National Bank of Canada

Linda Boulanger - VP, IR Louis Vachon - President and CEO Ghislain Parent - CFO and EVP, Finance and Treasury William Bonnell - EVP, Risk Management Jean Dagenais - SVP, Finance Diane Giard - EVP, P&C Banking Ricardo Pascoe - EVP, Financial Markets Luc Paiement - EVP, Wealth Management

Gabriel Dechaine - Canaccord Genuity Meny Grauman - Cormark Securities Sumit Malhotra - Scotia Capital Robert Sedran - CIBC Peter Routledge - National Bank Financial Sohrab Movahedi - BMO Capital Markets Doug Young - Desjardins Capital Markets Darko Mihelic - RBC Capital Markets

Good afternoon and welcome to National Bank's 2016 second quarter results presentation. My name is Linda Boulanger, and I am Vice President of Investor Relations for the Bank.

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

Joining us for your questions are Diane Giard, Executive Vice President, P&C Banking; Ricardo Pascoe, Executive Vice President, Financial Markets; and Luc Paiement, Executive Vice President, Wealth Management. Please also note that all documents referred to in today's conference call can be found on our website.

I would also like to remind you that a caution regarding forward-looking statements applies to our presentation and comments. With that, let me now turn the meeting over to Louis Vachon.

Thank you, Linda and welcome to the team. Good afternoon everyone and thank you for joining us today.

In the second quarter of 2016, National Bank delivered good performance in an operating environment that remained challenging. The bank took action to address credit issues in its oil and gas producers and services loan portfolio with a sectoral provision of $250 million before tax or 183 million after tax.

Last quarter we increased our guidance on credit losses to reflect the challenges that sector has faced. Over the course of the second quarter, our expectations were concerned allowing us to establish the sectoral provision.

Based on the current market environment we are confident that the sectoral provision will be sufficient to bring your BCL guidance back to 20 to 30 basis points. I also highlight that the performance of the overall loan portfolio excluding the oil and gas producers and service loan portfolio remains strong.

So why can we take a sectoral provision instead of increasing our general allowance? Because we wanted to address the credit issues of one well identified portfolio mainly the oil and gas portfolio.

The credit quality of our other exposures in our loan book remains within expectation and as you know we have limited indirect exposure to the all regions of Canada. Bill will provide in more detail update later on this call.

The bank also announced that during the third quarter, this current quarter, it acquired a majority ownership of ABA bank and financial institutions well positioned to take advantage of Cambodia’s long-term growth prospects. Following this acquisition which we do not expect any new significant strategic international investments within the next 12 months as the focus will be on consolidating existing operations.

We will share more information our international investments at our next Investor Day, which is it will be held in Toronto on September 16. Considering the previous elements, we are positioned to provide better guidance on our CET1 ratio.

At the end of Q2, 2016 our common equity Tier-1 ratio on the Basel III stood at 9.8% and our leverage and liquidity coverage ratios remains strong. We are focused on building capital and are therefore revising our CET1 ratio target to 10% by the end of fiscal 2017 at the latest.

I’m also pleased to report a $0.01 or 2% increase to our dividend brining our quarterly dividend to $0.55 per share. Turning to our quarterly results, including the impact of the sectoral provision adjusted debt income for the second quarters 2016 was $237 million or $0.60 per share, down 48% from the same period last year.

If we exclude the effect of the sectoral provision, the bank adjusted net income of $420 million or $1.14 per share was up 2% from the same period last year. P&C Banking continue to benefit from good growth in personal and commercial loans and deposit volumes and maintained tight cost control.

Our wealth management and financial market businesses navigated in volatile market conditions but continued to benefit from the diversification of their activities. Again one of the highlights of the quarter was solid contribution from Credigy.

Over the course of the year, we still expect low economic growth in Canada, volatile market conditions and continued adaptation to changing customer needs as well as fast paced technology evolution. The Bank’s ongoing transformation plans have good momentum and are delivering according to plan.

However, we are operating in an increasingly complex market environment and speed up change in the industry is accelerating. To succeed, we need to ensure good delivery and perfect orchestration on high growth transversal initiatives to have bank wide impacts like payments and machine learning projects just to name two.

In that context, we have decided to create a new function within the office of the President, namely that of Chief Transformation Officer and Executive Vice President, Strategic Initiatives Office. We have chosen to entrust his mandate to an internal leader in order to draw on his knowledge of the organization and ensure that the expertise developed is maintained internally over the long term.

I’m pleased to announce that this new role will be assumed by Ricardo Pascoe, currently Executive Vice President, Financial Markets. Ricardo has extensive experience in financial industry including 13 years at the bank.

Under his leadership, the financial market sector has carved out an enviable reputation and reported strong growth positioning as a market leader in Canada in various fields of expertise. In addition, he has successfully overseen an important transition to the organization’s values of collaboration initiated in the one-client one bank transformation making him the leading ideal candidate for the CTO role.

Ricardo will continue to be responsible for the Credigy and Innocap subsidiaries. Ricardo will be succeeded by Denis Girouard, currently Deputy Head of Financial Markets and Co-Head and Managing Director of Fixed Income.

With more than 26 years experience at the bank, Denis has a solid grasp of each of the groups sector. Under his stewardship the bank has positioned itself as a leader in government financing and structure infrastructure financing in calendar.

Both Ricardo and Denis will report to me. These announcements have no further impact on the office of the president as other members of the office will continue to report to me directly.

Before turning it over to Ghislain, I would like to thank Luc Paiement, who will step down from the EVP as Head of Wealth on June 30. During a career that has spend close to 35 years at National Bank starting with Levesque Beaubien, Luc has been a key contributor to the Bank.

Under his leadership, the wealth management platform was profoundly transformed and became a leader in Canada in a range of disciplines including private banking, third party clearing, and full service brokerage. On behalf of the Office of the President and Board, I would like to sincerely thank Luc for his contribution to the bank success.

Starting on July 1, we are pleased to be able to continue counting on Luc strategic input as Executive Advisor to the CEO. Martin Gagnon as you know will succeed Luc and will be present on the next quarterly call as will Denis Girouard.

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

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

First, on an adjusted basis, total revenues amounted to $1.5 billion in the same quarter, up 1% from the same period last year driven by revenue growth in P&C banking. Expenses were down 1% year-over-year resulting in a positive operating leverage.

Net income of $237 million or $0.60 per share was down from Q2 2015 essentially as a result a sectoral provision for credit losses recorded for producers and service companies in the oil and gas sector. Excluding the sectoral provision net income would have been $420 million.

up 2% from Q2 2015 or $1.14 per share. On the reported basis now, net income was $210 million or $0.52 per share.

During the quarter the bank recorded specified items of negative $27 million or $0.08 per share mainly to reflect tax changes. Now on Slide 7, for the first six months of fiscal 2016, revenues reach more than $3 billion, up 3% from the same period last year and expenses increased by 2% showing a 1% positive operating leverage.

All business segments contributed to the revenue improvement. Turning to Slide 8 for Q2 income statement overview.

P&C banking and Wealth Management represented a combined 71% of total revenues unchanged compared to the second quarter of last year. Financial markets revenue proportion was down 2% and 24% whereas Credigy represented 5% of total revenues, up 2% from the second quarter of 2015.

On the pre provisioned pretax contribution basis P&C banking net income leads with an 8% increase due to strong volumes and cost control. Wealth Management showed healthy growth considering market volatility and financial market declined by 2%.

Now to summarize on the net interest margin. When combined P&C and Wealth Management net interest margins trend was stable over the last six quarters.

Although P&C NIMs were down two basis points sequentially NIMs related to Wealth Managements lending in positive activities have 3.44% for second quarter were at the highest level of the last 18 months. Turning to Slide 9 for the year-to-date income statement overview.

After six months the combined contribution to revenues from P&C banking and Well Management is stable at 71%. Financial markets represented 23% of total revenues, down 3% from the same period last year while Credigy’s proportion doubled to 6%.

All business lines contributed to the pre-provisions pretax income growth on a year-over-year. P&C banking showed the largest contribution increase at 9% followed by Wealth Management and Financial Market at 4% and 3% respectively.

Turning to Slide 10 now for the expense overview. In Q2 2016, operating expenses amounted to $871 million down to 1% from the same quarter last year due to efficiency gains and lower variable compensation, partly offset by higher technology investments and servicing fees related to Credigy.

We maintain our objectives of the neutral to slightly positive operating leverage for fiscal year 2016. Our efficiency ratio improved by 9 basis points at 57.8% on a year-over-year basis.

The entire executive team continues to be strongly committed to maintain a tight control over expenses and to improve efficiency. Now, turning to Slide 11 for the capital overview.

CET1 ratio reached 9.8%, up 8 basis points from the previous quarter. The net income before the sectoral provisions added 29 basis points to the ratio while the sectoral provision removes 16 basis points.

The increase in value available for sale securities added 8 basis points to ratio, while the risk-weighted assets and others reduced CET1 by 13 basis points mainly from organic growth. Risk weighted asset decreased 2% sequentially at $68 billion due to foreign exchange and the impact of the sectoral provisions partly offset by organic growth.

Please note that a total capital ratio under Basil 3 comprise of all the capital instruments available to the Bank is solid at 14.8%. See Page 29 of the presentation for more information on the total capital ratio structure.

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

Merci, Ghislain. Good afternoon, everyone.

Before I turn to the slides, I would like to make a few comments about our oil and gas portfolio and the sectoral provision that we announced last month to address some questions you may have. First, to follow on Louis earlier comments let me provide more details on why we decided to take a sectoral provision.

Over the past few quarters we have observed a significant credit deterioration in one specific portfolio of loans to oil and gas producers and services due to the challenging environment in energy prices. Last quarter we increased our PCL guidance to reflect our expectations at some non-investment credit loans in this portfolio would become impaired.

At the same time, the other 97% of our credit portfolio has been performing very well benefiting from the benign credit environment in Central Canada where our loan portfolio was concentrated and the modest indirect exposure we have in the affected oil regions. We determined that the sectoral provision focused on the one troubled portfolio was the best way to address the situation.

Second, how do we assess the size of the provision? Well there are many uncertainties in estimating provision of this type.

Our estimate was informed by all of this stress testing and portfolio analysis done over the past year. While prices have recently improved, the spring borrowing base review has confirmed our expectation, a significant damage has already been done to some non-investment grade balance sheets in the portfolio.

The sectoral provision is our best estimates of the loss and value that the portfolio has experienced. Finally, what does it mean for PCL going forward?

We expect that individual provisions for credit losses and loans in this specific portfolio will be identified over the coming year and these provisions will be transferred from the sectoral allowance. In the coming quarters, we’ll provide updates on the size of these transfers in our investor presentations.

Now I invite you to turn to Slide 13 to review our loan portfolio. In the second quarter of 2016 the gross loan book grew to $121.9 billion.

The retail portfolio reached $69.3 billion, including C$55.5 billion of mortgages and HELOCs. The wholesale book represented 43% of the total and remains well diversified across industrial sectors with no one sector accounting for more than 7%.

Loans to oil and gas producers and services decreased to $2.9 billion or 2.4% of the loan book. I’ll talk about this portfolio later.

On Slide 14, the regional distribution of our Canadian loans is provided. Our portfolio is heavily weighted to Central Canada, a region that continues to experience benign credit conditions supported by the weaker Canadian dollar and low interest rates.

Almost 83% of the portfolio was in Québec and Ontario Provinces in which sharp growth has outperformed other regions of the country. Our exposure in the oil regions accounts for 9.4%, our largest portion of which is in residential mortgages, two-thirds of which are insured and HELOCs.

I'd like to point out that more than half of the 2.4% in the regions other wholesale relates to securitization activity in the financial markets group in which the underlying assets are insured mortgages. Additional details on some of the exposures in the oil regions are provided on the next slide.

So turning to Slide 15 you can see that approximately 40% of loans to producer and 45% servicers were rated investment grade. Related segments in the other wholesale column include $600 million in loans in the midstream segment and $300 million in refinery and integrated segment of which 80% and a 100% respectively were rated investment grade.

Looking at some of our indirect exposures, we have only $900 commercial exposure in the region and loans to the agriculture, commercial real estate and financial sectors account for almost 60% of that. Our unsecured retail exposure in the region was less than $500 million and although we did observed increasing delinquencies, most noticeably in credit cards, the exposure is modest and should not have a material impact on our overall credit performance.

On Slide 16, the trend in drawn and undrawn exposure to producers and services is provided. The key takeaways from this slide are first, we have been proactively managing the exposure throughout this downturn, both drawn and totaled exposure have been reduced by almost 20% on a year-over-year basis.

We recently completed about three-quarters of the spring borrowing base review and this trend of reduction continues. I should also note here that during the second quarter two loans on the watch list were fully repaid following a capital injection by private sponsors and M&A activity.

Next, as I referred to you earlier, we took sectoral provision of $250 million, which represents almost 9% of this sector's total drawn loan and 15% of the non-investment grade portion. Finally, we are comfortable that this portfolio has adequate provisions for credit losses.

Turning to Slide 17 and moving back to the retail portfolio, a geographical breakdown of the residential mortgage and HELOC portfolio was provided. At the end of the second quarter Quebec and Ontario accounted for 62% and 23% of the mortgage book, while Alberta represents only 6%.

The insured portion represented 42% of the book, while HELOCs and the uninsured mortgages accounted for 34% and 24% respectively. The average loan to value on HELOC and uninsured mortgage portfolio was unchanged at 58%.

I'd like you to turn Slide 18, personal banking provision declined in the second quarter to $38 million or 26 basis points. Specific PCLs and the commercial book increase to $27 million or 35 basis points, more than half of which came from the oil and gas sector.

Wealth management provisions were at $2 million and no provisions were taken in the corporate loan book. Overall, specific provisions for credit losses on impaired loans total $67 million or 23 basis points.

Excluding those in the oil and gas sector specific provisions were just 17 basis points in the quarter. Now that the sectoral provision has been taken to address the one troubled portfolio and to reflect continuing benign conditions we're observing in the non-oil and gas portfolio.

We are revising back our target PCL range to 20 to 30 basis points for the next two quarters. On Slide 19, we see that gross impairments increased to $521 million or 43 basis points of total loans.

Retail formations declines in the quarter to $21 million, formations in the commercial book were $89 million due to formations in three oil and gas accounts. There were formations in the corporate book and 3 million in wealth management.

On Slide 20 and 21 you will find highlights of our market exposure. Trading VaR averaged $6.7 million in the second quarter and we registered two days with trading losses.

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 23 to review the personal and commercial banking segment.

Revenues were $698 million in the second quarter of 2016, up 2% from the same period last year. Personal banking revenues amounted to $330 million, up 4% year-over-year, stemming from good loan and deposit growth.

Commercial banking revenues were down 2% year-over-year at $255 due to lower derivative and FX activities as well as the impact of the prepayment fee received last year. Credit card revenues increased by 7% from 2015 to $88 million as a result of good volume growth and improved margin.

Insurance revenues amounted to $25 million, a 4% increase year-over-year. Operating expenses at $395 million were down 2% from the same period last year, due to efficiency gains and lower variable compensation.

Pre-provision, pretax earnings were $303 million for the quarter, up 8% year-over-year. Provision for credit losses amount to $315 million and include the $250 sectoral provision for non-impaired loans for the oil and gas producer and service company loan portfolio.

Specific provision for credit losses increased up to $56 million in Q2, 2015 to $65 million this quarter also mainly on the oil and gas loan portfolio. P&C's key metrics for the quarter show that loans and BAs continued to grow at a good pace, up 6% on a year-over-year basis with retail loans increasing 6% year-over-year, while commercial loans were up 9% These increases were probably offset by lower energy loan.

Volume from deposit also showed good momentum rising by 8% compared to Q2 2015 with the 7% increase in retail and 11% increase in commercial deposits. On a sequential basis, net interest margin was down by two basis points to 2.20% due to the narrower prime rate cost of funds spread.

Finally the efficiency ratio was up 56.6%, a 240 basis points improvement from Q2, 2015. Overall, the P&C segment continued to deliver good volume growth and benefited from its efficiency program.

Please turn now to Slide 24 for the Wealth Management review. Revenues amounting to $355 million were down 1% due to lower transactional revenues partly offset by higher net interest income.

The increase in net interest income came from both higher volumes and higher margins. Fee-based revenues at $192 million were up 1% compared to Q2, 2015, despite a weaker stock market this quarter compared to the same quarter last year.

Expenses were down by 3% to $238 million, mainly from lower variable compensation. The efficiency ratio was at 67%, a 100 basis points improvement on a year-over-year basis.

Net income amounted to $86 million, up 2% from the corresponding quarter in 2015. Loan and BAs reached $9.4 billion, representing a 10% increased from last year, while deposit increased 12% year-over-year to $27.4billion.

Asset under administration stood at $316 million, down 1% from last year due to market conditions. An asset under management rose by 7% to $52 billion as a result of client migration to discretionary management.

Now, I invite you to turn to Slide 25 for the Financial Markets review. Financial Markets revenues were stable year-over-year at $429 million, trading revenues were $198 million in Q2, 2016 compared to $201 million for the same period last year.

Trading revenues were impacted by mark-to-market valuation adjustment due to new collateral agreement with some counterparties that will reduce funding costs in the future. Banking services revenues grew 19% to $75 million due to more robust credit activities which more than offset the decline in revenues from financial market fees due to lower activities in equity capital market, fixed income and advisory fees.

Credit risk revenues up $71 million in Q2, 2016 were up 67% year-over-year steaming from new portfolio equation. Finally other revenues were down from the same period last year due to dividend on an investment received in Q2, 2015.

Expenses at $195 million were up 3% from the same quarter last year due to servicing fees of credit risk acquired portfolios and professional fees partly offset by lower variable compensation. The efficiency ratio was 45.5% for the quarter compared to 44.2% in Q2 of 2015.

Financial markets net income for the quarter stood at $169 million compared to $174 million for the same period of last year. That concludes my remark.

I will now turn the call over to the operator for the question period.

Good afternoon. Just one quick one here on the location of the sectoral that was booked in the P&C segment.

I'm just wondering why that wasn't in the wholesale segment or capital markets. I guess because that's where the loans resided, but you know the way to think of it is those are the clients you have in your investment bank, you lend the money and you try to make extra money doing M&A stuff and raising equity and activities like that for the extra fee generating stuff.

So why was it in P&C?

Gabriel, this is Jean Dagenais. On Page 13, we showed the split of our portfolio of oil and gas and there is $1 billion in corporate and $1.8 billion in commercial and services enterprise.

And the reason why its book in P&C that we have taken the sectoral provision on the non-IG which are mostly located in the P&C and the commercial book, not in the corporate book. And the fact that this isn't commercial book doesn't prevent financial markets from selling other type of products to those businesses and helping them if they want to go public.

So were these companies where you weren't really generating extra investment banking fee revenue from?

They were, Gabriel, its Louis here - there were, but under one client one bank, which we launched 9 years ago for cross-selling purposes particularly when client does not need to be in one business sector to prevent from being cross-sell by other groups. And I think in terms of, Gabriel - I think in terms of the reporting, I think it was five years ago, I think four years ago we've been reporting oil and gas in the P&C segment.

So it was just for consistency purposes that we did that. There was no other reason.

We had this year we're all booked into the P&C segment also when we look at first quarter result.

Okay. Thanks for clarifying.

Now let's address the capital situation here and given the two recent announcements, the acquisition in Cambodia of the sectoral provision keeps your core Tier 1 ratio around where you were last fall, I think there were some concerns building that you'd have to go to the market again. However, it looks like there is some internal capital generation being emphasized here as oppose to having raise equity, i.e.

much stricter expense control or grow earnings through expense management if you will. And you lowered the dividend payout ratio target.

Is that the main message you're trying to convey here?

Let's just make sure this - we take them one by one. We have not changed the dividend payout ratio.

I think we did put a 40% somewhere, but I think that caused confusion. The target in terms of dividend payout ratio, Gabriel remains between 40% and 50%.

Okay.

There is no change to that. More specifically, I think let me be a very specific on this.

We will do our best and I think at this stage we are changing our capital target to 10% as you noticed on the slides. You raised a very good question as why now.

We've known for a while that we needed to increase our target in terms of capital, after all we did do an equity issue in October. However, when if you go back to end of 2015 year, we knew a couple of things already.

We knew we had a big question mark on our value of our position on Maple. We knew also that we at some point if oil prices did not stabilize, then we may have to take an increase in general allowance or a sectoral provision on oil and gas.

And thirdly, we were already in discussion and I've been in discussion for many quarters on acquiring a majority position on ABA Bank. So, those were three items which basically hit the first three quarters of 2016 and had cause some headwinds in terms of capital ratios.

So, having increase our target three quarters ago and then to have three quarters of explanation as to why our capital ratio was not going up, we feel it was not - we feel it was better simply make - simple keep our target at nine and three quarters, get these issues on at the way, go through them and then once these headwinds are out at the way we would then change our capital ratio target and that’s what we are doing today you know that it will hit capital for Q3 but after that we see no other headwinds for us and the priority is clearly to get our capital ratio about 10% and I would said Q4, 2017, but as I said on my call is the latest, it is our priority to do that. At this stage we do not planned and we think we can do that organically without having to do an equity issue and the equity issue I can assure you will be the very, very last option that we would look at, but I think based on what we seen in the targets and their capacity to generate excess capital on a quarterly basis we feel we should be able to do that by without having to raise additional equity.

Does that answer to your question?

Yes it does it – but the – you don’t foresee any issues on the horizon fair point but the – what we’ve learned in the past few years and I just going to ask almost for every other bank is the Basel III is a much more volatile metric than what we use to know the macroenvironment is for seems to be more volatile than it has been in the past, so there’s always something coming from somewhere unexpectedly that could put you aside of certain capital target, do you have in other banks just talking about balance sheet optimization, are you are going to shrink certain trading books that could free up capital, do you have enough levers to pull to really avoid that equity raise?

Yes, is the fair answer and keep in mind the – as you know we did lose 26 speeds to volatility but those were now permanent losses I’m referring to you – loss in terms of basis points and the available for sale portfolio. We did recruit about eight basis points of that in Q2 but we still have 18 basis points that we could recruit going forward so that the market could be I think equally positive or negative.

Secondly as you know we did change a little bit the way we positioned our books using more held to maturity as oppose to available for sale to reduce the potential impact of further volatility on our book, so we have taken some action to reduce the potential volatility. We have not eliminated that, but I think we’ve reduced the potential impact on volatility on our capital and lastly, I just want to reiterate yes, we do have means and where everybody is looking to optimize the balance sheet and that’s what we are doing.

Okay. One last one I am not getting the part here but talk about your international businesses, you are not going to make more acquisitions in the next 12 months you are focused on integration, what does that mean, are you operating them as if they are part of the bank?

I looked that the more as strategic investments.

Well, we now owned 90% of ABA banks, so it is part of the bank. At least I can tell you from a government ends and the regulatory standpoint it is part from the bank, so that is the first time really that we acquire majority control, majority operating control, the bank outside of North America, so for us it is a step and it is something that we need – to get operations we all need to get comfortable with that position we are predict as we made the acquisition but we don’t want any surprises there, so that remains a number one priority.

Secondly for the other investments that we made after ABA bank, ABA its been our first investment. We’ve had a over a close to three years now of working with them and we obviously got comfortable with them.

The other investments we made are new investments and we still and they get to know phase of these investments and those relationships and that’s why we are quite comfortable taking a 12 months pause before making, if necessary or we feel the opportunities are there but wait for another 12 months for doing anything else. Again, clearly the priority right now is increasing our capital above 10%, so that’s to be very clear then.

Okay. Thank you for the answers.

Hi, good afternoon. I have a question on operating leverage, year-to-date positive operating leverage of 1% within – you are right that you expect a neutral to slightly positive operating leverage for the full year and I’m just wondering if that a signal that you expect expense growth to quicken tied to the transfer of the restructuring that you’re doing, that transformational piece of the puzzle or what’s the reason why it seems like you’re downplaying the outlook for positive operating leverage for the year as a whole?

I will start and then maybe Ghislain or someone add, A, I think the transformation is going as planned. Financially Ricardo’s nomination, I don’t think will change anything in terms of our financial targets for this year and next year, I think it’s more a question of how we take the transformation going forward over the next few years as opposed to the next quarter or so.

Secondly, I think we like to be conservative on operating leverage, I think that’s what you should assume that in those targets, we’re being a conservative. Anything else Ghislain or Jean?

The only thing is that it always depend on the result or the expense for last year that you see the growth and the neutral operating leverage is like a minimum.

Yes maybe I could add that, we still – we continue to invest in technology, so that could have an impact on the second part of the year but as we mentioned, essentially we want to be prudent on our forecast on the operating leverage.

Then If I can just add a follow-up question just on Ricardo’s appointment, seems like the message being conveyed is just this transformation, this restructuring is even more on the front burner and I’m wondering whether there is something that changed that made it more of a priority, if I think that you can comment on that specific announcement, specifically why it came, when it did?

It’s a very good question, Meny. First of all, as I said the transformation is going well but what has changed is this, we did, we’ve had a number of meetings at the Office of the President over the last few months, essentially discussing not so much the strategy but more on how to implement the strategy and one thing what has changed, I would say in terms of our perception Meny, in the last 12 months is a couple of things.

One is that the speed of change is accelerating, which is you know no news to anybody on this call but the way we need to execute is the transformation certainly is picking up pace and I think it’s an issue for National Bank and everybody else in the industry. So that’s one thing, the second one is what we are seeing more and more is that not only the transformation is getting more size getting faster but it’s getting more complex, specifically on where we call transversal or cross sectoral issues, and I have discussed that on my opening remarks but I will give you couple of examples.

Payments for instance, we know that the CPA just came out with a new proposal on payments, we know that the payment system in Canada will change. Payments touches almost every single departments of the bank.

It touches treasury, it touches capital markets, it touches commercial, P&C and operations. Another one is machine learning, we have machine learning capabilities, we do algo trading in capital markets, we have robo-advisors with the InvestCube and Wealth Management, but these expertise are very in silos and we don’t want these expertise to stay in silos, we want specific key expertise like machine learning, expertise in payments to be transversal to the organization.

So that’s why we said we needed to create someone put somebody in charge at their BDP level not an external consultant, we love them dearly but we prefer one of our owns and to be managing their transformation because we see more and more of these thing. Thirdly, just as important, change management is becoming a key, key critical enabler for any institution in this market changing I say that to my employees all the time, the only thing I can promise my employees and I am sure I will meet my promises is more change.

So change management has to be an internal expertise, so that’s why we want to create that job so that not only we learn going forward, how to execute change but that expertise stays internally, it does not go away with consultants once they leave, we want that expertise internally. So that’s why we are creating a very senior job, it’s going to be a small team, we don’t want bureaucracy, created for this purposes, Ricardo will lead a small team but it’s going to be a highly talented team and that expertise we want to keep internally, so those were the really the conclusion in terms of our internal discussions is more how to effect change and to have adaptability become a key strength of the organization, as opposed to okay well just do a transformation and after that it will go back to running to bank, that's not going to happen.

That's not going to happen. The changes there and technology is changing everything and it will continue to change and that have to be a key component of our strategy, and keep it ability for the bank.

So that's why we did it that way and that's why we announcing it. And Ricardo was the most experienced of our business line and he has done a very good job at transforming capital markets, look at what capital markets look like seven years ago to compared to today, and Ricardo was re-challenging to how the research was run and how the business was run our cross selling was being done.

So Ricardo has been very successful in transforming capital markets and he had the credibility to be able to do it for all banks and that's why we put him in that position. That being said, Ricardo is kind of have to work with the other members of the VDP, the other members of the VDP not working for Ricardo, they're going to work with Ricardo.

So it is going to be a sectoral matrix reporting line, and but we're quite excited about it, and we think it's the right thing to do.

Thank you for that.

Thanks, good afternoon. I want to start by making sure I'm understanding how the energy provisions are going to look going forward in terms of geography.

So first half I noticed in your item that you call EPS excluding specified items, you are using the $0.60 so with the sectoral number in those results. So going forward when you have energy provisions that occur as specifics is it safe to say they will not be anything in energy up to $250 million of provisions will not be included in this specified your EPS excluding special items at the right way to think about it?

Yes, that’s correct.

And so what – how will you disclose this to us, I think Bill was saying something about that and I may have lost part of how that, how will that get disclosed to us going forward?

Yes, if you look into the quarterly report there's a table on the note six that to describe all the allowance for loan losses specific individual general and sectoral all and you'll see the transfer that will come out of the sectoral allowance to be classified as specific when impaired loan are reported.

All right. So we had – we had another bank yesterday tell us a number that they called their expectation for their cumulative energy loss rate and their range was in 3% to 3.5%.

If I look at what National has done here and depending on where you want to use as a denominator. If you want to include the midstream and downstream as well, you guys look like you're at something like 8% to 9% on that same cumulative methodology first off correct me if that number is wrong, but secondly and I'll give this to Louis is it fair to say by taking this sectoral at the level you did you feel as if the energy provisioning issue is no longer a topic of conversation for National?

I think there was the first part of your question -

Yes your numbers are correct.

So Bill is in agreement with your numbers. On the second part, clearly I think intent is to put this issue behind us, now it will not be completely behind us because we’ll have to be reporting on a going forward basis, and we don't know whether our process can do and if they go back to $20 then it may go back to – we may go through to 50 then we’ll have to see what happens between the 20 to 30 days , but even in a worst case scenario, we feel now with the $250 million of sectoral provision to $70 million dollars of losses at specifics that was already taken that even on the destructed worst case scenario we’ve discussed in the past that we would remain within the 20 to 30 days.

So you definitely got some runway here in terms of energy losses before any for lack of a better term any new money, any new capital of the shareholders would have to be put towards energy that's a fair statement?

That is a very fair statement.

Okay. So then let me go to the second part, so the energy issues off the table you've talked a lot about Alberta consumer not really being I think we can all see it's not – it's not nationals issue if it becomes a bigger problem.

So why not address capital in a similar way to giving us a few pieces to think about here 10% is the target by the end of 2017 at the latest, but I think you'll agree for the same level we are now three months from now, that's still decent amount of time especially compared it to where you are against your peers? If I go back to just over year ago, you sold a portion of your investment in Fiera to raise capital and give yourself some more flexibility whether its Fiera, whether it's Credigy, whether its some of the international, it would seem like you have some options here, why aren't you considering taking action on capital, the same way you did on energy to get that issue behind you too?

Terrific question I think, first of all, I think on the 10% I think and why we change the target, I think we have given the history to Gabriel. The second one is I think we are doing our ish.

We've done the acquisition and it will impact capital for Q3. Going forward though, I think what we've shown some of these, we still able to generate 15 to 20 bps even in environment where we had at least on – well, the first quarter of the year we had some specifics losses in oil and gas.

We still generated 15 to 20 bps of excess capital on a quarterly basis. So, I've told you where the headwinds were.

The headwinds were you know may fold the sectoral provision and the ABA. Those headwinds are that will be by the end of Q3.

So we feel that we can get there and yes, I know it's still a long time away, Q4, 2017, but at the same time, I'd say, twice so far at the latest. So we'll try to get there sooner, absolutely you can take that.

But given our recent history with capital, don't blame us we're being overly conservative.

No. I hear you there and I just -- it sounds like, I don't want to put words in your mouth, so only to confirm and I'll leave it there.

It doesn't sound like, obviously an equity raise would be the very last priority and I think your views on that going back to 2008, 2009 are well understood, so even leaving that aside it doesn't sound like you're contemplating any type of an external capital event, a divestiture to expedite the process to get you to 10%, is that best stuff?

That I would say is no. That is correct.

All right. Thank you for your time.

Hi, good afternoon. I actually just want to clarify an answer that I think both Gabs question and one of Sumit, so Jean, I knew the commercial energy exposure was in the P&C, I didn't realized.

Is all energy exposures in P&C or just a commercial loan?

Just a commercial loan, you have another billion that is in a corporate banking also which are mostly investment grade as we'll explain in this presentation, we have that on the slide 13, 14, 15.

Yes. So I can appreciate that those are mostly investment grade and I guess you're not as concerned about them, but if a loan loss was to materialized in there, would it be covered by the sectoral or would that require a new provision?

It would probably be covered into the regular 20 to 30 basis points.

Okay. And just quickly in terms of revenue and earnings contribution from some of these energy credits in the P&C segment.

Is it material?

Yes. It is a significant revenue portion, not that largest pie, because obviously P&C is mostly retail in commercial but it is significant.

Can you give a percentage range Jean in terms of what the revenue and earnings from the energy credit, but the energy business might be in P&C?

I don't have that now, but I can provide you something later on.

Okay. Thank you.

That will be helpful.

Rob its Louis here. Just a point that's clear here.

We're not as you know we are right sizing the portfolio but we're not getting out of the business, lending to energy companies. In fact we are navigating these difficult orders and some of the loans are in special loans, but we don't plan to get out of business.

And they continued to generate good income and they certainly continue to generate good hedging and FX income going forward. And we don't see that changing.

I understand. I was just looking for little bit more clarity.

I appreciate it. Any extra color would be helpful.

Thank you.

Yes. We'll get back to you offline.

Thank you.

Hi. Louis you touched on payments in response to question earlier.

I wanted to go little bit deeper on that. Five of your important peers agreed to share their customers with Apple, via the Apple Pay application.

What are your thoughts on that and how does what they did impact your own mobile payment strategy.

Clearly we will follow suit and join Apple Pay the timeline is to be discussed with my colleagues here but I think we echo some of the comments from our competitors that is customer driven market and that's where the customer wants, that's what they will get. In terms of I think we are - we expect that the - in terms of cost and everything else, in terms of sharing I think it should be similar between the different market players.

That being said though Rob as you know, given the fact that National Bank has a large corporate and commercial banking business, large in fact on a comparative basis to our peers any impact on payment is going to impact us less because retail payment is a smaller proportion of our revenue and has been historically really from the last 10 to 20 years is smaller percentage of our revenues than our peers. So, we're watching that very carefully, we will follow suit very soon but on a relative basis we feel we less impacted than they are.

And that’s why frankly we were not at the forefront of those negotiations, we were somewhat hiding at the back and waiting for these guys to settle on the negotiations.

Some your peers have admitted they see Apple as a competitor, how do you see Apple core or any of the other non-traditional players.

I think we live in a world that - and we already seen this that competitors and partners and clients all mixed up among the three so, welcome to our world.

Okay, thanks.

Thanks. Quick question first for Bill, Bill what’s the lesson learned from the oil and gas book?

I think the lesson learned is that we will continue to support sector in Canada that is pretty important sector for the GDP, it's been the sector that's created a lot of jobs and lot of wealth in Canada and it’s the role of the Bank to continue support that the sector like that. The downturn which happened I think happened much more quickly and more severely than was anticipated in our stress testing and forecast.

So, I think the one of the lessons is and looking forward to the possible severe events, the events that were more severe than what was interpreted and before. So lessons would be things can go more standard deviation away from expectations than what was might thought of initially.

So it was not reflective of your risk appetite?

No, I mean no.

Yes, I don’t think its reflection of risk appetite reflects on the - how many standard deviations away from the historical events that did happen some.

There is question - so obviously very, very good questions really. I think we have been in that business for 30 years so, the way we look at it we’ve had almost no loan losses in that book for 20 years up to early 2015 and when we look going back at the return on capital and the revenue generated versus the loss we ended up taking this year, with - and we always you raised a very good question every time there is a risk management issue like this we always be questioned, and should be questioned, what we should have done differently.

Bill raised a very good point, I think we benefit from hindsight, I think our stress testing should have been - we should have put in even worse case particularly as the price of oil kept going up and up and up, we should have probably added more standard deviations on the down side, that’s certainly one. But for the rest of the way we did the business, the way we supported, the way we cross sold and how we generated the income and how we approached it, that’s how we have been in that business for 30 years.

It's not a question we were the Johnnie come latelies, trying to catch up and being too aggressive on the street, it was a segment that we targeted and as Bill said, we felt of good economic and economic development value and as I said earlier to Sumit, we don’t intent to lead the sector. We feel the sector will be different after this crisis.

There will be structural change to the industry but the industry will continue to exist and we intend to continue to support the industry.

Okay. And if I can just do a one quick follow up I guess to Ghislain or to you Loui, I know that you have medium term objectives around your common equity Tier 1 ratio but Ghislain I think went out of his way to talk also about the total capital ratio of the bank, I just want to make sure you’re not - do you have a set target for that or is there something unique there that you’re trying to draw attention to or what was the subtlety there as to why we should look at the total target ratio - capital ratio?

Thank you, Sohrab for the question. This is Ghislain.

Of course we wanted to draw your attention to the total capital, we’re talking a lot about this CET1 but our Tier 1 and also total capital are very strong. So that was a purpose of my comments.

Okay. But the constraining factor for you is CET1?

Yes, of course, of course. The main ratio that we follow is CET1 and then to answer your first question, we don’t have an objective for total capital.

Okay. Thank you very much.

Just to answer your previous question about the percentage of revenues in P&C Banking, it’s 2.7% of revenue for Q2 and for the cumulative six months the same thing, 2.7% of revenue out from energy in the P&C banking sector.

Hi, good afternoon. I’ll be quick here.

So just on the P&C banking side, I noticed that non-interest revenue was down I think 4% year-over-year and it just seem to back the trend a little bit, wondering what caused that or what was the driver there?

You're right Doug, the non-interest revenue were down 4% for P&C, it was up 5% year-over-year for personal banking mainly due to current acquisition in banking fees. Now in the commercial side, non-interest revenues were down 14% year-over-year and that was due to lower derivatives and FX activities, as well as the impact of the prepayment fee we received at the same time last year.

As you know our commercial segment is larger than our peers on a relative basis and our non-interest revenues may fluctuate much more from quarter-to-quarter. That being said, looking forward, we do not anticipate the negative trend to continue.

We will show positive growth by the end of the year and our non-interest revenues in for all the P&C. We have seen some uptick in commercial client hedging activities during the past months and looking to the next two quarters, we expect our commercial non-interest revenues to grow at reasonable pace.

Thank you. Giard, thank you very much.

And then just on the business lending and obviously your loan book has grown quite rapidly and I think there is a few sectors that are responsible for that - just hoping to get a little bit more detail and what’s really driving the business loan growth because it seems like you’re outpacing your competitors by a pretty wide margins?

Well our vertical or specialty vertical strategy is really a success for us and what we have seen in three specific sectors first on real estate financing, second on agriculture mainly in agri foods and third is something that really differentiates us from the rest of the group is our business transfer financing and we have been adding some capacity, we have had commercial bankers across the country and that really has been paying off for us.

Great, I will leave it there. Thank you very much.

Hi thank you, I’ll be quick as well. I just wanted to confirm a few things with you, first of all, I realized we’re going to have an Investor Day in September on ABA but I just wanted to confirm a couple of things, first is you mentioned the accretion to your earnings $0.12 in the gain and so on but there is a $0.05 impact in fiscal 2016.

I just wanted to understand first off is there anything seasonal in that or is that more or less like a half year kind of run rate of earnings accretion that we should expect from ABA. And then secondly on top of that, just if you can give me a rough outline of geographically where ABA’s earnings will show up?

The first thing is yes it’s roughly about half a year that is $0.05 and the - all the international investments are recorded in the other segment, it's none in any of the three business line, it's in the other segments.

Okay, thank you. And then just one other clarification, you touched on the NIM expansion in wealth, can you touch on why that occurred if it’s sustainable and if it could further - and if it can go any further higher, any higher, it’s been a long week?

I guess it’s mostly related to the liquidity spread, the liquidity premium that is paid from treasury to the deposit in the wealth management segment.

Okay, understood. Thank you.

Look anything to add as a reporting comment. It is great answer.

Thank you.

Thanks very much.

Thank you everyone. And we'll talk for the Q3 call.

Thank you very much. Bye.