National Bank of Canada

Hélène Baril - Senior Director, Investor Relations Louis Vachon - President and Chief Executive Officer Ghislain Parent - Chief Financial Officer and Executive Vice President, Finance and Treasury William Bonnell - Executive Vice President, Risk Management Jean Dagenais - Senior Vice President, Finance Diane Giard - Executive Vice President, Personal and Commercial Banking Ricardo Pascoe - Executive Vice President, Financial Markets Luc Paiement - Co-President and Co-Chief Executive Officer, National Bank Financial and Executive Vice President, Wealth Management

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

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

Then Ghislain Parent, CFO and Executive Vice President of Finance and Treasury, will present the overall bank performance as well as the capital management review. His comments will be followed by the presentation of Bill Bonnell, Executive Vice President Risk Management, who will cover the bank's risk management section.

Following his comments, Jean Dagenais, Senior Vice President of Finance, will cover the business unit results. Then we'll 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 a very good performance in fiscal 2015 with revenues totaling $6 billion and adjusted EPS reaching $4.70, which represents a 5% increase from last year, meeting our mid-term target.

Furthermore, return on equity remain solid at 17.6%. The bank posted good results in the fourth quarter of 2015 with total revenues reaching $1.5 billion.

Net income amounted to $417 million or $1.16 per share on an adjusted basis, up 2% from last year. Credit quality remain solid with provision for credit losses at $61 million or 21 basis points.

Return on equity stood at 16.6% and a common equity Tier-1 ratio on the Basel III was 9.9%. In the quarter P&C continued to show solid volume growth and improving margins.

As for wealth management, the sector generated double-digit growth in fee-based revenues, offset by lower transactions revenues due to the market downturn. Financial market results were strong, driven by trading revenues and banking services.

For 2016, we expect Canada and Québec's real GDP growth to be around 1.5% to 1.6%. The low Canadian dollar supports business credit quality in manufacturing and service sectors, and we see positive signs in employment in B.C., Ontario and Québec.

At National Bank, our first priority in 2016 will be to pursue the implementation of our one client, one bank strategy by investing in new technology, and employee training, streamlining our processes and aligning our entire organization to be fully client centric. Our second priority is to grow in Québec and across Canada.

In Québec, growth will be generated through better executions across all three business segments. Outside Québec, we are implementing several targeted initiative, including: one, commercial lending penetration in specialty markets, where we have recognized expertise; two, opening carefully selected locations for high net worth individuals for private banking in Western Canada; and three, locate retail banking branches in close proximity to NBF wealth management offices in Canadian markets, following the successful pilot in British Columbia.

Our third priority will be to leverage Credigy's business model and specialized skills. We will also pursue our efforts to assess a prospect for replicating our super-regional model with respective partners and rapidly growing and under bank developing markets.

By executing against these three priorities, increasing operating efficiency and exercising sound risk management, National Bank will be well-positioned to continue driving growth and sustaining its financial objectives. Our mid-term target for EPS growth remains between 5% to 10%, although we do acknowledge that our common share equity issue closed in Q4 will make that objective challenging for fiscal 2016.

Mid-term target for ROE is still set between 15% and 20%. The dividend payout ratio target is between 40% and 50%.

We expect to achieve a neutral to slightly positive operating leverage for fiscal 2016. And our target for the common equity Tier 1 ratio under Basel III is to maintain a buffer of 20 basis points to 25 basis points, above 9.5%.

At this time, we do not have anything else to add on Maple Financial Group status, aside from what we already commented on October 1. At yearend 2015, our capital base is solid, with common equity Tier 1 ratio under Basel III at 9.9%.

We have increased our quarterly dividend by $0.02 to $0.54 per share in the first quarter of 2016 and we will continue to review the dividend payment every other quarter. Having issued shares, just a couple of months ago, we will wait at least a quarter before discussing other types of capital returns.

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

Thank you, Louis, and good afternoon, everyone. I will begin on Slide 6, which shows our key financial performance metrics for the current quarter.

First, on an adjusted basis. Total revenues amounted to $1.5 billion in the fourth quarter, up 2% from the same period last year, thanks to revenue growth in P&C banking and financial market.

Net income amounted to $417 million or $1.16 per share, representing a 2% increase from the same period last year. Return on equity was solid at 16.6%.

On a reported basis, now. Net income reached $347 million, up 5% from last year and diluted EPS was up 4%.

During the quarter, the bank recorded after-tax specified items of negative $70 million or $0.21 per share. As we announced to the market on October 1, 2015, the specified items include a restructuring charge of $86 million before tax or $62 million after-tax.

This charge relates to employee severance pay, premises optimization and other reorganization cost, and was initiated to continue our transformation plan to meet the needs of our customers and to achieve greater operational efficiency. Now, on Slide 7, for fiscal 2015 financial metrics.

Adjusted revenues totaled $6 billion, representing an increase of 6% on a year-over-year basis. Net income amounted to $1.7 billion or $4.70 per share, up 5% from last year.

Return on equity remained strong and within our corporate objective at 17.6%. Reported net income and diluted EPS were up 5% and 12%, respectively.

Turning to Slide 8, for the Q4 income statement review. P&C banking and wealth management represented 72% of total revenues in Q4, while financial markets and Credigy stood at 23% and 5%, respectively.

Both financial markets and P&C banking increased their net income on a year-over-year basis by 7%. Wealth management net income contribution was down $4 million from last year, due mainly to lower transaction fees and market decline.

For the other segment, the net loss increase was mainly driven by the provincial tax and salary, and expenses incurred for business development. On Slide 9, now for the fiscal 2015 income statement overview.

P&C banking and wealth management represented 71% of total revenues. All business lines delivered solid revenues and net income increased year-over-year.

Financial markets show the largest net income increase at 18%, followed by P&C banking and wealth management up 6% and 5%, respectively. Turning now to Slide 10 for the expense overview.

In Q4 2015, operating expenses amounted to $869 million, up 3% from the same quarter last year, due to our investments in technology, business development, employee benefits and provincial tax and salaries. For fiscal year 2015, operating expenses reached $3.5 billion, representing a 6% increase from the same period last year.

The operating leverage was flat for fiscal 2015. While managing tightly our expenses, we continue to invest in technology and process simplification to improve our efficiency.

This as mentioned at P&C Investor Day held earlier this year, this challenges our expense level in the short-term. But in the mid-term, it will bring benefits and drive a more efficient bank.

As Louis mentioned earlier, we expect to achieve a neutral to slightly positive leverage for fiscal 2016. Over the last two years, our efficiency ratio improved by 160 basis points, at 58.6% for fiscal 2015.

The entire executive team continue to be strongly committed to maintain a tight control of our expenses and to improve efficiency. Turning now to Slide 11 for the capital review.

CET1 ratio reached 9.9%, up 42 basis points on a sequential basis. The current share issuance and net income contribution added 42 basis points and 25 basis points to the ratio, respectively.

The volatility of credit spread and swap spread in Canada under CMB and provincial bond AFS portfolio, we moved 17 basis points from the ratio in the fourth quarter. Since most of the CMB and provincial AFS book is swapped to remove interest rate risk, this portfolio is subject to movements in the credit spread and the swap spread.

We have observed a narrowing of the credit spread in October, but this positive movement have been offset by the same trend in Canada swap spread, leaving the portfolio flat in assets. Risk-weighted assets increased by 0.2% in Q4 at $68.8 billion.

For Fiscal 2015, risk-weighted assets grew by 6% in line with our total asset increase. 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 fourth quarter of 2015, the gross loan book totaled $116 billion, an increase of 8.5% from last year. The retail book reached $67.6 billion, including $54 billion of mortgages and HELOCs.

The wholesale book represented 42% 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 the oil and gas sector declined slightly last quarter and accounted for about 2.7% of our total loan book. The majority of the autumn borrowing base review is complete, and as expected has led to a decrease in authorizations of about 2%.

This sector remains a concern. However, we continue to see our Canadian producers reducing costs, protecting cash flows and benefiting from the weak Canadian dollar.

During the quarter, we had one loan in this portfolio, moved to impaired status and has taken a provision for credit loss on this facility. We continue to view the potential impacts of a prolonged oil price decline as manageable and within our historical range of credit losses.

On Slide 14, the regional distribution of Canadian loans highlights the central Canada focus of our lending portfolio with more than 83% to borrowers in Ontario and Québec. The bank's exposure in the oil region remained low at 9%, but the largest portion being residential mortgages, which were about 60% insured and HELOCs.

The unsecured retail portfolio in the region is small, accounting for less than one-half of 1% of the loan book. So while we would expect this region's increased unemployment to cause a deterioration in credit metrics, we don't expect it to have material impact on our overall portfolio.

On Slide 15, a geographical breakdown of the residential mortgage and HELOC portfolio is provided. At yearend, Québec and Ontario accounted for 63% and 22% of the mortgage book, while Alberta represented only 6%.

The insured portion represented 42% of the book, while HELOCs and uninsured mortgages accounted for 34% and 24%, 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 half of 1% of that portfolio. I invite you to turn to Slide 16.

In the fourth quarter, provision for credit losses amounted to $61 million or 21 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 previous quarters.

PCLs in the commercial book were at $20 million or 26 basis points, up $5 million from last quarter and unchanged year-over-year. The commercial provision included a $15 million provision for one oil and gas producer, which I referred to earlier.

Wealth management provisions were stable at $1 million, and no provisions were taken in the corporate loan portfolio. Looking ahead, there are two key factors that are guiding our expectations for credit performance.

The first factor is our current conditions, the weak Canadian dollar, low interest rates and decent economic growth in the U.S. are generating a pretty favorable environment for both commercial and retail clients in our core market of central Canada.

The second factor is that these persistently low oil prices are directly impacting our oil and gas producing clients. Weighing these two factors, we maintain the 20 basis point to 30 basis point target for PCLs in the next two quarters, recognizing that if oil prices remain at these low levels, we'd expect credit losses to migrate higher from their recent cyclical lows.

On Slide 17, we see that gross impairments were stable at $457 million or 39 basis points of total loans. Retail formations reached $23 million, in line with previous quarters.

Commercial formations were at $19 million, slightly down from previous quarters. There were no formations in the corporate book and only $1 million in wealth management.

On Slides 18 and 19, you'll find highlights of our market risk exposure. Trading VaR averaged $6.4 million in the fourth quarter and we registered only two days with net trading losses over $1 million.

And on that, I will turn things over to Jean Dagenais for the business review.

Thank you, Bill, and good afternoon. I invite you to turn to Slide 21 to review the personal and commercial banking segment.

Revenues reached $717 million in the fourth quarter of 2015, up 4% on a year-over-year basis, mainly due to strong loan deposit and mutual fund growth. Personal banking revenues amounted to $348 million, up 7% year-over-year, mostly from loan growth and improved prime cost of fund spread.

Commercial banking revenues reached $257 million, up 3%, as loan and deposit growth was partly offset by reduced deposit margins, which were impacted by the yield curve. We expect that commercial revenue growth will improve in fiscal 2016, as a result of initiative implemented in fiscal 2015.

On a year-over-year basis, credit card revenues decreased by $2 million to $88 million, due the lower interchange rate. Insurance revenues amounted to $24 million, down $2 million from the same period last year, in part due to securities loss.

Operating expenses were up by only 2% from the same period last year, due to tight cost control, resulting in a 2% positive operating leverage. Provision for credit losses amounted to $60 million, up $4 million from the fourth quarter of 2014, when credit card losses were lower.

P&C's net income reached $187 million, representing a 7% increase from Q4 2014. Looking at the P&C key metrics for the quarter, loans and BA's continue to grow at a solid pace, up 6% on a year-over-year basis.

Volume from deposits also showed good momentum, rising by 4% compared to Q4 2014. On a sequential basis, net interest margin increased by 2 basis points to 2.20%.Deposit margin were 8 basis points tighter due to the impact of the yield curve, while loan margin increased 6 basis points due to the wider prime cost of funds spread.

Finally, the efficiency ratio was at 56.1%, a 110 basis points improvement from Q4 2014. Overall, the P&C segment continued to deliver good volume growth, improving margin, as well as solid cost control.

Please turn now to Slide 22 for the wealth management review. Revenues in the fourth quarter 2015 amounting to $340 million were flat from the same quarter last year, as higher fee based revenues were offset by lower transaction of revenue due to a weak stock market and few new issuances.

Fee base revenues were up 10% at $195 million as a result of AUM and AUA growth and customer's migration to fee base accounts. Net interest income was up 3% at $81 million, while expenses increased by 3% to $237 million, due to IT expenses and other support unit costs resulting in efficiency ratio of 69.7%.

Net income amounted at $76 million, down $4 million from the corresponding quarters in 2014. Loan and BA's reached $9 billion, representing a 7% increase from last year, while deposit increased 3% year-over-year to $25 billion.

Asset under administration stood at $308 million, up $6 billion or 2% from last year and asset under management rose by 14% to $50 billion. National Bank investment launched two Smart Beta funds managed by the Rothschild Asset Management, showing our commitment to the open architecture concept.

I would also like to underline that gross sales gained momentum in our partnership channels. Now, I invite you to turn to Slide 23 for the financial markets review for Q4 2015.

Financial market delivered solid revenue growth of 6% year-over-year, reaching $404 million, due mainly to strong trading revenues and higher contribution from banking services. Trading revenues amounted to $195 million, up 41% from last year from all types of products and better prop trading compared to the same quarter last year.

Banking services posted 18% year-over-year revenue increase, thanks to solid balance sheet growth offsetting in part weaker investment banking activity. For fiscal year 2015, banking services growth largely outpaced a reduction in financial market fees.

Credigy's revenue were up 17% from last year thanks to the acquisition of new portfolio this year. The other adding was down $7 million due to a small negative contribution from Maple Partners in Q4 of 2015 compared to a small positive contribution in Q4 2014.

The increase in operating expense was mainly due to strong revenue growth at Credigy. For Q4 2015, financial market delivered a net income of $162 million, up 7% from the corresponding quarter of 2014.

For Q4 2015, CVA and DVA was a positive $6.5 million, while prop trading, was negligible compared to $19 million loss for the same period last year. And finally, the efficiency ratio stood at 45.5%.

That concludes my remark. I'm turning now the call to the operator for the question period.

I'm not sure if it was covered in commentary on swap spreads and corporate spreads, but the loss on the available-for-sale securities this quarter, can I get a little more color behind what -- because from a normal run rate that's a pretty big divergence. Is that one item or is it a few different things?

I'll take the first crack at it and then Ricardo -- I think you're referring to the loss in Ricardo's business?

Well, I mean, if I look at the non-interest income, there's a $10 million loss and gains on available for sales.

Yes, that was equity related. That's equity related and that had the impact.

As you know, deadline, which is the old securities gains and loss line has being getting on a relative basis much smaller, as you know. You've covered up for many, many years.

And on an absolute basis, it's been relatively stable at relatively low levels. So as you know, we had a lot of volatility in Canadian stocks, particularly resource stocks in Q4.

And secondly, as you know too, the accounting standards have become a lot more stringent, and how quickly they have to recognize losses in that portfolio. So that's basically what's behind that.

It's unrelated to what Ghislain did describe, which is the regulatory capital impact, which was completely fixed income related.

I appreciate your comments, Louis. It just is not often that we see it negative.

The bank has -- it's been fairly stable at a low level, but it's fairly stable as well, that's why I was a little surprised to see a negative on that line. Not something we should expect going forward, fair?

I don't think so. But as I said, Rob, this line has been getting smaller and smaller on a relative basis.

And I wouldn't expect it to be a big contributor up or down, certainly not in a current environment.

And just quickly, I know you said there is not a lot to say on Maple, but as an external watcher, what should we be watching for in terms of when the bank will have a better idea of when you will have something to say on that front?

Stay tuned, for hopefully by next quarterly conference call, I think hopefully we'll have much better visibility between now and then.

The increase in the dividend was a little bit paradoxical considering you just did an equity raise. Now, I'd have my own little pet theory behind this, but could you give us some insight into thinking what's going on at the board level when you decided to increase the dividend this quarter?

I'll be curious to hear your theory, but at the end of the day, let me walk through our thinking here. The capital raise was related to the need to increase our capital cushion.

And the capital cushion had to be increased for three reasons, one of them positive, two of them less positive. The first one is that we had thought that through organic capital buildup, we would build a bigger cushion toward the end of 2015.

What occurred is on the positive side is that we ended up using more capital to finance the growth of different businesses, including Credigy, which did purchased a number of portfolios and did end up costing us a bit more capital than we have planned. And also our international envelope, we had planned to invest the money over a 24 to 36 period and ended up being spent because of good opportunities more over an 18 month period.

So we did used capital bit quicker than we thought we would in 2015. The two negatives was one what we just described what happened to our AFS portfolio given volatility, very unusual volatility, particularly in swap spreads.

And third one was the situation with Maple. So that's why we took the action, and being below 9.5% was essentially not an option.

And for us, we had no pressure from external parties. It was a decision that we made on our own and that's what we did.

The level of dividend is, as you know, just a small increase in dividend that we announced today has a 4 basis point impact on our capital ratios for 2016. So dividend, in and of itself, especially a small increase does not have a big impact on a cushion one way or the other.

The issue that we did raised 42 basis points, so just keep put it in perspective. So dividend, as you know, is a reflection of earnings.

Ultimately, as you know dividend increased in line with earnings. We had a good -- we increased earnings in line with our mid-term targets to 5% to 10% in 2015.

Also, we did want to signal to some extent that we think we'll be able to increase to some extent the earnings in 2016. So that's why we went ahead and said, hey, I think it is a reasonable move, it's a small increase, but we've been sustaining these increases for many years now and we think it's still a prudent thing to do.

So that's why in our mind, and I think it was easily reconciled with the Board on that thinking, that the two, the capital raise and the dividends were separate issues.

And I know you're trying to sidestep this issue in your prepared commentary, but now with the bank at 9.9% and you're stating that you're wanting to keep north of 25 basis points level above the 9.5%. Going forward, what would your preferred uses of capital be, if you were sitting with a north of 10% common equity Tier 1 ratio at the end of Q1?

I think, as you know, John, we've been very, very consistent in our usage of capital and the clear priorities on that. Number one has been for many years financing organic growth.

And when we made some decisions to use the capital to finance the strong growth in commercial banking and corporate banking and Credigy in 2015, I think we were consistent with that. Number two, its acquisitions, right now we don't see -- we see limited opportunities for acquisitions in Canada, they are existing, but they are very few.

And we've been deploying the envelope internationally. And three is other forms of -- I've promised people here that I will not pronounce the B word, so he's not going to get me to say it.

We'll talk about other types of capital return. So that's why I have been -- and I was very specific in my opening remarks, I am cognizant that we were talking the B word on last conference call and six weeks later we ended up doing an equity issue.

So I think we want to be a very stern as to visibility on a number of items that will impact our capital going forward. The two main ones I can highlight to you right now, John, that we're monitoring very carefully is what Ghislain just mentioned in terms of the 17 to 18 bps we lost on AFS, which we think that over a period of time we should be able to recoup.

And the other one is the old, is the end of the saga of MAV notes and ABCP, which should come to a final chapter between now and the next three quarters or so. And it's still about 9 to 10 bps there of regulatory capital.

So right there you have 27, 28 bps of which if we have some visibility, it may give us a bit more confidence in terms of being more specific about other types of capital returns.

If I could just start with, maybe a follow-up question on the liquidity book. Has there been any post-quarter change in the mix within the liquidity book or any additional hedging you've thought about or is the risk rewards sufficient to maintain the status quo and suffer this kind of down side when it comes.

I think I know your answer to that question based on some of your comments here, but I am also wondering, if there's any indications from the regulator that a concentration level probably above peers in [indiscernible] and CMBs, which are highly correlated, I think, if that's an issue you'd offer them.

No, Steve, I think keeping a large liquidity portfolio of government related paper in Canada and swapping out the interest rate risk is, I think, perceived by just about everybody as a pretty prudent way of doing this. I think, no, there has not been any changes and nor do I expect.

The only change, Steve, is I think is a hard learned lesson that we do need to keep a bigger buffer of an asset, than what we did in the past. So that's a very short version of it.

And then on risk weighted, pretty good job of managing that in the quarter. It looks to me like the biggest moving parts are, what looks like about 1 billion decline in RWA within counterparty risk on trading and almost 1 billion in terms of an increased market risk.

So can you get a little more detail there? And has the market risk number come back down in Q1 with equity and fixed income volatility moderating from Q4 levels?

Jean, will answer that question for you.

On the credit side, we have -- as you can see, we've revised some models, some models related to our OTC activities and some quality also of the book, so this has decreased the risk weighted assets. And on the market risk, as you can see, we had some changes in model for Q3 and Q4, and this should be it for this year and for 2016 also.

So the market risk was up, right? So you are saying that will remain higher?

This will remain higher. This was an adjustment to the models and this will remain there.

And just one more thing, Louie, back to your comments at the top of the call, leveraging the Credigy model, can you just build on that a little? Are we talking about something new or are we talking about expanded geographic footprint within Credigy or importing some of the collection capabilities somehow, if you could just expand on that a bit for me?

I will turn the question over to Ricardo. I don't think it's more of the same is what I would say, I think, in terms of the opportunities right now, Ricardo it's mostly U.S., right?

That's right. And there has been a real new opportunity set in purchasing performing assets for liquidation.

And I think that opportunity is growing and will be there for the next few years. So that's why we're very bullish on Credigy prospects for growth.

So not expanding geographically, but just dedicating more capital to it, given that it --

Correct.

That's exactly, yes. And I think we had -- our three-year target was we gave at Ricardo's Investor Day two, three years ago, and I think we have a good shot of meeting that target this year for the Credigy earnings.

Just hoping to get more color on the decline, in the oil and gas loan book. You talked about the impact from the borrowing base reserves reviews, but I'm wondering what else was driving that sequential decline.

It's both through the oil at the borrowing base reviews, but also we had a few exit accounts this quarter. There is some M&A activity in the third quarter that's generated some reductions in a number of accounts.

I think we had four accounts to leave the portfolio and there was one new account during the quarter.

And more broadly, I've noticed that there is some negative data coming out of Québec, the recent employment numbers, and definitely some headlines. If you could just update what you're seeing on the ground in terms of Québec and the Québec economy, I'd appreciate that?

We can say we've been negative in 2015 for Québec employment. I think Québec employment for 2014 to 2015 is pretty good improvement in 2015.

Our views are that government is in a good fiscal position. We've got a low dollar supporting very, very good levels of exports and the signals from our portfolio are positive.

In fact, as I mentioned in my text, the signals and delinquencies and beacon scores from both Ontario and Québec are signaling good indication, so continued good performance in the credit.

So just to build on that, Meny, we don't have major concerns at all for Québec for 2016 certainly.

First question, just to go back to your statements on operating leverage for 2016, I think it was flat or modest positive. You are talking about this at the all bank level, is that correct?

Yes, that's correct. That's for national bank, not a divisional prediction.

In Canadian P&C or P&C banking, which is your largest segment, you've been consistently positive in that business, and again, very good in Q4. In saying, you're going to be flattish or modest positive at all bank level, does this have more to do with some of the market sensitive business lines?

And perhaps a comment on what your revenue outlook is there, or are you expecting some of the investment spend that you communicated in Investor Day is going to slow P&C. What's really the -- how would you parse this on a component basis?

I think the investment over a mid-term period will be positive for all business lines, but particularly P&C that we discussed this year at the Investor Day. But we are investing a fair amount of money in technology we have in 2015 and we will again in 2016, and the amortization of these investments will be impacting the results for the bank, so that's why we're cutting cost at the same time.

So we remain very positive and optimistic. And as you know over the last two years we did improve our efficiency ratio by about 160 basis points.

Given the level of investments we plan to make in '16, it will be little bit more challenging to improve it a lot in '16, but we remain very positive for '17 and '18 that we will get, as we discussed at the Investor Day, that we will get not only a significant improved customer experience, but also efficiency through all the initiatives that we discussed at the Investor Day.

So just on that, its more of a comment on some of the investments you're making as opposed to any implied guidance on how wealth management or capital markets revenue is going to trend?

No, that's right. It's mostly investment related.

As you know also, wealth management is investing in private banking in Western Canada. So there are some of these investments being made in people, and to a lesser extent in real estate and offices.

So that's also a point of investment in 2016 that's going to be a bit more of an issue in terms of spending. But we also think that is, given everything that's going on in Western Canada, there's a very good timing to do that.

And my last question is on capital. We have talked about this a few times already.

Rather than deployment, I just want to take out your take on generation. I have a feeling you won't disagree if I say it's been somewhat strange year for capital trends, for the sector as a whole, but for National, you have the fewer sales take earlier in the year, the issue and the -- or the widening spreads and liquidity book and then the capital raise.

It doesn't look like though for the last two years the level of capital generation from National has been nearly as consistent as we had seen in prior years. I guess I'll ask you first, do you agree with that?

And secondly, do you have visibility now that you're on a more consistent path as far as the organic build in your capital ratio is concerned?

I would certainly -- you used the word strange for our capital management in 2015, I would --

Capital trends more as a --

Yes, I would use another expression that would be too colloquial to use having to add issue equity, and you know how much I like to issue equity, I will use another expression that I will not use. But I think it's fair to say that we've had some surprises, and it's been mix of surprises.

And as I said earlier, Sumit, it's been a question of choices. I mean, we did decide to commit more capital to Credigy, because we saw growth opportunities there.

And we did invest our international investment portfolio a bit quicker than we have planned, again, because we saw opportunities, so that's a positive. On the negative side, yes, we've had a few surprises and it's been less consistent than it's been in the past, I will agree with you.

I'll turn to Ghislain and Jean for 2016. I don't think we -- I'd certainly hope we're not going to have the same level of surprises, but --

Well, it look that its going to be fairly stable for all quarters in 2016, so this is what we're seeing right now.

Yes.

But I think what we're planning to do is to generate the same level of excess capital as we've had 15 bps to 20 bps per quarter. But from what we see so far, depending on organic growth opportunities and acquisitions, we'll see how we build up capital over the year.

And then there's the two special issues that I've discussed earlier, the MAVs unwind maturity and hopefully a reversal of what we've seen in AFS, which hopefully could be positive tailwinds as opposed to headwinds in 2016.

So AFS will keep an eye on spreads. Obviously, Maple you'll give us some color when there's a resolution there or update there hopefully in three months time.

And just maybe one reminder here at yearend, I know it's somewhere in the documentation, but how are you viewing the MAV notes potential benefit to the bank at this point? I know it's smaller than it used to be.

Yes, it's down to 9 bps. I've given the number earlier, Sumit, its 9 bps.

I think by the latest, I would say, probably three or four quarters from now we should recoup that, and if there is action to unwind early some or all of that portfolio, than it could be recouped earlier.

I just want to go one of Bill's comments on his remarks. It sounds like redetermination process resulted in facilities being reduced by 2% on average, which isn't a big number, if I understand that correctly.

But I also want to delve into what else is happening, not just the credit lines, but what I've seen is full revolver is going to partial revolver in a term. So the term component, getting that repaid within the next year is contingent on companies being able to sell their assets, correct?

The companies are hoping that the activity in asset sales increases and the capital market activity increases as well for sure.

Could you quantify how many, what proportion of the book maybe have there -- not necessarily the commitments adjusted, but the structure of the loan adjusted?

I don't have the number here. I don't think it's been that significant to-date, but you'd expect, we can look and say and talk and give it to you offline, but I don't have that number.

And Ricardo, I guess, you can pipe in as well, but essentially, if that term portion isn't repaid or some will be able to sell assets to pay off the term loan, some might not, and that's when we'd see the impairments. So it's still may be a few quarters away before that issue develops, right?

It's very difficult to be precise in timing. You don't know when events will happen certainly.

It depends also on cash flows over the next few quarters. We've done an extremely good job at reducing cost.

We've been really working on protecting cash flows. It helps, of course, the Canadian dollar is giving some aid to that, but it's pretty difficult to give any precision in terms of timing.

And then just based on what you see now, your target PCL ratio for the full bank is 20 to 30, and you're bumping along the bottom end of that range now. What do you think you're going to do next year?

Is it going to be the high-end of the range based on what you see now?

As I said in the text, we're comfortable with our target for the next couple of quarters. So crystal ball doesn't look out over a long period of one or two years out.

I think I'm trying to be as clear and transparent is a tale of two stories. The Central Canadian book, to be honest, performed better than we expected in 2015.

Commercial Québec and Ontario Retail as well it pleasantly surprised us. I think for the last four years we've been bouncing around the bottom of the target range.

And I think almost every quarter I've said we can't expect it to stay at the bottom forever, just trying to be an increase. And the two factors are what's happening in Central Canada, which is positive, and certainly, the oil and gas book specifically is a negative.

I'm equally surprised, if not more. And we've seen all the other banks report, four banks anyway, and most of them have had PCLs coming lower than I expected, and I think the Street expected.

I'm just wondering what needs to happen for that to change, not that I want it to, but --

I would agree with you there.

Then last one for Louie. You did downplay M&A based on what you're seeing in the market right now.

I just want to confirm that that 9.5% core Tier 1 ratio is indeed a firm floor on the management target for your capital level, and if the right acquisition came along, you wouldn't be willing to breach that level. You'd have to raise some equity if it was big enough, I guess.

I think, yes, you have to work on that hypothesis that we will not go below 9.5%. You saw us doing equity issue in Q4 to move up that number.

So that's how committed we are to that. I think you have to -- yes, if there is a significant acquisition to be made, and it would require a lot of capita, I think we would probably have probably have to do some kind of issue to stay within the range that we've given, so 9.5% plus a buffer of 20 to 25.

Louis, a very broad question. On the sort of rare occasion that I find myself talking about National's international banking investments, specifically, the stuff in Africa, I also find that I can't really describe how it fits into National and National's long-term strategies.

So could you help me, like put it in terms that sort of ties it into your long-term strategy. And I'm thinking about like how much is actually invested in this business now?

Do you view it as like just a free option on the strong growth in that region or is it a real long-term commitment? And when will this matter over, what time period?

Is it a decade? Is it five years?

Just, if you could help me think that through.

So let's go, and go through what we've said already. First of all, it is to some extent to give ourselves some strategic optionality.

So we started small. We got the Board to approve a envelope of $250 million to take minority positions in Q3 different banks or a financial institution in the high growth areas, preferably areas where we have at least a cultural affinity, namely that the frankly form factor is existing.

So we have three main investments right now, the one in Cambodia at 42%, ABA Bank 17%, AfrAsia Bank in Mauritius, and our 21% in NSIA in Western Africa. We have, let's state clearly and categorically, we have no intention of becoming a global bank.

We feel that the global banking model right now, given everything that's going on with the regulatory capital, global SIFIs, cost of compliance is not a very attractive model. So HSBC and others can sleep well at night, we have no intention of trying to compete against them.

Where we are and where we've been very successful at is being a super regional bank. So the hypothesis of strategic option that we're giving ourselves with the small investments is to see whether we could replicate in one or two high growth market around the world, the super-regional model that has served us so well.

That's what we're testing as a hypothesis. If a year or two or three down the road we don't get comfortable that we can execute that strategy with a high-level probability of success, then we'll eventually sell those investments and move on and take a large, hopefully, a nice investment gain.

If we feel that we can continue to develop a strategic narrative around that and we can actually execute on building in one or two areas in these markets a super-regional model that will work and that will be sustainable, then hopefully with that investment within three to five years combined with Credigy, we will create a forth reporting segment to the bank, to add to the three reporting segments that we have today. And for that to occur, to be relevant, a look a little bit to guidance to you, but I think that should represent at least 10% of the income of the bank on a yearly basis, and probably more than 10% of the marginal growth and profits over a long period of time.

So that's how we position it and that's how we are looking at it and going forward.

Is the current investment 250 right now?

That's correct, yes. That's where we're at now.

We've basically, as I said earlier in my call, we had expected to invest that over 24 to 36 months period. We ended up, because of opportunities, that came quicker than we thought, ended up investing at around an 18 months period.

And as you know, emerging economy is great growth prospect. The risks are there are too.

And right now, it's not about time to invest, because there's been significant disinvestment, and emerging economies are significantly less attractive than they were three or four years ago, at least in the market consensus.

Couple of quick ones hopefully here. Bill, the one account in oil and gas that went impaired and you took a provision for.

Just so that we can get a sense of how toxic these things can be. What is -- I mean, these are secured.

So what would be the provisioning level relative to the amount that was at risk here?

This follows around 50%.

50%?

More than historical.

And would you say that's probably higher than you would expect on these types of secured credits or is that what you would expect on these types of secured credits?

More than in the past, but it's a specific file to file.

And then, Louis, the question on higher capital ratios that you're solving for, does it make the upper-end of the medium-term ROE target attainable?

In a very good quarter, I think it's still possible. Yes.

And it's a very good question. We sort of discussed that internally.

But I think in a very good market environment, I think close to that type of the range and by quarter-by-quarter it could be achievable, yes. I still think that it is.

And then one last question. When I look at the personal and commercial bank and I look at the wealth management and I kind of look at the loans and the deposits, you're certainly growing your loans faster than your deposits.

Are you worried about how you're going to end up funding these faster loan growth, if you don't have the proper deposit growth here?

I think if we look at -- on a year-on-year, if you look at last 12 months, you're right, that we've grown the loan. Although, I think we did have a very good deposit growth too.

You have to look at the whole balance sheet. As you know, we do grow our wealth management, you have to look also at corporate deposits, which have grown quite nicely.

But your point is a valid one, Sohrab. I mean we do have to long-term, as you know it's not an option, it's a liquidity management, now from the regulatory standpoint is very prescriptive and we have to make sure that we grow our deposits in line with loans.

So Jean did mention that and Karen at the Investor Day, and there is a lot of action been done to make sure that we grow our deposit and funding in line with our loan growth.

A follow-on from Sohrab's question. On Page 21, I always appreciate that P&C margin evolution chart.

And I think I understand why the deposit margin is shrinking. But I wondered if you could give us some more inside as to why the loan margin is expanding?

If you look at the end of presentation, the supplementary package, you'll notice that prime BAs have increased 193. So this is one of the reason for it.

So it went from 175 last year to 193. So when we add the lower interest rate from the Bank of Canada, the bank did not reduce their prime totally, so we kept a portion of it to offset the loss in margin on deposits.

So that's why loan is improving, while deposits are reducing.

So it's not a sign that you're taking more risk. It is a sign of just a wider prime BA split?

Yes, exactly.

And there's been no drift in that -- Bill, correct me, there's been no drift in the risk policies of those credits and on the portfolio side. There's been no drift on that side.

We've been under way from the unsecured.

Bill, I'll ask you a little off-the-wall question. About your Alberta retail portfolio, we've heard from other banks that there are early signs of deterioration.

And I wonder from your vantage point, and I understand the smaller portfolio than peers. Do you see any retail deterioration in oil producing reach in credit?

It is a pretty small portfolio, as we've pointed out. Certainly, unemployment has gone up.

I haven't seen any signs that you have to stand out. But I wouldn't expect that it would be the institution that would be giving you the best signals on that.

It's pretty small. As you remember Peter too, a lot of our exposure in the west comes through retail expression and the rest comes through the wealth partnership, HELOCs and some of the retail products.

So that origination channel is typically a very, very high quality. So again that impacts you and our portfolio in that region.

And I don't think we'll be the best ones to be signaling to change.

Just a couple of questions, actually. So just to finish off the discussion of regional distribution of your loans on Page 14, you just discussed the retail.

What about the other side? Obviously, we've talked about oil and gas to death.

A little bit commercial and the other. Are you seeing any signs there, any movement in the watch list?

And if oil persists at these low levels into next year, should we think about migration into other kinds of commercial lending in Alberta/Saskatchewan and so on?

The reason why we have this concern, well, we think about what the impacts are of the oil prices. We certainly do look at, as we've said before, oilfield services, when they first impacted our oil and gas producers, then we look at the indirect exposures of unsecured retail and small commercial.

And as I mentioned to Peter, it's pretty small portfolio. We haven't yet seen signs.

And part of our portfolio, as you say, comes through the wealth channel and partnership and is of very, very good quality. So, no, we haven't seen it in our portfolio.

And then maybe just my last question. It has to do, Louie, with your second priority, which is to grow maybe more locations in Western Canada.

I think, obviously, White Rock must have been. So how aggressive are we talking about?

I mean you're making this your second priority, what should we see? How many locations?

What kind of an investment? And does this alter any of the pathway that you've provided for us in the Investor Day with respect to your revenue outlook for the business?

Actually, it was the third priority. Locate retail branches in close proximity to NBF.

The number two is the private banking expansion. So Luc has been looking forward to participate to this call, so I'll let him talk to about a little bit about the private banking expansion.

And also in terms of the retail branches close to NBF, aside from White Rock, Luc, how many others have we opened up and what else are we planning?

Thank you, Louie. So what we are trying to do there is, as Louis mentioned, some private bank activity in Western Canada on a bit more visible level than we used to.

And we have 1859, as you know, with mostly in Québec, but now we're going to go with 1859 storefront in Calgary and Vancouver. And we're doing the opening in Calgary on January 13 and later in the spring in Vancouver.

So we'll see how that goes. We go small, we go step by step.

And if that model works there, we will maybe expand, but one step at a time. At the same time we're doing, as you know, we've done White Rock a-year-and-a-half ago, two years ago.

But we see is proximity between the bankers and the brokers makes a huge difference, and across the street is close enough. So within all their regulatory concerns or issues there, but they're in door-to-door, next door.

And the IAs now days talk to their client and come and see my banker, and the banker is now part of the team more than anything else and they work well in White Rock. And now we're doing the same thing in Vancouver, Calgary, Winnipeg, and even two spots in Québec, one in Québec City and one in Montreal.

So those are the branches that will be located on the 22 floor and will be fully dedicated to the NBF network. And the last thing is, well, if that model keeps working the way we think, we might ask partners that would like to experiment their model like that.

So that it could be other openings, but that's down the road.

So I'm right then to assume, this is not a massive undertaking in terms of FTEs or locations. It's still at the earlier stages.

And it wouldn't really alter the revenue outlook you provided in your Investor Day. Is that a fair statement?

That is a fair statement. But it's quite encouraging early days, and we combine with technology and using the small footprint, I think it's quite encouraging to see what.

And as Luc mentioned, we are doing this not only outside of Québec, we're going to test two locations in Québec and see whether there is other markets where we could start addressing this in Central Canada.

Thank you, everyone. And we'll talk to you for the Q1 2016 call.

Merry Christmas and happy holidays everyone. Thank you.