lower activity for smaller producers. The current economic environment is more favorable to large producers, which are serviced by the financial market sector.

Credit card revenues at $97 million increased $6 million or 7% from Q1 2016 due to higher balances, improved loan margins and increased fee revenues. Insurance revenues amounted to $43 million compared to $27 million for the corresponding quarter of 2016 due to higher premiums and a $12 million gain following a change in the distribution model for property and casualty issuance. Operating expense at $412 million were down 1% from the same period last year due to efficiency initiative. The operating leverage for the quarter stands at 5%, improving the efficiency ratio by 290 basis points to 54.6%. The provision for credit losses amounted to $52 million, down 16% year-over-year due to the good credit quality for both retail and commercial loan portfolios. Overall, P&C’s net income was $213 million in Q1 of 2017, up 18% year-over-year.

Please turn now to Slide 12 for the Wealth Management segment. Revenues increased by 11% to $399 million year-over-year mainly due to a strong 17% increase in net interest income attributable to our balances and a 12% growth in fee-based revenue due to strong market conditions. Expenses were up 5% to $255 million due mainly to variable compensation, generating a 6% positive operating leverage. The efficiency ratio was at 63.9%, a 430 basis points improvement on a year-over-year basis. The quarter’s adjusted net income was about $100 million for the first time at $106 million, up 26% from the corresponding quarter in 2016. The key metrics show strong growth for deposit of 19%, asset under administration of 17% and asset under management of 18% due to both organic growth and favorable stock market.

Now I invite you to turn to Slide 13 for the Financial Markets review. Revenues increased 20% compared to the same period last year from all major business activities. Trading revenues were $254 million this quarter, up 18% from the same quarter last year due to increases in equity and fixed income trading. Banking services revenues increased 13% to $81 million due to a 9% growth in corporate loans and BAs and higher deposit margins. Financial Markets fees were 44% higher to $72 million from increased activity in both equity and debt capital markets. Gains on security were $9 million in the quarter compared to $1 million last – in Q1 2016. Expenses at $170 million were up 18% from the same quarter last year mainly due to higher variable compensation, in line with revenue growth. The efficiency ratio stands at 40.6% for the quarter compared to 41.4% in Q1 2016. Finally, Financial Markets net income for the quarter increased by 23% at $183 million.

Turning now to Slide 14 to review the new U.S. Specialty Finance and International segment, considering that ABA was acquired in a third quarter of 2016, the year-over-year comparison is less meaningful, therefore I will comment sequential growth. However, as a reminder, in Q1 of 2016, Credigy benefited from favorable collection revenues as well as revenues from a newly acquired portfolio, which has been partially repaid since then. Globally, for this segment, Q1 2017 revenues amounted to $180 million, up 9% sequentially due to strong growth for both Credigy and ABA stemming from a loan balance growth of 4% and 9%, respectively. Expenses were down $10 million sequentially to $56 million for the quarter due to additional collection expenses incurred by Credigy in the previous quarter. Provision for credit losses at $7 million in Q1 2017 were in line with expectations. And finally, the net income for this segment stood at $38 million compared to $21 million for the previous quarter.

I will now turn the call back to Bill for the risk management.

Bill Bonnell

Merci [ph], Jean and good afternoon. I invite you to turn to Slide 16 for an overview of our loan portfolio. Retail loans grew to $79.4 million representing 62% of the total loan book. Our product mix is heavily weighted to secured lending, with only $10 billion or 8% unsecured loans and credit cards. Wholesale lending accounts for a 38% of the total loans and is well-diversified across industrial sectors. Looking at the regional distribution of our Canadian loan portfolio on Slide 17, we can see that more than 81% of the portfolio is in Central Canada, which continues to benefit from stable economic conditions. The oil region accounts for less than 10%, with the majority being in secured retail lending and with limited exposure to the unsecured retail and commercial segment.

On Slide 18, additional details of our Canadian retail mortgage and HELOC portfolio are provided. Insured mortgages represent 48% of this portfolio, which remains heavily weighted in Quebec and Ontario. Loans in Alberta represent 8% of the total, with two-thirds being insured. British Colombia represents 7% and has 60% insured. The average LTV of the uninsured and HELOC portfolio remains stable at 59% and ranges from 48% in BC to 66% in Alberta. Credit performance in the portfolio remains strong with PCLs in the low single-digits.

Turning to Slide 19, gross impaired loans totaled $442 million, a decline of $50 million from last quarter and account for 35 bps of gross loans. Retail formations were stable year-over-year at $23 million and both the commercial and oil and gas sectors benefit from repayments during the quarter. There were no formations in the corporate and wealth management portfolio.

Turning to Slide 20, credit performance remained strong in the first quarter with provisions for credit losses of $60 million or 19 basis points. Retail PCLs amounted to $37 million or 23 basis points, stable from last quarter. Commercial PCLs were $15 million or 20 bps, a decrease of 3 bps from Q4.

Details of provisions in our new reporting segment are provided and were in line with our expectations, with Credigy registering $6 million and ABA $1 million in the quarter. There were no provisions registered in Financial Markets and there were no transfers from the sectoral provision during the quarter. We revalue the adequacy of the sectoral provision each quarter and are comfortable we are well provisioned at $204 million. We will review it again next quarter. We maintain our 20 to 30 basis point target range for the next two quarters. If economic conditions remain stable, we would expect to stay around the lower end of that range. In the appendices, you will find highlights of our market risk exposure, trading VaR average $7 million during the quarter and we experienced 3 days of losses in the trading book.

And now, I will turn things over to the operator for the Q&A.

Linda Boulanger

Operator, we are ready for the question period.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] The first question is from Meny Grauman from Cormark Securities. Please go ahead. Your line is open.

Meny Grauman

Hi, good afternoon. I have a question on credit, specifically the oil and gas sectoral. I am wondering what you would need to see before you consider reversing that sectoral, what indicators or other metrics do you use to judge that?

Bill Bonnell

Thanks, Meny. It’s Bill. I just want to remind you that when we established the sectoral, we wanted to be prudent in terms of the size and it’s not something that you want to do twice and we want to remain prudent in our evaluation. Certainly, as the size of the portfolio declines and the risk profile improves, we are very comfortable that it is adequate. We do review the valuation every quarter and we will do so next quarter and determine if it’s appropriate to release or not next quarter.

Meny Grauman

Okay. And then if I could just ask in a different line you changed the distribution model for P&C insurance and I am wondering why you decided to make that change and what the implications are specifically for revenue going forward?

Diane Giard

Its Diane here, Meny. Thanks for the question. The reason why we did it is we needed to invest in technology to really be at par with the industry and something that we decided not to do. But what we did do is expand the relationship with Intact and we went from a joint venture to a white-label agreement. So with the customers, it’s really transparent when we are still using our brand to deliver and sell insurance, P&C insurance to our clients. Now, the benefit to us is that we will be increasing the commission based revenue as a result of two things. First is the enhanced client experience and also the gradual expansion also to Québec and the reason why I would say expanded or enhanced client experience is for two things. Number one is better technology, so have access to whatever policy you have online and second is a much better risk assessment and risk appetite from Intact. Benefits to client, as I said, they will definitely have competitive offers and definitely for our employees that all employee there, they have a career opportunity within the P&C insurance.

Meny Grauman

So, would you be able to quantify the revenue impact of the change? I don’t know if you mentioned it, but...

Diane Giard

Well, we have – it really depends on how much more we can sell, but we can anticipate – I mean, those are small numbers. I don’t think it will be materially impactful for P&C, but I would anticipate our premium that would go up about 5%.

Meny Grauman

Thank you.

Operator

Thank you. The next question is from Steve Theriault from Eight Capital. Please go ahead.

Steve Theriault

Thanks very much. I had a question on wealth management, but Bill, just to start, wondering did you get through the resolution processes, you indicated last quarter that they would take a few months to get through or is that still ongoing? And is that what may or may not be holding up any sort of reversal in the oil and gas sectoral?

Bill Bonnell

Thanks, Steve. You will have seen that there were some repayments during the quarter, during Q1, so we did have some files resolved. There are certainly a couple of files, which are still stretched and we expect some further resolution during Q2. And as I said, we will reevaluate at the end of Q2.

Steve Theriault

Okay, okay. Thanks for that. And then for Martin, the wealth management efficiency ratio had a huge improvement this quarter, pretty obviously. Is there anything one-off in the decline? And I guess how sustainable is an efficiency ratio in the range of where it was this quarter?

Martin Gagnon

No, this is part of the transformation of the bank, so wealth management embarked on this like any other units and it started last summer, the planning for this and we are really seeing the fruits of this with the results. However, it was a very good quarter. We had budgeted for slightly higher than this. And what’s sustainable is probably slightly under 65% is kind of what we are looking at.

Steve Theriault

Okay. Then maybe related on the expense side, you have got – I think we have the guidance of $135 million run-rate saves for this year. How much of that was in Q1? And was the disproportionate amount of it maybe in the wealth business this quarter?

Ghislain Parent

Yes, Steve, this is Ghislain here. Well, we are very comfortable about the $135 million, as I said, in my previous remarks. And well, basically, we are going to obtain the benefits throughout the year. So, Q1 was a good quarter and we expect also the other quarters to be good on that front.

Steve Theriault

But it wasn’t particularly chunky or front-end loaded into the first quarter at all?

Ghislain Parent

Sorry, I didn’t hear the question. I am sorry.

Steve Theriault

No. Just to the $135 million that you expect to realize by year end, I guess another way of framing it, is it safe to say that about a quarter of that is in the run-rate now? Are you any further ahead than that?

Ghislain Parent

I would say about it. I would say anywhere between 20% to 30%.

Steve Theriault

Okay. And then lastly for Louis just on capital, you were pretty reported your guidance on the buyback there. But you said last quarter I recall that you would be more generous on dividend increases once you get back to the mid-10s in that range of CET1. So, is that still the plan and did you give any consideration to raise the dividend this quarter given the upside to capital and the small increase you had last quarter, are you pretty hard and fast that you want to only look at it every other quarter?

Louis Vachon

Yes, Steve. For the first question, yes and I think we do want to keep the same schedule we have had on the dividend. And it’s one thing we have been predictable on. And I think we want to remain predictable on the timing being in the second and fourth quarter of the year. So, I reiterate what I said, I think we are in a better position to be a bit more generous in our increases in dividend. Of course long-term, it all be dependent on ultimately on the increase in earnings, but we are definitely in a position to be a little bit more generous. And I think the 10.50% is quite clear. I think we want to, as possible, remain above 10.75%. And as long as we can remain above 10.75% on the CET1 ratio, I think we’ll be in a position to do buybacks to the extent that again the number one priorities is always to fund organic growth. So that will be the number one. But to the extent we still have plenty of capital and we expect to – we will to fund organic growth and to stay above 10.50%, then we would certainly look to buyback initially the shares that we issued under the stock option plan over the last few years when we stopped doing the buyback. And hopefully one day buyback the shares also that we have to issue in October of 2015.

Steve Theriault

And sorry last thing then just to follow-on to that. The 10.75%, is that a number that you have in mind given some of the capital uncertainty with respect to hopefully what stores the rule changes on capital or like is that – what’s – I guess what I am trying to ask is once that uncertainty clears, does that 10.75% go lower or do you that’s the number that is sustainable through time?

Louis Vachon

That’s – I think that’s a number that’s sustainable over time. I think we will see. I think we don’t have any special insight as to what could happen in terms of Basel 3.5 or whatever else, I think we read the papers just like the way you do. Probably the – probably Bill, these are something harsh happening and probably – has probably declined over the last six months. That being said, I think there is not a huge amount of science Steve, in this. I think we want to say above 10.5% and we have seen orders in the past where we have had surprises by market movements or on the pension plan, on AFS or other things by 25 bps, so 10.5% plus 25, it’s 10.75%, so we feel that is a comfortable target for the mid-term, above which, we should be able to do buyback.

Steve Theriault

Thanks. That’s clear. Thank you very much.

Operator

Thank you. [Operator Instructions] The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Dechaine

Good afternoon. I just wanted to ask a quick one on the sectoral and then on the operating leverage guidance, I know that’s two, but anyway the sectoral, I think there is an expectation that that gets release or a part of it gets released into income, I am just wondering if there is any thought about using that sectoral and rolling it over or however you would want to call it into one of the new allowances that’s set up for IFRS 9 in fiscal 2018. And then on the operating leverage, you had a great quarter, 4% for the total bank and you are guiding to 1% for the full year, is that conservative guidance, because it would imply a pretty steep decline from what you did this quarter and I think people might be disappointed by that?

Bill Bonnell

On the first one Gabriel – hi Bill. As I have said, we really will review it every quarter and next quarter, we will have the discussion again. I don’t know whether Jean you have any comments [indiscernible] of time.

Jean Dagenais

The only thing I can say is that you cannot do IFRS 9 before November 1, 2017, so we won’t roll it out before. So the only thing that’s being done is doing all the reserve every quarter, sectoral, specific, general and then adjusting it accordingly as needed.

Gabriel Dechaine

Right. So if you don’t release it before Q4, then it’s still there for that purpose, then?

Jean Dagenais

If it’s not released, it will be changed to the new rules of IFRS 9, that’s what will happen.

Gabriel Dechaine

Okay.

Louis Vachon

Gabriel, on your second question on the operating leverage, well, of course, we had a very good quarter. We don’t expect to have 4% every quarter, of course. Though as we mentioned the 1% plus, so if you are 1% plus, so if you remember in 2015, 2016, our language was more slightly positive. Now we are a little bit more firm about the 1% and it could be over 1% as well.

Gabriel Dechaine

Let’s see.

Operator

Thank you. The next question is from Robert Sedran from CIBC. Please go ahead. Your line is open.

Robert Sedran

Hi good afternoon, just wanted to ask about the wonderful chart on the capital ratio on Slide 9, so the last bar shows the negative 26, that’s RWAs and other, but risk weighted assets on a net basis really didn’t move very much, so that seems like a lot for that $300 million odd increase in risk weights, so I would like to know A, what else is in that others that’s affecting it and B, it seem like a pretty big increase in the market risk weighted assets because credit risk weighted assets were actually down, so is that something abnormal, unusual, end of quarter kind of thing or is that a kind of new run rate level for that line?

Bill Bonnell

I can answer you for the first question. It’s the fact that what we have identified here is the movement for the MAV note, which increased 9 basis points, but the MAV note had the impact of reducing risk-weighted assets. So that’s why by reducing that you will see that there is a bit more increases in risk-weighted assets that shows into the 26 basis points.

Robert Sedran

So that 26 basis points is not the total risk-weighted asset movements kind of in, it’s in the last two bars, not the last bar basically.

Louis Vachon

Yes. Because the MAV note is also an impact on the risk-weighted asset. When we use the MAV note, it reduces risk weighed assets. For the larger portion, it’s related to the bar and its market related activities.

Bill Bonnell

Yes. And then interest rates were up during the quarter, positioning to take advantage of that, nothing else significant, I don’t think it nothing is really significant in that quarter.

Robert Sedran

The kind of thing that might settle back down, Bill or is that a kind of thing that I should – like I guess was already a big increase in the CET1 ratio, I am wondering if it could have been more?

Bill Bonnell

No. I think it’s pretty much as usual. There is nothing big one way or the other. So I don’t think there will be significant changes next quarter. Usually a 13 basis points internally generated capital net of profit and risk-weighted asset is pretty much the trend from quarter-to-quarter.

Robert Sedran

Okay, fair enough. Thank you.

Operator

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

Sumit Malhotra

Thank you. Good afternoon. First one for Louis and I want to go back to how you are thinking about capital, the 10.75% number, you gave us an indication as to the fact that this has gone up maybe because there is some macro movements that can affect that ratio and we have certainly seen that across the group, good and bad, over the last couple of years, but you have communicated a lower level in the past, I think just three months ago or in December, you were talking about 10.5%, so is moving that up, even if it’s relatively minor, 25 basis points, is that a reflection of anything you are hearing on the regulatory front or is it more a reaction to the fact that the group as a whole is moving higher and you want to make sure National Bank keeps the pace?

Louis Vachon

It’s certainly not – nothing we have heard, Sumit. I think on the opposite. I think the smoke signals on a regulatory front have been getting less aggressive, as you know, so it’s certainly nothing on the first side. On the second side is, I think 10.5% and I wouldn’t make too big of a thing. The last time I said 10.5% was to increase dividend and I stick to that number. To do buybacks however, what I do want to avoid is doing buybacks and then having adverse market moves and then ended up significantly above 10.5 – below 10.5%. So that’s why for the dividend, it’s still very much 10.5%. For buybacks though, just to make sure that we stay, again comfortably above, a cushion above 10.5%, I think we need to be at 10.50% before we entertain and start executing on the buybacks. That’s the only – that’s just nuance. It’s not a significant markup on our mid-term objective in terms of capital.

Sumit Malhotra

And I am going to guess that acquisitions would get placed into the same tranche or bucket as buybacks and that you would want to be higher and I think previously you had said, we want to get into the second half of the year, see where things are, that’s still stance?

Bill Bonnell

Still stance, in fact I think I was quite clear it is. Right now, I reiterate the priority is very much operationalizing what we did in Canada. So and as you know, organic growth is very strong there. And frankly, in the context of strong organic growth, acquisitions in Cambodia would be more a distraction than anything else. Credigy does not have a history of acquisitions. They are completely focused on growing the book organically. And Africa, it’s too early at this stage to entertain significant acquisitions in that space. So I think at this stage, it’s – the Q3 still stands and it’s very likely to get extended further into time.

Sumit Malhotra

Okay. One more and then I will re-queue, if needed. That has to deal with the total return swap business, a few other banks have told me that a good gauge for what’s happening in that business would be the TEB, the tax equivalent benefit line and when I – first off, you can tell me if that’s true for National, but when I look at this number this quarter at about $72 million, it doesn’t seem like it slowed significantly and I know we got a lot of lead time for this, but we are getting close to the implementation of that legislation, so is this line a good proxy for your contribution from that business or if I recall correctly, maybe you have a few other things going on with your ETF franchise, just want to get your thoughts with that legislation coming up, where you stand on the equity synthetic total return swap business?

Louis Vachon

Yes. I think that – I think we have given guidance in the past, I think of the 1% EPS. I think we have the impact of that. I think to some extent last year and that’s still ongoing. It is – CET1 is a bit of a proxy, but as you know, there are many, many businesses on to that line. You mentioned….

Sumit Malhotra

Sorry, TEB is a good proxy.

Louis Vachon

Yes, sorry TEB. And it is a good estimate. But that being said, there are many, many businesses in there. ETF trading, as you mentioned, is one of them, retail structure notes and there is all things. So, it is inflation covered a particular part of the equity derivative business that was quite specific. It did not cover other parts of the business, which are probably more retail-oriented like ETF and retail structure notes.

Sumit Malhotra

So just to wrap this up, the guidance you gave us way back when I think probably in the spring of 2015, that still stands and you have been progressing in that direction by running off some of this business?

Louis Vachon

That is correct.

Sumit Malhotra

Thank you for your time.

Operator

Thank you. The next question is from Nick Stogdill from Credit Suisse. Please go ahead.

Nick Stogdill

Hi, good afternoon. My question is just on the commercial lending in Canadian P&C, excluding the oil and gas portfolio, growth was about 5% this quarter year-over-year and it’s kind of moderated a little bit over the last few quarters. So, just wanted to get your color on the drivers of that and then maybe the outlook for the remainder of the year?

Diane Giard

Thank you for the question. It’s Diane. Well, first of all, the business of government affairs has been going down on the lending side, because we have been focusing on getting deposits from that business and that really hit us by 1%. So, if you look at the core commercial business, it would have been a 6% growth year-over-year. And what we are currently seeing is an improvement of our pipeline. So, I do anticipate that business will pick up towards the third and fourth quarter. And then as I said some good pipeline for the second quarter and I am still saying that we believe that growth will be in the mid single-digit for the year, so it will be anywhere between 5% to 7% for this year.

Bill Bonnell

Nick, if I may add to that. Also one thing we have mentioned a number of times in the past and it’s still very much relevant is given the history of National Bank, there are many accounts, which get qualified or get included in the corporate – in our corporate lending segment under MBS, which in other banks would really qualify as mid-market commercial client. So, when you look at enterprise lending for National Bank to get a real feel as to going on, you do have to merge both the commercial lending, commercial banking line and the corporate banking. I think it gives a better portrait as to what’s going on, because some of our categorization is a little different and we include more small and medium-sized clients in the corporate lending than some of our peers would do. So you really have to look. And when you combined corporate and commercial banking combined, you get a better feel as to what’s going on.

Nick Stogdill

Okay, that’s helpful. Thank you.

Bill Bonnell

Thank you.

Operator

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

Mario Mendonca

Good afternoon. I want to focus on operating leverage as well, but in a slightly different way. You outlined how much of the $261 million in restructuring charges taken over the last few years have actually sort of made its way back into earnings, released under earnings, as you spent it, of course?

Ghislain Parent

I’m not sure, Mario, I understand your question, but essentially what we told the market is that for 2017 from the last two charges, so the one in 2015 and 2016, so it would bring savings of $135 million in 2017, but we are on track to do that.

Mario Mendonca

Yes, I am familiar with that. What I mean is when you book a restructuring charge you build a liability because you don’t spend all the money upfront. So what I am asking now is how much of that liability has – how much has the liability declined, but how much has essentially been released?

Ghislain Parent

Mario, you have that in the quarterly report. I was just trying to get – there is a note that shows how much we have reserved and how much is left that we handed out. On Page 59, so we have accumulated a provision for severance fee and other of $152 million at the end of October and $46 million was spent at this time to $106 million.

Mario Mendonca

So – but the total provision that was set up was $261 million over the 2-year period. So of that $261 million, is the $106 million left over, is that the right way to look at it?

Ghislain Parent

Yes.

Mario Mendonca

Okay. The second sort of unrelated question really relates to wholesale. The – I am sorry, not in wholesale, well, yes, I am sorry let me just backup a little bit. What I am getting at here is the trading environment has been absolutely good for everybody and I know it’s not possible to give guidance on what next quarter’s trading number would look like, but the conditions that gave rise to this sort of environment, did those conditions exist at least in maybe in a more moderate way looking out to 2017?

Denis Girouard

It’s Denis. Listen, the pipeline is quite good and it’s always consequences of what will happen in the economy and what will happen in our border. But what we can see right now is that either fixed income equity, M&A activities, everything is quite good. Does it mean that it will materialize? We don’t know. But so far what we can say, environment is pretty stable and pretty good. And tough to predict, but all the indicators that we have right now and the teams are working in the field, that are on the field they are quite active.

Mario Mendonca

That’s helpful. Yes, I know you can’t be precise. So, I appreciate the comment. Thank you.

Louis Vachon

Well, Mario, there is a proxy of that. There is a number of things. Volatility will help, some level of volatility is helpful, so some people use it as a proxy to predict or to see what’s going on. And also when you have a lot of new issues, both as you know on the equity and the fixed income side, it tends to fuel trading income, because people reposition use the new issues to reposition their portfolios and so there is a little bit of correlation too when you issue volumes.

Mario Mendonca

Yes. And the reason I was asking is U.S. elections of this consequence only happen once a generation, it would seem and U.S. elections only happen once every 4 years, so it’s just – it’s difficult to see an environment like that going forward, but the banks are similar to yourself are expressing some confidence in the future. So, it’s good to hear.

Louis Vachon

Yes, there was also – as you know, Mario, there was a relatively negative regulatory bias against the trading business. And I think if you see some deregulation, it didn’t really exist in Canada, but it did indirectly impact us. And if you see more favorable regulatory environment, everything else being equal, on a structural basis, not a cyclical basis, on a structural basis, that could be helpful to the trading business. That’s the only point I would highlight.

Mario Mendonca

I get it. That’s clear. Thank you.

Operator

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

Sohrab Movahedi

Thank you. Maybe for Louis or Ghislain, I know lots of talk about the CET1 level. Does the leverage ratio also need to get up to have a four-handle here to be closer to the peer group or is that not something you are that focused on?

Louis Vachon

Yes. I think it is something that we are looking at and I think we want to move over the next 12 months, I think we will move progressively towards the 4%.

Sohrab Movahedi

And so just to be clear, Louis, is that something that you will try and solve for with equity capital or other forms of capital?

Louis Vachon

I think it’s – I think 10.75% and a moderate amount of preferred shares, I think we will get to 4%.

Sohrab Movahedi

Okay. And on the deployment of capital through buybacks, I think you said that you certainly have a desire to, at some stage, kind of soak back the dilution of the October past share issuance. But generally speaking, are you price sensitive on buybacks here?

Louis Vachon

I am less price sensitive on the shares that were issued under the option plan for obvious reasons. Many of them were issued – we had, for instance, about 2 million shares issued in December at mid-50s in terms of price. So, those are a pretty easy one for us to do. And then all the other shares have been issued to neutralize the concept of the impact of dilution. And on the other points around – to the extent, I do look at absolute prices, but I do look also and you and I have discussed them in the past, I do look at relative valuations. And in the context where we see our shares trading at a 10% plus discount on a relative basis to our peers, even though our long-term ROE and our long-term earnings per share growth has been inline or above industry average, I found that on a relative basis, it is still pretty cheap to buy the shares. So, that’s how I would position it.

Sohrab Movahedi

That is very helpful, Louis. Thank you very much.

Operator

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

Darko Mihelic

Hi, thank you. Can you please remind me with the 54% efficiency target for personal and commercial and the 53% thereafter, what is the revenue growth assumption that we are using for that? This quarter, there was 4%. Is that enough?

Diane Giard

The guidance we gave, Darko, was at the Investor Day was between 5% and 6% CAGR between ‘15 and ‘18.

Darko Mihelic

So the revenue growth needs to accelerate from here in order for you to keep the efficiency target?

Diane Giard

Well, I will actually manage tighter on the expenses, which we have done. So either/or or both and we are looking at both.

Darko Mihelic

Okay.

Louis Vachon

Yes. We have accelerated I think from the guidance we have given. We have certainly accelerated in terms of expense management. But again, your point is well taken. I think as Diane mentioned, we are looking at both revenue and expense side.

Darko Mihelic

And then maybe just a quick question as a follow-up to that, when we look at the segment’s results this quarter, I mean, you see a small dip year-over-year in expenses actually, which is commendable, but then when I look at the other segments, I see a $28 million year-over-year increase and a fairly sizable increase quarter-over-quarter in the Other segment. So I am just curious if you can speak to what’s happening and where those costs are coming from. And at the end of the day, I guess the overall efficiency ratio outlook for fiscal 2017 and 2018 all bank level.

Ghislain Parent

Yes, Darko, this is Ghislain. So we are not necessarily giving the efficiency ratio target for the bank for 2017. So of course, we don’t expect to have improvements of 210 basis points every quarter. So of course, the trend is on the good side, so we will show improvement on that ratio at the end of the year for sure, but it’s too early to give our guidance for the year. So on your first question, the pension plan charge for ‘17 was negatively impacted by the decrease in the long-term interest rates in 2016. So, this is probably half of it. The other is really the P&L impact of the different projects that are going on right now in the bank on the different efficiency initiatives. So that the P&L impact during the life of the project is essentially charged to other things.

Darko Mihelic

Understood. Okay, thank you.

Operator

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Dechaine

Yes, just wanted to follow-up on the capital, but looking at it through the oil and gas book. As that book, the credit quality deteriorated under the AIRB model that will consume more capital did you ever quantify how much of that factor reduced your core Tier 1 in past 2 years or so? And are you starting to see a reversal there?

Louis Vachon

I don’t think we quantified it, discussed it in the previous quarters, but certainly, it would have had an impact. Likewise, as the certainly the size of the portfolio decreased, there is some recovery there. And as the credit quality or the risk profile improves, there is some marginal impact there. Any other comments, Jean?

Jean Dagenais

In fact, we already have the sectoral allowance which is – has reduced the impact of that portfolio on CET1. The charge itself costs around maybe the reduction of risk weighted assets partly offset the cost of the charge. So, any movement now is less significant on the risk weighted assets.

Gabriel Dechaine

Okay. So even in the performing oil and gas portfolio where you just downgraded ratings internally or something like that, there wasn’t – there wasn’t a big increase in capital consumption there that could reverse?

Jean Dagenais

It will take time before it reverses. It takes – before we can have any benefit on the risk weighted assets.

Gabriel Dechaine

Okay, thank you. That was it.

Operator

Thank you. [Operator Instructions] The next question is from Sumit Malhotra from Scotia Capital. Please go ahead.

Sumit Malhotra

Thanks for getting me back on. A quick one hopefully related to Credigy. So with your new disclosure, we can go back and get a little bit more history here. And it looks like and this is my recollection too and this was in Financial Markets, we hadn’t seen much in the way of loan loss provisions for Credigy and the last couple of quarters, not huge numbers, but the context of the overall bank, PCL not insignificant either. What exactly is driving this loan loss experience? And is it something that we should expect to continue in the near term?

Louis Vachon

Yes, Sumit. Historically, as you know, initially Credigy was buying, because they felt the opportunity was mostly in non-performing portfolios. So, there was no loan losses in non-performing portfolios. It was adjustment in values at the portfolio. Credigy has, in the last 3 years, has been because they feel and we all feel that the opportunities are more in the performing and the prime, super-prime performing space is where the opportunities are on a risk-adjusted basis. They have been buying assets. The big portion of the assets that they have bought have been secured and have caused relatively lower loan losses. I think most of the losses that you have seen are tied to the transaction we have done with lending clubs, which is unsecured debt. And so to the extent the portfolio keeps going up. In terms of size, that number could go progressively. But so far, we are targeting, again, we are targeting unsecured with debt with lending club, but we are certainly targeting the prime space. We are staying away from the near prime and the sub-prime. And so the numbers we have seen in terms of loan losses have been very much in line with what we expected in our models and the portfolio is performing very much in line with the Credigy expectations.

Sumit Malhotra

Okay. So you are – they are unsecured assets, but they are obviously performing, so you are going to accrue provisions against them, but I think your point is provisions are up, but revenue is up more because of the risk adjusted returns on this business?

Bill Bonnell

That is correct.

Sumit Malhotra

Thanks, again.

Operator

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

Sohrab Movahedi

Yes, thank you very much. I also appreciate you are getting me back on. On Credigy, my recollection is that at least half of the book was in auto, let’s say, related lending and I think you had indicated that those were primarily leases. I mean, to the extent there are losses on that half anyway, would it go through the PCL line or would it be some sort of a contra revenue item?

Louis Vachon

It will be against the revenues.

Sohrab Movahedi

Okay, thank you.

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 everyone for your time and we will talk to you next quarter. Thank you again. 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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