National Bank of Canada

Hélène Baril - Director of IR Louis Vachon - President and CEO Ghislain Parent - CFO and EVP, Finance and Treasury Bill Bonnell - EVP, Risk Management Jean Dagenais - SVP, Finance Diane Giard - EVP, P&C Banking Ricardo Pascoe - Executive Vice President, Financial Markets Luc Paiement - Executive Vice President, Wealth Management

Meny Grauman - Cormark Securities John Aiken - Barclays Steve Theriault - Bank of America Merrill Lynch Robert Sedran - CIBC Gabriel Dechaine - Canaccord Genuity Doug Young - Desjardins Capital Markets Sumit Malhotra - Scotia Capital Peter Routledge - National Bank Financial Darko Mihelic - RBC Capital Markets Sohrab Movahedi - BMO Capital Markets Mario Mendonca - TD Securities

Good afternoon, and thank you for joining National Bank's third quarter 2015 results conference call. In a few moments, Louis Vachon, President and CEO, will start the call with the opening remarks.

Then Ghislain Parent, CFO and Executive Vice President of Finance and Treasury, will present the overall bank performance, as well as the capital management review. His comments will be followed by a 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, 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.

Good afternoon, and thank you for joining us today. National bank delivered solid results in the third quarter of 2015, with total revenues reaching $1.6 billion, up 5% from last year.

The bank posted record net income of $444 million or $1.25 per share on an adjusted basis, representing a 4% increase on a year-over-year basis. Credit quality remained solid, with provision for credit losses at $56 million or 20 basis points.

Return on equity stood at 18.4%, and the common equity Tier 1 ratio on the Basel III stood at 9.5%. In the quarter, all three main business segments increased net income compared to the same period last year.

Results are showing solid volume growth and stable margins in P&C, while wealth management continues to produce double-digit earning increases. Financial markets delivered a great performance, benefiting from its solid pan-Canadian presence and broad revenue diversification.

For the coming quarters, we still foresee a slow growth economic environment and keep our conservative view on commodity prices and interest rates. In light of the recent Chinese economic slowdown and Yuan devaluation, we expect Canada and Quebec's real GDP to grow that 1.3% in 2015 and at 1.6% in 2016.

We continue to believe that Central Canada will perform better than world regions, as confirmed by recent indicators. For instance, we noticed in Q3 a higher level of investments in plant and equipment, as well as strong export numbers in Quebec.

In addition, the continuing trend on generational change in business ownership is positive for Central Canada. Furthermore, globalization and continued low economic environment still provide a positive background for M&A activities and related financing, as evidenced by our corporate and commercial loan growth.

Our priorities in terms of capital management remain as it has been for many years. Number one is to fund organic growth, two to fund acquisition, three to increase dividend, and lastly, four to buy back stock.

Dividend will be reviewed next quarter, while buyback timing will depend on risk weighted asset growth opportunities. On that, I will turn things over to Ghislain for the financial and capital review.

Ghislain?

Thank you, Louis, and good afternoon, everyone. I invite you to turn to slide 6 to review the third quarter results for fiscal 2015.

Total adjusted revenues amounted to $1.6 billion in the quarter, up 5% from the same period last year. Revenue growth came from all three business segments.

Net income amounted to $444 million or $1.25 per share, representing a 4% increase from last year. Return on equity was solid at 18.4%.

On a reported basis, now. Net income totaled $453 million or $1.28 per share, up 3% from last year.

During the quarter, the bank recorded a positive adjusted item of $16 million to reflect capital repayments and the rise in the fair value of the MAV restructured loans. Now on slide 7.

For the first nine months of fiscal 2015, adjusted revenues amounted to $4.5 billion, an increase of 7% from last year. Adjusted net income was up 6%, reaching $1.3 billion.

This good performance was driven by strong revenue growth from all business segments, disciplined expense management, and good credit performance. After 9 months, return on equity stood at 17.9%.

Turning to slide 8, now. In the third quarter, P&C banking and wealth management represented 70% of total revenues, while financial markets and Credigy stood at 26% and 4% respectively.

All business sectors contributed to net income growth. Wealth management, financial markets, and P&C banking were up 11%, 8% and 6%, respectively.

Still on slide 8, the net loss increase in other segments was mainly driven by higher variable compensation costs, tax and salaries, and expenses incurred for business development. On slide 9, now.

Year-to-date, P&C banking and wealth management represented 71% of total revenues. All business lines delivered solid revenues, improved productivity, and grew net income year-over-year.

Financial markets showed largest net income increase of 21%, followed by wealth management and P&C banking, up 9% and 6% respectively. Turning now to slide 10.

During the quarter, operating expenses amounted to $900 million, up 4% from last year due to investments in technology, higher variable compensation, and regulatory costs. For the first 9 months, operating expenses were up 7%.

On an adjusted basis, National Bank posted a positive operating leverage of 0.8% in Q3 and the efficiency ratio improved by 19 basis points to 58.5%. We continued to be strongly committed to maintaining tight control over expenses and a slight positive operating leverage for 2015.

Now turning to slide 11. Basel III CET1 ratio was 9.46%, unchanged on a sequential basis.

Capital levels increased by 52 basis points, due to net income and the MAV restructured notes. Risk weighted assets also increased by 52 basis points during the quarter.

The increase was driven by business opportunities, international investments, FX, and to a lesser extent, model updates [ph]. At quarter end, the Basel III leverage ratio was 3.6%, and the LCR ratio stood at 128%.

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

Good afternoon, everyone. I invite you to turn to slide 13 to review our loan portfolio.

In the third quarter of 2015, the gross loan book totaled $113 billion, an increase of 9% from last year. The retail book reached $66.6 billion, including $53.2 billion of mortgages and HELOCs.

The wholesale book represented 41% of the total and remains well diversified across industrial sectors, with no one sector accounting for more than 7%. Details of the mining and oil and gas sector are provided, outstanding loans to oil and go producers accounted for about 2.8% of our total loan portfolio.

The sequential decrease of about $400 million in loans to commercial borrowing base customers was primarily due to asset sales and M&A activity we saw during the quarter. We continue to see our Canadian producers take the right actions to reduce costs, raise capital and to benefit from the weaker Canadian dollar.

We will continue to monitor this portfolio very closely and see the potential impact of a prolonged oil price decline as manageable. On slide 14, the regional distribution of Canadian loans shows that close to 84% of our book is to borrowers in Quebec and Ontario.

The bank's exposure in the oil region remained low at 9%, with only a small portion related to unsecured retail or commercial accounts. On slide 15, a geographical break down of the residential mortgage and HELOC portfolio is provided.

At quarter end, Quebec and Ontario accounted for 63% and 22% of the mortgage book, while Alberta represented only 6%. The insured portion represented 43% of the book, while HELOCs and uninsured mortgages accounted for a 34% and 23%, respectively.

The average loan to value on the HELOC and uninsured portfolio was unchanged at 59%. Second lien loans accounted for less than $300 million, or about 0.5% of that portfolio.

I invite you to turn to slide 16. In the third quarter, provisions for credit losses amounted to $56 million or 20 basis points, remaining at the lower end of our targeted range.

Retail banking PCLs amounted to $40 million or 27 basis points, in line with the previous quarters. PCLs in the commercial portfolio were at $15 million, or 21 basis points, up $2 million from last quarter.

Those commercial provisions included $9 million from the oil and gas sector, relating to two old files that had been impaired since last year. There were no new impaired loans in that sector this quarter.

Wealth management provisions were stable at $1 million, and no provisions were taken in the corporate loan portfolio. Current financial conditions of low interest rates, low fuel costs, and a weaker Canadian dollar remain supportive of a stable credit performance, and we maintain our 20 to 30 basis point estimate for PCLs for the next two quarters.

On slide 17, we see that gross impairments were $449 million or 39 basis points of total loans. Retail and commercial formations were lower than last quarter at $16 million and $24 million, respectively.

There were no formations in the corporate book and $4 million in wealth management. On slides 18 and 19, we find highlights of our market risk exposures.

Trading VaR averaged $6.2 million in the third quarter, and we registered only three days with net trading losses. On that, I'll turn things over to Jean Dagenais for the business review, but before I do, we like to celebrate milestones here at the bank, and today is an important one.

This is Jean's 100th quarterly result. Congratulations Jean.

Thank you very much, everyone, and good afternoon. I invite you to turn to slide 21 for the review of the personal and commercial banking segment.

Revenues reached $728 million in the third quarter of 2015, up 5% on a year-over-year basis, mainly due to strong volume growth from loan deposits and mutual funds. Personal banking revenues amounted to $344 million, up 6% year-over-year, mostly from loan growth.

Commercial banking revenues reached $259 million, up 3%, as loan and deposit growth was partly offset by the yield curve impact on deposits. On a year-over-year basis credit card revenues increased by 1% to reach $91 million, since higher balances were partly mitigated by lower interchange rates.

Insurance revenues amounted to $34 million, up 13% from the same period last year, due to lower actuarial liability. Operating expenses were up by 3% from last year, resulting in a 2% positive operating leverage.

Provision for credit losses amounted to $55 million, up $7 million from last year, mostly from losses in the commercial sector. P&C's net income reached a record of $197 million, representing a 6% increase from Q3, 2014.

Looking at the P&C key metrics. For the quarter, loans in BAs continued to grow at a solid pace, up 7% on a year-over-year basis.

Volume from deposits also showed good momentum, rising by 4% compared to Q3, 2014. On a sequential basis, net interest margin decreased by 1 basis point to 2.18%.

Deposit margin narrowed by 4 basis points due to the impact of the Bank of Canada lowering the overnight rate for a second time this year. Loan margin increased 2 basis points, due to the wider prime cost of funds spread.

Finally the efficiency ratio was at 55.5%, a 100 basis point improvement from Q3, 2014. Overall, the P&C segment continued to deliver good volume growth, stable margins, as well as solid credit quality and cost control.

Please turn now to slide 22 for the wealth management review. Revenues in the third quarter 2015 amounted to $347 million, a 4% increase compared to Q3, 2014, due to the higher fee based revenue, which amounted to $195 million, up 15% from last year as a result of AUM and AUA growth.

Transaction and other revenues were at $73 million, down 16% year-over-year, due to lower brokerage commissions and new issuances. Net interest income remained relatively stable.

On a year-over-year basis operating leverage was at 4% and the efficiency ratio improved by 220 basis points. Net income amounted to $84 million, up 11% from the corresponding quarter in 2014.

Now some key metrics for this segment. Loan and BAs reached $8.8 billion, representing a 5% increase from last year, while deposits increased 1% year-over-year to $24 billion.

Assets under administration stood at $315 billion, up $13 billion or 4% from last year, while assets under management rose by 20% to $50 billion. The myWEALTH program, launched in June of last year, did particularly well, reaching more than $9 billion in assets.

Finally, the bank entered into an exclusive partnership with Goldman Sachs to distribute national bank investment funds which they are managing. Now I invite you to turn to slide 23 for the financial market review.

Financial markets delivered solid revenue growth of 6% year-over-year, reaching $470 million, due mainly to higher client driven risk management products and solid underwriting revenues in fixed income. Rating revenues amounted to $206 million, up $15 million from last year, mainly from equities, as well as commodities and foreign exchange.

Stronger underwriting revenues in fixed income were driven by increased activity in government finance and infrastructure projects, which were partly offset by lower investment banking fees. However, banking services posted a 17% year-over-year revenue increase thanks to solid balance sheet growth.

As expected, Credigy's revenues were lower this quarter due to the sale of a portfolio in the corresponding quarter of 2014. We anticipate Credigy's revenue to pick up in the coming quarters, thanks to the acquisition of new portfolios this year.

Operating expense growth was mainly due to Credigy, stemming from asset acquisitions. For Q3, 2015, financial market delivered net income of $202 million, up 8% from the corresponding quarter of 2014.

The CVA/DVA was a positive $2.1 million, while prop trading was negligible. Finally the efficiency ratio stood at 41.1%.

On this, I'll turn back the call to the operator for the question period.

Hi, good afternoon. Question, I think, is for Ghislain.

In Q1, you talked about how, if your stock starts trading below 10 times expected earnings, I think your words were you get a little more antsy about doing something with capital. I'm wondering, how antsy are you?

And how that tradeoff is between what the stock is doing right now and arguably, a macro outlook that's more difficult and a lot more market volatility right now?

Hi, it's Louis. I think I was the author of that line, not Ghislain.

So I'll stand by what I said. The issue is, here is, that what we saw in Q3 is we had good growth - organic growth, and our job here as a management team is to allocate capital.

And in this particular case, we saw good opportunity to grow the balance sheet. What we feel is good risk adjusted returns.

And so we decided to allocate the capital to those opportunities. We were somewhat surprised, and we had not planned for a 10 basis point negative hit by the impact on the currency and its increase in risk weighted assets.

That was clearly not in the capital plan, but fundamentally when you look at the increase in capital and the risk weighted assets, that's where it came from. So as I said in my opening statement, we'll take it quarter-to-quarter.

I am very antsy to buyback stock. At the same time, as I said also in my opening statement, we feel that long-term buybacks are a good compliment to a growth strategy, they not a substitute to a growth strategy.

So we feel that our number one obligation is to grow the bank organically, and occasionally, when possible to do tuck-in acquisitions and to increase the dividend, and the buyback of course is last on the line. So our capacity to do a buyback will depend on what level of organic growth we see going forward and its impact on risk weighted assets.

Great. Thanks for that.

And just to change tack, I'll ask an unoriginal question that's come up in the other calls. Just given the environment, if you could provide an update on your stress testing assumptions and sort of how they've changed over the last little while?

Are you referring specifically to the oil and gas portfolio?

Yes.

Bill?

Sure. Hi, Meny.

We focus our stress testing on the oil and gas portfolio, primarily the producer portfolio, because our other exposure in that region is really small. We do run enterprise wide stress tests with pretty severe scenarios, and the potential losses in the oil and gas region from those are really too small to have a significant impact.

For example, our credit card exposure in Alberta is about $20 million. So it doesn't move the dial, and likewise there's clearly a benefit to Central Canada from low oil prices and the low dollar.

For the oil and gas book, it's important to remember that it's almost entirely Canadian producers spread across gas and oil and skewed towards light oil, not heavy oil. So when we do our stress testing we focus on stressed Canadian dollar price to take into account impact to currency and spreads and differentials.

Now, as I know you've been talking a lot about comparing stress test results, so to try to translate that into US dollars, the US equivalent of our stress test prices were around low $40's in 2016, going up to mid $40's in 2017. And I think in the last bit of 2015 is in the high $30's.

So the result of the stress test is potential loan losses that, as we've characterized before, are manageable. If they happen, they should happen over a period of time, not all at once.

And in that scenario the environment of the low Canadian dollar and low rate should be pretty favorable for our core Central Canadian markets, across our diversified businesses at wealth, P&C, and financial markets. Does that answer your question, Meny?

Yes. Would you be able to comment specifically on where you see loan loss ratios or a range of loan loss ratios under your stress test assumption?

There's two many moving parts to want to give you an exact number, but certainly we see the losses as manageably within our historical range of PCLs. So in the last 10 years we've seen whether our ranges in the high teens to high 30s and too many as I said moving parts to say where in that range it would be, but that's a range I would guess.

And under the stress test methodology you talk about some continuing strength in Central Canada. What are you assuming in terms of growth rates and unemployment rates for the non-oil producing regions of the country?

Yes. In that, we take the conservative approach.

We don't actually account for benefits in the others. We think that in fact it will be there, but we aren't taking into account benefits.

Thanks a lot.

Good afternoon. This is for Louis.

We saw a fairly significant drop in the securities commissions in the quarter, now it was a little bit, it was actually far greater than what I anticipated. Look, was there anything unusual in the quarter or is this just a drop in volumes that you saw with your clients and if that's the case what are the prospects of this revenue line recovering over the next little while?

The transaction numbers that you see there will go down even if the market is good for the first reason. There is a lot of brokers or clients that move from transactional to fee based business, so just to start with it there's going to be a drop.

Second, we saw some slowdown in the full service brokerage and in direct brokerage over the last two or three months. That picked up over the last two or three days, but I think we've seen the worst on that front, and just see improvement going forward.

Okay. Thank, Louis.

Thanks a lot. If I could go back to Bill, a second, though you've had that 20 to 30 basis point guidance for some time and hardened [ph] to the low end of the range.

Do you feel like we're getting to the point now where the higher end or even the middle part of that range could be in sight over the next couple quarters based on what you're seeing today or do you think as you pick up the next couple quarters status quo is more likely the outcome?

Steve, I certainly hope I'll continue to have that range for a period of time. But I'm pretty realistic.

I think one thing that’s been – that surprised us on the positive is the performance in the commercial Canada book, ex-energy has been very, very good. I think the number these quarters will be 4 Bps of losses, and so well under last year and well under what we expected.

So the - I don't want to count on that always being the same. But I can tell you my crystal ball is not so clear, and the 20 to 30 range is about what I can give you for the next couple quarters.

Ask that in part, with the oil and gas price re-determination mind over the next couple of months, don't have a great look into that. But if the spot and forward price stay the same, do you think we'll see anything concerning in terms of the outcome for you guys in Q4?

Yes. I think the timing of - if the conditions remain very, very challenged and strained it depends on a few things.

One, we have seen producers really reduce costs and lower dividends of course, but the cost reduction is pretty impressive. Our analysts had a pretty good report out last week showing 20% to 25% cost reduction, some of them were down over 30%.

So that supported cash flows and they of course also benefit from the weaker Canadian dollar. So there are some supportive factors for that sector.

Also as we predicted before, there's a lot of opportunistic capital on the side. We saw some of that get put to work this quarter which lead us to have a reduction in our outstandings to some of the commercial borrowing base customers.

So that's a factor which needs to be considered. So in terms of timing I don't - early to mid next year, depends on a few things, but I'd guess that at later, not at the end of this year, but later next year.

Okay. I may follow up on that.

If I could switch gears to Diane, 2% positive operating leverage obviously pretty strong. I know you'll likely tell us the efficiency ratio is going to head north in Q4 due to seasonality.

But otherwise is there anything unusual that drove the very strong efficiency ratio this quarter, anything you might maybe have to give back in future quarters, maybe swung too far one way or I guess in other words is this – this is the lowest efficiency ratio we've seen in quite a while - as far as I can see anyway how repeatable is it?

Well thanks, Steve for the question. I think what we're doing is we're actually deploying the initiatives that we spoke about at the Investor Day and we do have a series of opportunity on the efficiency side that we're continuing to deploy and that we're already seeing some of these benefits.

So my crystal ball as my colleague Bill would say exactly short term, I could tell you in the fourth quarter we're still expecting to have a good positive operating leverage. I'm confident that we'll see some good similarities with Q3.

And as far as next year, I think as I said at the Investor Day, I think we'll be very diligent about cost control but we'll also be deploying some new efficiency initiatives that will provide us with a positive operating leverage.

Thanks very much.

Hi, good afternoon. So each of the operating segments had earnings growth that out paced the consolidated bank, so I want to ask about other.

And I think it was just mentioned a few items variable comp, taxes on salaries and business development. Are all of those items related to sort of corporate center activities or is there some almost an accrual or something that has to get trued up in the segments over time.

I would have thought some of things might find their way into the segments themselves?

Well Robert, thanks for the question. Essentially this is mostly related to corporate functions.

As I mentioned in my sticky notes, so provincial tax and salaries is something new that we have to assume this year and also when I mentioned business developments is essentially related to IT marketing, some also efficiency initiatives that we are funding. So it's more corporate stuff, maybe some would eventually end up in the business line, but as I mentioned it's mostly corporate.

Okay. And the MD&A mentioned something that I don’t think you did in your comments, which was lower treasury, revenue as well.

Can you give a bit of sense of what happened in the treasury this quarter and whether it was unusually low or perhaps the interest rate environment means the lower allocation going forward?

Well, yes, I didn’t mention it in my sticky notes, but you're right, we - the treasury had a little bit less revenues this quarter, nothing unusual I would say its part of the environment.

Good afternoon. First, a quick one for Ricardo.

Can you give me a sense of how trading is progressing so far in August and if you're seeing reduced client activity having a negative impact?

I obviously have to be careful with what I say.

Please, don't.

I think volatility tends to be good for our risk management products business and we have seen increased volatility. At some point that volatility drives a negative sentiment and pushes our clients to the sidelines then that would not be good, but we haven't seen that yet.

Okay. That's helpful.

Then in the - just I guess a question or a comment I keep hearing from the banks is how their energy borrowers are cutting costs and that helping the cash flows and all that. But cutting costs is going to have a ripple effect in some other areas like their suppliers, their employees that they are letting go.

Is that something that’s is going to be an issue will be targeting about a year from now or sooner if you don't have big losses in the energy book you might see some negative things pop-up elsewhere?

Well I think that's part of it Gabriel. So that's why when we talk about exposure we talk about direct and indirect and our book is in one that gives us a whole lot of insight into that because it's pretty small in that region outside of our direct exposure, the producers, but typically you would expect to see some impact at some point on secured retail and on the small commercial that are supporting that sector.

And no big inter provincial trade with Alberta that's concerning at all? Or reduction to it I mean?

No.

Okay. And then my last one is for Louis.

So one of your peers is possibly going to end up on the G-SIB list later this year and clearly that would have an impact on them. But I wonder what impact that could have on the other Canadian banks.

I find it hard to believe that either the regulator or the market creates an uneven playing field and maybe all the banks get pushed towards higher capital ratios, as the smallest of the big six, what do you think about that?

I'm not concerned about that. I think we are still about $700 billion of assets on the balance sheet away from it.

But listen, I think you know that we do follow certain standards, but when it suits us we can go on our own way. And so I really don't expect first of all, on the regulatory side, I think I would be extremely surprised if we were asked to live by the same standard being still today a super regional bank and not a global bank.

So I think the regulatory risk is extremely small, and in terms of the market and expectations I think we can tell our story and point to elements of differentiation that will convince people that we do not need to be at whatever very high level of capital at CT1 that global is expected to be at. So no I don't have any concerns about that, and so that's what I have to say about that.

I'm a simple guy. I like simple pictures and I look at the Canadian banks and where they rank versus global peers and ignoring the G-SIB stuff the Canadian banks are lower, have lower capital ratios than some of the other jurisdictions.

And that if I'm betting then I think that over time that has to push Canadian banks higher. What's the devils advocacy argument against that?

Well, history is one. The fact we haven't blown up our banking system, we have something to do with it.

The nature of assets on the balance sheet and many other things, I think to the extent that to move away, I mean, if you look at super regionals on a global basis and on a global basis we tend to compare ourselves more to global - super regionals. I think where we are certainly compared to the Americans I think we're at 9.5, I think we are very well capitalized.

So I think that we'll cross the bridge once we get to it, but for now I think we'll stick to the levels of capital we think are adequate.

Fair comments. Thanks.

Hi, good afternoon. Just sticking with capital.

I think you mentioned last quarter there could be a headwind from an increase on market risk factors in the second half. And just I'm just wondering did any of that go through in the third quarter?

I did see a model update impact on your risk weighted assets, but I'm not sure if that was it. But did any of that go through this quarter or is that more in the Q4 items?

No. It was…

I could take it. Hi, thanks for the question, Doug.

Some of that did go through this quarter. It was about 7 Bps in total, model updates in credit and market risk and 7 was the number.

And do you expect more later or are we done with that?

We do continually update the model and so it's always difficult to know what potential impacts may be on some will be up, some will be down. So it's a little difficult to give guidance on that.

Okay. And then I guess my second question on capital was and I thought and correct me if I'm wrong, I guess the investments you're making outside of Canada wouldn't have a big impact on your set one, but I did notice this quarter it was a 15 basis point impact.

So maybe my interpretation of what the comments were previously were wrong or just wanted to get maybe thoughts on how much - thoughts on that comment?

It was - this one was related to the NFCI investment we made in Africa. It was not a surprise.

The deal was announced in February. So in our capital management the last couple quarters we knew this was coming.

It is chewing up a bit more regulatory capital than other investments we've made for a similar size. First of all, it is somewhat larger than some of the other transactions we've done and secondly, as you know, NFCI is both insurance and banking businesses and the insurance business if I'm not mistaking, Jean correct me if I'm wrong had some goodwill because they made some acquisition over time.

So there was a higher goodwill component to the balance sheet of NFCI, and that's why it chewed up a little bit more regulatory capital than we - some of us would have expected from the international investments. So going forward, it will depend what kind of premium we pay in the amount of – I think but this was, you know this was a pretty big impact on a relative basis.

And going forward, what we'll see I think short term for the next few quarters don't expect anything close to this. In terms of size, we are still reviewing what we've made our investments, still reviewing our strategic options going forward and if it's going to use up a lot of capital going forward, certainly we'll let you know.

But it's not the plan for the foreseeable future.

So this is the biggest impact you would anticipate from these types of investments, is that a fair statement?

Yes, I think this is pretty big. At least for the amount as you know, we had a $200 million US portfolio that was approved the Board.

We are essentially very close to that. I think we have room for one more investment or something like that.

But that was by far the biggest impact on that book. And we are going to do something that's going to impact more than that.

We'll certainly give you a heads up before that happens and we would have to update everyone on what we plan to do with our international investment going forward, what is the strategic plan, and where do we want to take it to the next step or are we just looking for the status quo.

Okay. And then just on the MAV notes, there was I guess a 14 basis point impact.

I think last quarter you mentioned the wind up was going to add about 24. So does that mean there was 10 basis points left, am I reading that correctly or is that incorrect?

Ghislain will give you an update.

Yes. Well on top of the 40 basis points that have been recorded this quarter we expect another 12 basis points to come by Q1, 2017 at the latest, but it is likely that the different amount will be along before 2017.

The max benefit left is 12 basis points?

12 basis points.

Okay. And then I guess just back at – I think the question was asked, but just on the buybacks, I mean, I think you said 9.5% you'd like to be comfortably above that before you were to pursue buybacks in any meaningful way.

Is that, it doesn't feel like that's going to be a Q4 event on the buyback side, but maybe I'm wrong. Is that still what you're thinking?

Yes.

Okay.

Yes. I mean, you see that there are elements as you saw clearly with just with the FX impact on capital.

You can have 10 basis point swing on one quarter to the other. So to stay above 9.5 you do need you know, some buffer to be somewhat above that to start the buyback again.

Okay. Great, thank you.

Yes.

Thanks. Just to pick up on that last point, you mentioned that the foreign exchange volatility or the impact on capital wasn't part of the game plan.

When I look at your business mix, I think well over 95% of both the loan book and your earnings power is domiciled in Canada. So what exactly - what component of your asset base you're having such a big impact on the capital position and frankly are you concerned that as a – as you'll describe yourself as a pure play on Canada regional bank that FX is having such volatile it on your CT1?

No, keep in mind that our capital markets business, we were quite active again in Canadian aggregates, but trading US denominated bonds and other assets. So no we not concerned about that and keep in mind Sumit it was a pretty big move in the currency, right.

So it doesn't take a huge amount of risk weighted assets that CT1 impact.

So what about the…

Yes, sorry.

Sorry, what about the offset from OCI?

Some of it is in there, but the impact of risk weighted asset increase is more important.

Yes. It was mostly risk weighted asset increase from currency.

OCI was a component of the 10, but a small one.

Because there's edge already in the P&L risk and OCI risk.

And kind of staying with that and I guess we've danced around a few different topics here in terms of where capital has to go for the bank to get more active on the deployment front. One of the other topics of interest of late has been possible floors in mortgage risk weights.

I think you've told us in the past that the conversation isn't there yet. We saw the Aussies have a very is similar banking system to that in Canada make the move to go to a minimum 25%.

Has that moved by that country, put that conversation on more of a front burner here in Canada?

I don't have - I saw the announcement as you did Sumit. I don't have any special insight on that at this point.

Frankly, we haven't had had much of an update with the regulators on this front. So I have nothing to add to that conversation.

All right. Last one is probably for Ricardo, and it's going to go to the energy sector.

Earlier this year, when we were at our previous low on oil prices, I think the market was somewhat relieved that we saw such a strong level of equity issuance activity from particularly the larger producers. And I think that helped to come some of the fears as to the debt exposure of these companies, particularly as banks are concerned.

To be charitable I think it's fair to say those deals haven't gone particularly well for investors. So when you look at the situation now for your investment banking operations, do you think there's still capacity or market appetite for further equity issuance and if not, is M&A or frankly shotgun M&A something we're going to see more of in the coming months?

I think as oil prices have been rose, I don’t think you'll see a lot of activity on the equity side. M&A the pipeline is good, looking interesting, Bill mentioned there's been a few already that helped our loan book as well and I think we could see more of that.

But you know, we framed it before and there wasn’t much of it this quarter and so we still have a pretty good quarter on the fee side. So we have a really good diversified platform of businesses and it's not something that's putting concern on us – for us to going forward even though we do expect it to be very quiet.

Thanks for your time.

Hi. Its sort of bigger picture question for Louis.

Second quarter in a row financial markets has earned more at least on specified earnings than P&C and I know you've always been very clear that you're not going to put breaks on capital markets for reasons of appearance. But if that gap widens, the market may not react as benignly to a higher weighting in capital markets in National Bank's earnings mix and I wonder does that concern you or the Board at all?

Concern is the big word. I think we are looking at a balanced mix of business and that has been a continued strategic priority for us.

Keep in mind that's why we break down the Credigy aspect of – we can for reporting purposes the Credigy reports to harder, but you can debate whether time Credigy is really capital markets business and that's why we break it out. But that being said, I think we are still looking for - continue I think our growth generally and commercial and retail banking has been very good on an absolute and relative basis, wealth management continues to perform well and they are quarter-over-quarter as you know the capital markets segment can be, can go up and down depending on the market conditions.

We are as you know, one of the reasons that we started the small international investment portfolio was to see whether we could create over time a fourth reporting segment that would include if we decide to go further into our international investment, that would include some of the investments we've made in emerging economies with Credigy to create a fourth reporting segment. Now it is more an experiment right now and the processes that we're testing and it is somewhat related to this.

It depends on whether it's the right timing to do so, whether how comfortable we are moving forward on our capacity to execute that strategy over time, and so fourth. But that is also one of the reasons that we are looking to create a fourth reporting segment.

So all these going forward are ways for us to continue to increase earnings and help the divisions, but to put a certain tap on the capital markets business going forward on a proportional basis versus the rest of the bank.

I guess another way investors have mentioned to me is a way of altering National Bank business mix is domestic acquisition heading into probably 2016 where there might be more opportunities than there otherwise would be. Would you share any thoughts with us on that?

Well, they are very limited, so of course I think we continue to look particularly on the wealth side and acquisition I think we've had a good history there and I think we have good capacity to execute and integrate acquisitions particularly on the wealth side. But as I said all the time, they have to make sense from a financial and also a cultural standpoint.

So we are always on the look out and we'll see how that goes.

All right. Thank you very much.

Hi, thank you. My questions for Bill and maybe it's easier if we're looking at slide 13 to talk about the oil and gas portfolio.

I'm really not that interested the mining. So when we are looking at the call out on the right hand side, the $3.2 billion oil and gas, can you tell me how much of that portfolio is syndicated?

I don't have that number. I'll need to get back with you on that.

But typically, the top end larger ones would be syndicated facilities certainly and the very small ones might be even some of the small ones are syndicated as well. So in terms of dollars, I would guess, the vast majority would be syndicated, but I'll need to look and see if I can get some more precision and call you back on that one.

Okay. And sticking with the same portfolio could you also tell me how much would be considered investment grade by your own sort of classifications?

Yes, well going into the year it was the higher number. We were about 70% going into the end of last year.

We were pretty aggressive or conservative in risk rating downwards earlier in the year. So now the percentage is probably a little bit under 50%.

Okay. And maybe just one last question on this portfolio.

I mean, the concern that's out there is that you're lending to the oil patch is different from peers. So is there anything else you can offer to me that would help me understand how similar or how dissimilar your lending is to the oil patch versus your peers?

Well, I think the first difference is its very Canadian book. That's the first difference.

I think our peers are more diversified in the US which is a different market. Aside from that, I don't really have any other comments.

I wouldn't be able to comment on the differences.

Okay. And then I just have a question on expenses.

We're running now year-to-date an expense growth rate of about 7% and I guess the question is effectively, if we're looking at a lower growth environment how quickly could that 7% turn into 4% or 3%? Variable comp I can see it as a proportion of our overall expenses.

It doesn't seem to be the one it's obviously higher, but it's not the one that seems to be running away. It looks like a lot of expenses across the board are kind of running away and most of it is in corporate and other.

So I guess Louis or anyone who cares too tackle this question. If revenue slows to four at the overall bank level, never mind the individual segments for next year.

Can expenses really come under that given your current investment in initiatives?

Well as you know, Darko, necessity is the mother invention, so if we have to, I think there's two parts to your question. One is a cyclical one and the other one is a structural one and long-term one.

On a cyclical basis, I think yes if we have to I'm sure we'll find a way to reduce to some extent that expense growth. That being said, as you know, if you want to maintain your franchise given what's going on in the world of technology today, you have to invest to deploy new technology and to get the benefit of new technology to improve your customer experience and to improve your efficiency.

So there is some room for to reduce the speed of growth on the expense side. That being said, there's some aspect that limits that I just discussed.

On the other point over the long-term though Darko, I think there's still when I look at the industry, I think it's true of us, but I think it's true of the Canadian industry generally. I think there's still a lot of room to improve to use technology and improve processes to improve customer experience and to lower cost of the industry and you benchmark - when we benchmark ourselves versus others, particularly the Scandinavian banks and others, there's still a lot of stuff to be done.

Some of that is up to the banks individually. Some of that’s like getting rid of checks and getting rid of cash or lowering use, having much less usage of cash in the economy may involve coordination with government policies.

But I think if it’s been done in Sweden there's no reason why it should not be done in Canada. So fundamentally I think you should assume and I think the street to some extent is underestimating the fact that we still have a lot of room to improve our efficiency as an industry.

And so - but some of that will require investments over time. Does that answer your question?

It's a helpful start. It's just that I guess in the shorter term it's difficult, I mean, last year you had 5% overall growth in expenses and this year you're running at seven.

Just trying to understand how much of that structural initiative work that will fall away or won't fall away as you get into a slower revenue growth environment?

I think we gave a lot of fair amount of information during their Investor Day on the P&C. I think we gave a fair amount of that time.

So…

That's the difficulty though, Louis, the difficulty with that it's a segment based sort of presentation and as is rightly pointed out a lot of your expense creep is happening in the corporate and other and that's something that we just have difficulty modeling?

Okay.

Thank you.

Yes.

Okay. Thank you.

Just to finish off on Darko's question over there. I mean, you would have done your planning for next year, presumably you would have assumed the slower economic growth environment Louis that you talked about at the onset of the call.

So is it realistic to have 7% growth next year if you have a sub 2% GDP growth environment in Canada?

That's a very good question. I mean, we are still looking at our expense growth and to see.

I think we are looking at the planning for next year. Some of the expenses on the investment front that we discussed, some of which are regulatory and many of those some of them are but also the ones we've done to improve our efficiency and customer experience, we are going to go ahead with them.

Now have we made a decision to slowdown some of them, not at this stage. So to be quite frank, our real GDP number that I gave in my opening statement changes on a weekly basis right now given everything that's going on in the market.

So I think what we'll do is I think by the time we get around to September and October I think we'll have to put it in. But we are right now throwing darts at the board in terms of what the real GDP growth in Canada will be for 2016 and then we'll act accordingly and plan expenses accordingly.

Okay. And if I can just sneak one more and – or two more in.

One, for Bill. Bill, when you run the stress scenarios, can you give us a sense of what happens to the banks RWAs under your stress scenarios?

What's the RWA increase?

The RWA, there is migration of course that will happen. So RWA does increase.

We saw - as I said we've seen migration through the years, so there has been some impact on RWA already in the books. But I don't have an exact number for you for percentage increase in RWA throughout.

Okay. Maybe I'll follow-up on that.

And then Louis a bit of an unfair question. But last quarter, you reported the positive impact of the [indiscernible] share sales at a 15 basis point benefit to the CET1 ratio and this quarter the international investments cost the CET1 ratio 15 basis points.

Am I thinking about it the wrong way that you sold that to make room for the international investments?

Yes, you are. I think there was not - as you know that had been planned for awhile.

As I said, the planning has been going on for the capital for awhile. The fact was that we were really trying to in a perfect world try to get a bit of room to accelerate the buyback and then we faced a decision as I explained earlier in the call, that we hate to make, we had to make an arbitrage between improving certain transactions and continuing growth in assets in our risk weighted assets versus doing the buyback.

And I took the decision and we'll live by it and that we decided to go for organic growth versus the buyback. So – and as I said the only surprise we've had really was the 10 Bps impact on the currency move on the risk weighted assets.

So - and then the rest was stronger growth on risk weighted assets and we decided to go for that. So I would make - I don't think we're at plus or minus 15 Bps.

If the trade had be like 50 Bps, 50 in terms of capital then you can say yes, I'll sell some assets say for the end one. But given the capital we generate on a quarterly basis, 15 Bps is not that much and I would not take that kind of decision solely on that basis.

I think it was just as we explained before, the capital treatment, the accounting treatment of minority interest and related goodwill had changed and from the time we did the transaction and it became for the earnings impact, the net NPS impact we felt that it was better to optimize the capital structure by reducing it a little bit and keeping most of our shareholder rights at around the 22% where we are today. So that's what drove the thing and frankly if it had been the other way around I would have no hesitation to tell you that, but I'm telling you the way I see it.

Thank you very much, guys.

No problem.

Good afternoon. First a question for Bill.

When you're providing your stress test outlook, you said you wouldn't see the PCLs ratio exceed the 10 year range and just looking at that 10 year range, the average over the last 10 years is something, its very surprise to see how low it was, it was low as like 22 basis points. But clearly there were periods when it got closer to 35 basis points.

So is that what you're suggesting to us that you wouldn't sigh PCLs exceed that 35 basis point level?

Yes. I think looking at the last 10 years sort of range is a good place to look and I think it got high 30s was the top back in 2009 and this was as low as high teens.

So you're correct.

Okay. So now a follow-up question then, more for Louie.

You used the word manageable and plenty of people do, but it's not - manageable is not always obvious, it's hard to interpret manageable when someone else uses it. So would you consider it manageable or let me phrase it this way.

In the scenario that Bill outlined for us with PCLs approaching say 35 basis points plus, would you be confident in suggesting the dividend growth would continue uninterrupted?

You're asking a tougher question to me than you're asking to my competitors.

They didn't answer those questions, so I thought I would go somewhere else.

You're asking it differently. Listen, you know, there is no such thing as a normalized environment, so I'm not going to go into that discussion.

Where we are managing today is we're managing change and we are managing volatility. So that's where we perceived to be - what we're trying to do here at the bank.

Listen, if we have - here is the elements we're looking at for '16. First of all, what will be the growth and I've given you my or the firms, or growth view for '16, right, on an asset sense, that's Canada and Quebec.

Ontario we probably were slightly higher than that and the US will be probably above two. So that's what we're working on right now and if it changes it changes and we'll update you next quarter.

But as of today in August 2015 that's what we're working on. We're looking at a moderate growth environment, okay.

So we feel that at that level employment will still be positive, investments will still be positive, and we'll still be M&A. We aren't going to get significant increases in loan losses.

So I'll tell you what, I'll do something that my others haven't done. I think we have a pretty good chance.

We have a shot and increasing EPS in 2016 even if there are increases in loan losses and the oil and gas, how is that?

Right. But – I mean, you opened the door, so clearly if you were to see PCLs go from 21 basis points all the way up to 35 basis points, let's call it, that's not doubling but it’s roughly close to a doubling of PCLs.

In an environment like that, loans aren't growing, capital markets could be messy, the question I was asking your peers was in an environment like that would earnings grow and you know, it doesn't really take a very detailed model to figure out that they don't?

Yes, Mario, the only thing I would tell you is we are dealing with different hypothetical scenarios.

But that's what a...

Yes, but in 2009, our PCL reached close to 39 basis points and we did increase earnings into 2009. Now you'll tell me that was not a normal year.

I'll tell you is 2016 a normal year or '15 a normal year? So I'm giving you a precedent that in 2009, PCL hits 39 Bps and we still manage to grow earnings in 2009 on a year-on-year basis.

Right. And trading almost double that year?

Yes and what tells you that trading won't double next year?

I guess that's the question.

We don't know, we don’t know, Mario. That's the only point we're saying.

That’s its moving parts. All I'm saying is we have precedent in the past where we see an increase in PCL, and we manage to out earn the increase in PCL to actually increase EPS.

So it's not a promise, but I'm telling you, we're going to try and I'm telling you it’s been done before. That's all I'm saying.

Louis, for what it's worth that was a much more helpful conversation than the previous two I've had. Thank you.

Thank you.

Thank you all and clearly we're already ready for the conversation for Q4. So looking forward to update you guys on the plans for 2016 and our Q4 numbers call.

Thank you. Bye.