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 Denis Girouard - EVP, Financial Markets Martin Gagnon - EVP, Wealth Management

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

Good afternoon, everyone, and welcome to the National Bank Q3 2016 investor presentation. My name is Linda Boulanger and I'm Vice President of Investor Relations for the Bank.

Presenting to you this afternoon are Louis Vachon, President and CEO; Ghislain Parent, CFO and Executive Vice President, Finance and Treasury; Bill Bonnell, Executive Vice President, Risk Management; and Jean Dagenais, Senior Vice President, 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; Denis Girouard, Executive Vice President, Financial Markets; and Martin Gagnon, Executive Vice President, Wealth Management. Please 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.

Thanks, Linda. And thank you, everyone, for joining us today.

In the third quarter of 2016, National Bank delivered very good results. Adjusted net income was C$486 million, up 9%, and diluted EPS stood at C$1.33, up 6% on a year-over-year basis.

For the third quarter of 2015, the Bank generated a solid return on equity of 19%. Credit quality remained strong.

Having taken a sectoral reserve in Q2 on our oil and gas portfolio, our overall loan portfolio registered only C$45 million, or 15 basis points or loan losses this quarter, clearly benefiting from the good economic conditions in Central Canada. Bill will provide more details on our credit performance in a few minutes.

In terms of capital, we are approaching our 10% target. We closed Q3 with a CET1 ratio of 9.9% and we expect to get to 10% at the latest by the end of Q1 2017.

Turning to the performance of our business segments; our P&C segment posted record net income of C$203 million, benefiting from the growth in personal and commercial loans and deposits and the quality of our loan portfolio. Despite competitive pressures and a low interest rate environment, our net interest margin was up 5 basis points sequentially due to favorable business mix.

Operating leverage stood at 2.4% year-to-date in that segment driven by disciplined expense management. I am pleased to report that we are on target with our efficiency program for personal and commercial banking as announced last year with a running rate of savings of C$44 million in fiscal 2015 and C$90 million of total recurring benefits in fiscal 2018.

Our transformation is progressing well, and as planned, with the successful deployment of our new CRM and a simplification, centralization, and digitization of certain processes, forms, and reports. This combined with our ongoing certification program for our employees is resulting in improved sales effectiveness of our advisors and an enhanced customer experience.

Wealth Management delivered strong performance this quarter with a net income of C$86 million dollars, up 5% year-on-year. National Bank investment continues to perform well and benefited from the higher net interest income, which was partly offset by businesses generating transaction revenues.

Overall we're benefiting from our strategic choices based on our open architecture model and working with partners. In Financial Markets, our results are up sequentially and should be compared with a record quarter last year.

Our trading results declined mainly due to a decrease in revenues from equity derivatives. This was partly offset by strong performance in fixed income and equity cash trading activities, strong financial market fees in M&A and equity capital markets, as well as corporate banking services.

Credigy continues to perform very well and on target for its expansion plan. To wrap up, I am pleased with our performance for the third quarter.

All of our businesses are performing well. Our transformation to a more digital and efficient organization is accelerating and producing tangible results.

Loan losses are low. We are delivering industry-leading returns and our CET1 ratio is approaching our 10% short-term target.

Our priorities in terms of capital management are clear: first, to target a CET1 ratio of 10%, again, at the latest by the end of Q1 2017; two, to invest to capturing efficiency gains and stimulate business growth in Canada; third, a reminder that new investments in emerging markets remain on hold until Q3 2017; and finally, we plan to maintain solid dividend growth and generate superior shareholders return. And as usual on that I will provide an update on our dividend policy next quarter.

We invite you to join us for our next Investor Day in Toronto on September 16 to hear more about our international strategy and to meet our teams from ABA Bank in Cambodia and Credigy. On that I will turn things over to Ghislain for the financial and capital review.

Ghislain?

Thank you, Louis, and good afternoon, everyone. Please turn to Slide 6, which provides our key financial performance metrics for the quarter.

First on an adjusted basis, total revenues amounted to C$1.6 billion in third quarter, up 4% from the same period last year, mostly driven by increases in P&C Banking and Wealth Management. Net income for the third quarter was a record C$486 million, up 9% year-over-year.

Third quarter diluted EPS stood at C$1.33, up 6% from a year ago. On a reported basis now, net income was C$478 million or C$1.31 per share.

During the quarter, the Bank recorded the usual specified items related to Wealth Management acquisitions. Please see Appendix 1 for more information.

Now on Slide 7 for the first nine months of fiscal year 2016, adjusted revenues amounted to C$4.6 billion, up 3% from the same period last year. Expenses of C$2.7 billion increased by 2%, showing close to 1% operating leverage.

Excluding the pre-tax oil and gas sectoral provision of C$250 million recorded in the core results last quarter, net income was up 3% for the first nine months. Turning to Slide 8 for Q3 income statement overview.

P&C Banking and Wealth Management represented a combined 71% of total revenues compared to 70% a year ago. Financial Markets revenue proportion was down 2% at 24%, whereas Credigy represented 5% of total revenues, up 1% from the third quarter of 2015.

Financial Markets represented 34% of net income, down 5% on a year-over-year basis. As previously mentioned by Louis, Other segment includes a C$41 million gain realized on the revaluation of previously held interest in ABA Bank.

National Bank now holds a 90% interest in this subsidiary. Turning to Slide 9 for the first nine months of 2016.

The combined contribution to revenues from P&C and Wealth Management is stable at 71% after nine months. Financial Markets represented 24% of total revenues, down 2% from the same period last year.

Credigy’s proportions of total revenues increased to 5%, up 2% from a year ago. For the first nine months, the lower P&C net income is mainly due to the sectoral provision recorded in Q2 for the oil and gas portfolio.

Excluding the sectoral provision, P&C Banking contribution to net income was up 2% at 42%. Turning to slide 10 for the expense overview.

In Q3 2016, operating expenses amounted to C$932 million, up 4% from the same quarter last year. Salaries and staff benefits remained flat compared to last year.

The increase is due to higher investments in technology, regulatory projects, and expenses in ABA Bank, which are now consolidated. However, efficiency ratio stands at 57.9% for Q3 and at 58.1% for the first nine months of fiscal 2016, down 40 basis points relative to the same period last year.

As indicated in the previous quarters, we still expect a slightly positive operating leverage for fiscal 2016. Cash management is a key priority for the Bank and the entire executive team is strongly committed to maintaining tight control over expenses.

Also with the support of the Transformation Office, we continue to focus on efficiency improvement initiatives. Turning to Slide 11 for a capital overview.

CET1 ratio reached 9.86% at the end of the third quarter, up 11 basis points from the previous quarter. [Indiscernible] 31 basis points, while our recent transaction with ABA Bank reduced CET1 by 22 basis points.

Risk-weighted assets remained stable sequentially at C$68 billion. Pension plan had a negative impact of 9 basis points during the quarter, due to lower long-term interest rates.

This was offset by a positive impact from the AFS portfolio following credit spread tightening during the quarter. Total capital ratio, comprised of all the capital instruments available to the bank, is solid at 15.1%, up 30 basis points from the last quarter.

In addition to capital, our leverage and liquidity ratios are well exceeding the regulatory minimal requirements. On this, I’ll turn the call over to Bill for the risk review.

Merci, Ghislain, and good afternoon, everyone. Before I turn to the slides I’d like to make two comments about the performance of our credit portfolio in the third quarter.

First, our direct exposure to oil and gas producers and services continued to be proactively managed with both drawn loans and total commitments lower by about 30% on a year-over-year basis. The more favorable market environment allowed our producer and services clients to raise additional capital and spurred increased M&A activity, which led to further reductions in bank facilities.

During the third quarter, three new impairments were identified in the portfolio and C$37 million for specific provisions were transferred from sectoral provision that we established last quarter. The portfolio's credit performance this quarter was in line with our expectations, and we remain confident that the level of provisioning is adequate.

Second, we saw a strong performance in the rest of the loan book last quarter with provision for credit losses of just 15 basis points. The reductions we observed in impaired loan formations and credit loss provisions were broad-based across our core Central Canadian retail and wholesale loan books.

Now I invite you to turn to Slide 13 to review our loan portfolio. In the third quarter of 2016, gross loans grew to C$125.6 billion with a stable split across retail and wholesale segments and remained well-diversified across industrial sectors.

Loans to oil and gas producers and services now account for 2% of the total loan book. On slide 14, you can see that the regional distribution of our Canadian loans remained stable and heavily weighted to Central Canada.

We have limited exposure to small commercial or unsecured retail lending in the oil regions. Turning now to Slide 15, 46% of loans to oil and gas producers were rated investment-grade, an increase of 6% from last quarter as the reduction in loan facilities I referred to earlier occurred mainly in the non-investment grade segment.

Lending in the midstream and integrated segments increased during the quarter, and we remain very comfortable with the loan quality. On slide 16 we can see the results of proactive management of the oil and gas portfolio over the past two years, which led to outstanding loans being reduced by about a third from the peak.

If current market conditions persist, I would not expect the same magnitude of reductions in the coming quarters. Although we do expect some additional day downs on existing loan facilities, we would also expect M&A and organic growth to generate new lending opportunities for well-capitalized and resilient balance sheets in the sector.

The sectoral provision now stands at 9% of total loans and 16% of non-investment grade loans and we remain very comfortable with the overall level of provisions for this portfolio. On slide 17, the distribution of the residential mortgage in HELOC portfolio is provided.

Quebec and Ontario account for 83% of the portfolio, while Alberta and BC account for 6% and 5%, respectively. Insured mortgages have the largest share of the portfolio, and their weight increased slightly to 42.9%.

The average loan to value on the HELOC and uninsured portfolios was unchanged at 59% and secondly mortgages accounted for less than C$300 million. I invite you to turn to Slide 18.

Provisions for credit losses declined quarter-over-quarter in Personal and Commercial Banking as well as Wealth Management. No provisions were taken in Corporate Banking.

The oil and gas sectoral provision stands at C$213 million as of July 31st following the transfer of C$37 million to specific provisions during the quarter. If the constructive market conditions persist, we'd expect a lower transfer from the sectoral provision revision in Q4.

Stable financial conditions in Central Canada continue to support a benign credit environment for our loan portfolio, and we maintain our guidance for PCLs at 20 to 30 basis points for the next two quarters. Based on the strong metrics we have observed, we would expect to remain around the lower end of that range.

Turning to slide 19. Gross impaired loans declined to C$452 million and the GIL ratio improved to 36 bps.

In the oil and gas sector, new impaired loans were partially offset by repayments, generating C$29 million of formations. Some write-offs and a small recovery were also registered during the quarter.

Formations in Retail, Commercial and Wealth Management all declined. The Corporate Banking portfolio had no formations in the quarter.

On slide 20 and 21 you'll find highlights of our market risk exposure. Trading VaR averaged C$5.5 million in the second quarter and we registered three days for trading losses.

Now to summarized, we were pleased with the results from the credit portfolio this quarter. Our portfolio with its larger weight in Central Canada and smaller weight in unsecured retail lending continues to display a strong performance.

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

Thank you, Bill, and good afternoon. Turning to slide 23 for the Personal and Commercial Banking segment.

Revenues were C$739 million in the third quarter 2016, up C$8 million from the same period last year. Personal Banking revenues at C$344 million were up C$1 million year-over-year as higher net interest income due to increased loan and deposit balances were mostly offset by lower other revenues, mainly mortgage prepayment fees.

Commercial Banking revenues were up 3% year-over-year at C$273 million due to higher loan and deposit balances, partly offset by lower FX activities and acceptance fees. Credit Card revenues at C$92 million increased C$1 million from Q3 2015 due to higher volume and improved loan margins, partly offset by adjustment to facility [ph] program reserve.

Insurance revenues amounted to C$30 million, C$3 million lower than the same period last year, mainly due to actuarial reserve change. Operating expenses at C$417 million were up 1% from the same period last year due to efficiency initiative.

The operating leverage for the first nine months stands at 2.4%. The provision for credit losses amounted to C$44 million, down 20% year-over-year due to good credit quality of the portfolio and lower PCL for the oil and gas portfolio.

Overall P&C posted net income of C$203 million in Q3, up 5% year-over-year. P&C's key metrics for the quarter show that loan and BAs continue to grow at a good pace, up 4% on a year-over-year basis, with retail loans increasing 5% year-over-year, while commercial loan were up 3%.

However, excluding loan to the oil and gas sector, commercial loans were up 8%. Volume from deposits also showed good momentum rising by 9% compared to Q3 2015 with a 7% increase in retail and 12% increase in commercial deposits.

Net interest margin was 2.25% for the quarter, a 1 basis points improvement year-over-year and 5 basis points on a sequential basis, mostly due to the business mix. Finally, the efficiency ratio is at 56.4%, which is stable compared to the same quarter last year.

Please turn now to Slide 24 for the Wealth Management review. Revenues increased 4% to C$362 million from Q3 2015, mainly due to the net interest income attributable to higher balances.

Fee-based revenues were C$6 million higher to C$202 million in spite of a negative average market return. These increases were partly offset by lower transactional revenue.

Expenses were up 4% to C$245 million due to variable compensation, management fees, and support services expenses. The efficiency ratio was 67.7%, a 30 basis improvement on a year-over-year basis.

Net income amounted to C$86 million, up 5% from the corresponding quarter in 2015. Loan and BAs at C$9.4 billion increased 7% from last year, while deposits increased 17% year-over-year to C$28.3 billion.

Assets under administration stood at C$332 billion, up 5% from last year due to market conditions, while assets under management rose 10% to C$56 billion due to migration of assets from transactional to discretionary management at the full-service broker. Now I invite you to turn to Slide 25 for the Financial Markets review.

Revenues were C$440 million in Q3 2016 compared to C$470 million for the same period last year. The decrease was mainly attributable to trading securities gains and the other heading.

Trading revenues were C$181 million this quarter compared to C$206 million for the same quarter last year, since lower equity and commodity derivative were partly offset by favorable fixed income trading. Banking service revenues increased 12% C$84 million due to increase in credit activities.

Financial Markets fees were up 3% to C$93 million from equity capital market and merger and acquisition activities. Credigy’s revenue were C$70 million in Q3 2016 or up 11% year-over-year stemming from new portfolio acquisitions.

Finally, other revenue were down from the same period last year, partly due to revenues from Maple recorded last year. Expenses at C$198 million were up to 2% from the same quarter last year due to higher salaries, professional fees and support service costs, partly offset by lower variable compensation.

The efficiency ratio was 45% for the quarter compared to 45.5% sequentially and to 41.3% in Q3 of 2015. Financial Markets net income for the quarter stood at C$174 million versus C$201 million for the same period last year.

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

Good afternoon. Jean gave us the year-over-year growth on personal and commercial lending volumes, but I was wondering when we take a look at what happened on a sequential basis, there was actually no growth.

Do you have that number available ex energy loans in terms of seeing what the growth was on a sequential basis in personal and commercial?

A very good question, John. Diane will answer.

John, if we exclude the oil and gas sector for P&C sequentially, the growth would have been 1%. For commercial that growth would have been – sorry, I got 1%.

And then for personal banking the growth was 1%. For commercial banking the growth was 0% .

I can tell you year-over-year, though, the growth for P&C on loans excluding the oil and gas was 6% year-over-year, 8% for commercial and 5% for personal banking.

Thank you. That's quite helpful.

And can you expand upon just the increase in margins that you were able to generate this quarter? If there was anything unusual in that or if this is something that we might be able to see going forward?

It’s Diane again. What you have actually seen is the change in the business mix, our growth quarter-over-quarter in deposit was 4% for P&C and our growth in lending was 0% if you include the oil and gas sector, which we do in the margin and the NIMs calculation.

Great, thank you. I’ll requeue.

Hi. Good afternoon.

Just following up on John's question. Is there anything else weighing down average loan growth on a year-over-year basis in the P&C segment that you would highlight, besides the pullback in energy lending?

No, not that we've experienced. We have a very strong pipeline in commercial, and I would expect that we would continue to maintain the growth that we’re experiencing, and in fact we are showing a P&C growth in lending that is above the average of the big five.

Okay. Thanks for that.

And then if I could just ask a question on credit, the PCL ratio came at 15 basis points and you're maintaining declines of 20 to 30 basis points, and admittedly you talk about the lower end of the range. But given what you did this past quarter and the fact that the energy losses are hived off with that sectoral, can you just go into the thinking, why still be I guess relatively conservative on this measure?

Why did you decide not to take your guidance down somewhat on the PCL ratio going forward?

Meny, thanks for the question. It’s Bill.

As you point out, the performance was very, very good at 15 basis points, and the signals that we get from the portfolio remain good. But I think we prefer to be prudent.

Although commercial portfolio is performing very well, you can have some lumpy quarters and we’d rather remain prudent. But certainly we expect to be around the lower end of that range.

Thanks, guys.

Yeah. My first one is on the ABA gain and I talked to someone earlier today.

I just want get a better clarification on why you felt it was reasonable to keep the mark-to-market gain on your position in your core EPS this quarter?

Gabriel, it’s Louis. It’s a good question and I think John Aiken did a good job in his report highlighting the pros and cons of including and not including the gain.

But the reason we decided at the end of the day, and frankly we leave that to all your good discretion. But at the end of the day because we are acquiring the company, we felt that going forward given the fact that we will include the revenues and the profit of ABA going forward that on a recurring basis, there would be a bump up in earning.

So, yes, there is a revaluation gain, which is a bit exceptional. But going forward, in terms of recurrent income, the increase in revenues and profits will be there.

So unlike a disposition of a particular assets, which doesn't generate future cash flows, this one we definitely expect and that's going to be the subject of – one of the subject of discussions a couple weeks from now. We do expect it to contribute to our growth of revenues and earnings for the bank.

That's why at the end of the day we decided to bring it in. But I think everybody has their own opinion on this, and we expect that people will treat it the way they feel it should be treated.

Sorry, is it like the – if I look at it in a certain way, the C$9 million of normal earnings you got out of this business this quarter on the same I guess run rate of the C$40 million if you annualize it plus some growth, is that kind of…

Yeah, as I said we’ll give you all the details on the 16th. I don't want to jinx it.

No spoiler alerts?

But I think it will be in that ballpark, Gabriel.

All right. And the equity derivative trading and going back to that 2013 Investor Day and Capital Markets you talked about the importance of the derivatives – sorry, the ETF market on your equity derivatives.

Is that the part of the business that didn’t work well this quarter? Is there anything going on in any particular segment that might cause those equity trading revenues to be flat or decline from what we've seen over the past year prior to this quarter?

Yeah, a good question again. I'll let Denis Girouard answer that one.

Yeah. Hi, Gabriel.

It’s Denis. Thanks for the question.

No, effectively what happened this quarter compared to the previous quarter is really the volatility in – we're very long big by nature in that book and that volatility really dried down in this quarter. That’s affecting us quite a lot.

Right now we decided we’re going to keep that position where it is now, because everything is kind of low and we will not hedge it. Then with what we can see forward there is going to be probably a lot of volatility coming into the market, and maybe surprise will be on the upside.

But this is a natural position that we have and that's our position that we manage, but this time around it hurt us a little bit in this quarter, but we don't expect that to be on a constant basis, on a regular basis.

I'm sorry, the volatility was not helpful this quarter? I didn’t quite catch the…

No, no in fact volatility was just good for two weeks at Brexit and after that it dried up quite nicely and is pretty low right now. Sorry, volatility in the market is very low right now.

You provide derivatives, the ETF programs, and a lot of those ETF programs in Canada anyway are offered by your competitors, the other big banks. Are they internalizing any of this stuff or…?

No, no.

No.

We never did business with them. We deal with the independents, which are still very much in that market.

So that's no impact. So as Denis mentioned, because of our retail structured note business, we tend to be long volatility on single stocks, and so usually that's a good position to have.

But quarter-over-quarter it didn't work out. And also the second factor that Denis alluded to is what we mentioned earlier last year, namely the changes in tax and the impact on the equity swap business.

And we stick by the guidance we had given at that time that it would be roughly 1% impact on EPS on an annualized basis. So that also was a factor.

And my last one is on the operating leverage. It was flat for the Bank and flat for the Canadian banking business, which I think we’ve seen several years of that business delivering positive operating leverage, though every good streak comes to an end I guess.

But do you view this quarter as – you're highlighting that the salaries were flat and employee costs were flat, but yet some kind of one-timeish or maybe unseasonal expenditure in the IT and consulting areas that you expect to come back down and were going to be back on track for positive operating leverage for the full year and into next year?

I think as Ghislain mentioned that in his opening remarks, it remains very much a priority for us. And over the long term we expect we can do better than what we did this quarter.

Okay. Merci.

Thanks. Good afternoon.

Just want to make sure I have a good understanding of the geography of the ABA gain. So that that C$41 million revaluation, did that all go through the other income or the fee income line in the Other segment?

This is Jean. Yes, all of that goes into the other income of the other segment, including all the revenues from our international investment also our groups there.

All right. And I know we're going to hear more about how those businesses are trending in a couple weeks.

So let me ask you this Jean while you're there, when I look at that segment, the net interest income, and maybe this is related, the negative or the drag of C$53 million in the quarter, that's a lot lower than it has been. If you look at that line over the last couple years, it's usually been around a C$100 million.

Is that again some of the benefits of these international acquisitions, especially the ABA picking up? Or was there something on the funding or Treasury side that resulted in that improvement?

The net interest income that comes from the acquisition of ABA is booked there, so yes, it was a factor. Also it is where we reverse the tax covenant basis adjustment, which is booked in Financial Markets, it is reversed in the other, since the tax covenant basis adjustment was lower than the variance is better, and Treasury at better net interest income during the quarter also than previous quarters.

Okay. So some of this is just I want to make sure I have an understanding what's happening with the net interest income.

So negative or the improvement of 50 basis points quarter-over-quarter, some of that is, for lack of a better term, real or sustainable because of ABA, some of it may be more transitory because of those issues you mentioned. Is that a fair statement?

It’s correct, but [obviously tax covenant basis 0:34:01] is higher in Financial Markets. It will be good for Financial Markets.

That thing will be reversed into the Other segment.

All right, thank you for that. I just want to go back – and this is probably for Diane on this issue of P&C loan growth.

So when we look at the supplement that you show as the average loans and average assets, I think a few guys mentioned it's pretty flat quarter over quarter. You have a few different loan disclosures you provide.

One of the ones I always use is in your report to shareholders. I think you give an all bank number on Page 13 of the report to shareholders.

And when I look at that, it looks like the mortgage growth quarter-over-quarter and the personal loan growth was actually really good. If you're on the same page as I am, you're seeing like a balance of a C$47.5 billion in mortgages.

And if I have my numbers right, that was up something like 5% quarter-over-quarter. Am I missing something, because the numbers in the supplement are flat and these personal loan or consumer loan numbers look really strong.

If you could just help me understand why there's such a big difference between the two, that would be helpful.

Yeah, sure. There’s other business that deals with residential mortgages.

The growth in P&C is about 4%, but there's also businesses in the financial market that buy mortgages for securitization purpose, and Treasury also does the same thing. So growth in mortgages is not only in the P&C segment.

That's why we’ll go back to see a larger growth.

Okay. So as far as you're concerned, when we look at the – yeah, and I know you gave the numbers ex of oil and gas earlier.

So if we look at the numbers in the segment that's a better representation of what's going on.

Yeah, the one that I spoke about represent only what we do within the P&C segment. It does exclude all of the mortgages that are done for the securitization purposes that Jean just spoke about.

Okay, and then I'll stop here and requeue if there’s any. For you Diane, if we look at your segment, revenue growth year-over-year 1% in Q3, 2% in Q2, certainly a pretty noticeable deceleration from what you've had previously.

It looks like the fee income lines have been somewhat more challenging. Maybe leaving the oil and gas aspect aside, unless you think that's the biggest driver, what's a more reasonable level of revenue growth for us to contemplate for this segment heading into 2017?

Is there enough loan growth for the bank that mid-single digits the way you were putting up previously is still what we should be thinking about or has something changed to the downside?

Okay, well, long question and I'll try to summarize. The one thing that I will say that I'm not concerned about our growth going forward, and we are very committed and still committed to what we have presented at the Investor Day in May of last year, which were a target of 5% to 6% of CAGR between 2015 to 2018.

And I can tell you that three things that lead me to believe this, maybe four things. The first one is that we continue to experience solid growth on loans and deposits and our pipeline in commercial is also very strong.

Second is our net interest income is better than the industry. And third is we continue to see an increase in a number clients.

Without the impact of the oil and gas sector, our growth would have been 2%. Now that being said, I understand that we’re certainly still under pressure, but the issue this quarter is really specific to non-interest revenue.

And this is due to the fact that we have a higher proportion of our revenues coming from commercial as it’s about 36% versus 24% for the average of the big six, which brings more volatility in some of the categories, such as derivatives, FX, BAs, etc. So that really didn't help us this quarter.

And those are not necessarily reoccurring going forward. So I can tell you that we’re expecting in the fourth quarter to stay in the low-single digit, and again going into the next few years we’ll aim for the 5% or 6% to reach our Investor Day target.

Thanks for that detail.

A quick one for Bill. How will movements in the price of oil impact the quarterly draw on the sectoral provision?

Thanks for the question, Peter. The movement in prices is one of the factors that we look at.

There’s many other factors there, including level of repayments and other activity in M&A that can lead to the growth or decrease in the portfolio. So I wouldn't want to give you a guidance on a direct what the correlation might be.

I would say that clearly there's been improvement in this sector in the past quarter. If that remains stable, we’d expect that the draw next quarter would be smaller.

But we think that over the next couple of years, we see that this provision is certainly adequate to cover the expected loss in our portfolio.

If oil rallied a bit more than folks expect, might that provision prove to have maybe a little on the high side?

I think it's a little too early to talk about the provision being on the high side. We’ll reevaluate it as the time goes forward and that would be a good conversation to be having with you in a couple quarters.

That's fair. And then one other question really for Martin Gagnon and Diane on deposit growth in each of your segments, which looks to be quite strong.

Are you getting that through price or are there other ways to get there?

I’ll start and then I’ll let Martin finish. We had very targeted initiatives with our government affairs.

That was a segment that we had neglected in the past and there was a good opportunity for us to be back in the market, especially in Quebec but also outside of Quebec we had put a new team on and that really did drive some very good results for us. And also we've actually in our commercial team, as you know, we've been adding capacity in commercial, and that has helped not only to get a good growth on the lending side but also getting to the deposit side and that's really what we're aiming to get is that really global relationship with our clients and we’re aiming at developing some good cross-sell.

We had some good pricing, but we're not compensating our margin as you can see. Martin?

And on the Wealth Management side, Peter, three sources. The biggest one was increases in our balances of the high interest cash performer, a little bit of GICs on the broker network, and to a lesser extent balances in our brokerage network businesses.

There's no price incentive to capturing that growth?

No.

No. Okay, thanks.

Hi, good afternoon. I guess just first back to the Canadian P&C banking NIM expansion.

I guess maybe just kind of direct question. Is this a sustainable NIM that we should anticipate that can continue, or was there some unusual items that kind of inflated it this quarter and we should expect it to go back more towards what it was the previous quarter?

In fact, we're seeing with the low-rate environment and also the rate decrease that we've experienced in 2015, I think we can expect the next quarter to see a decrease in the NIM. And going into the next year, although it's early to tell, but if market conditions remain the same, I think there will still be pressure on the NIMs.

And I think we can expect, again, that could be revised in the next little while, but we can expect maybe to be hit by a one basis point per quarter next year.

So it's more in the one basis point per quarter range. It's not like going back to the Q2 levels essentially?

That's right, exactly.

Okay. And then, Bill, I guess the oil and gas formations were C$29 million.

You had a release of C$37 million. So clearly I guess there was some migration on your existing portfolio and some related to the new formations.

Can you give the split between the two?

Yeah, thanks for the question, Doug. That formation number is net of repayments.

What happened was there was a sizable amount of repayments pay-downs during the quarter. So on the growth of new impairs would have been around a C$100 million and then repayments of I guess around C$70 million for the net number that you talked about.

Okay, so that's what I'm missing. Okay.

And then just lastly on the CET1, obviously, the build was quite significant. I know, Louis, you’re kind of pushing to grow this over 10% or to 10% at least by the end of next year.

I was just wondering if there was some adjustments made within your loan book or it just seemed operational risk-weighted assets I think declined and there's declines in risk-weighted assets related to book size and quality. So just trying to get a little bit more sense of how did the bump up occur, such a significant bump up occur in the quarter.

Yeah. Thanks for the question, Doug.

Just glue to make sure because I'm just double-checking that I said the right thing during my introduction. We're targeting 10% by the end of Q1 2017, Doug, not Q4 anymore.

We’ve moved forward on that point. So what I said on my introduction was at the latest by the end of Q1 2017 we want to get to 10%.

Okay.

And then the rest I think Ghislain gave some good details on it. We did recoup on the positive side – if there was a positive side was, we did recoup some of the basis points we had lost on the AFS portfolio in previous quarters, and we recouped that.

At the same time we also lost some bps because of the pension fund. What I can tell you, though, is that we're not starving the businesses, either P&C or Capital Markets or accumulation of capital, and that's why our target of 10% plus is over a period of time, because we don't want that to be at the expense of funding organic growth.

So there wasn't anything unusual in this quarter. This was normal business activity.

No, to begin with, as you see on the slides there, we can debate about which segment should be included in specified items or not, but when you make C$486 million profit in the quarter, it does create capital. So it has that advantage and then we started with that created 30, and then for the rest I think, as I said, on the market movements, at least for once in the last three or four quarters, we had a neutral, not a negative, but a neutral adjustment in terms of market impact on our CET1 ratio.

Okay, great. Thank you.

Hi, thank you. I have a few questions, and I appreciate that you don't want to provide too much information on ABA given the Investor Day is coming.

But one of the disclosures in your shareholder report kind of strikes me as funny, and in this disclosure you suggest that had you have had ABA since November 1, you would have reported earnings of C$959 million, which to me seems rather small for an extra two quarters. Can you help me reconcile why it's only C$10 million of earnings for the first three quarters of the year?

Did they have a rough start to the year, or am I just reading that incorrectly?

No, I guess it's mostly because of the growth in portfolio was very strong, so at the beginning of the year it was not as important and as it grew back, then the pickup was there, and it was a lot more profitable in the third quarter.

And am I right in thinking, however, that the C$41 million revaluation gain is in there too?

No, no it's not. It's only the profit, ex sector, not the reevaluation gain.

The reevaluation gain is done on the investment that bank’s had. It's not from the profit.

They don't have that in their own book at ABA. It’s the gain that the bank had.

Okay. That's good.

Thank you.

Darko, I think we will provide quarterly numbers, historical quarterly numbers for ABA, so I think you'll see what the progression has been, and I think that should answer all your questions on the 16th.

Okay, that will be helpful. And then just with respect to a couple of other questions that I've got here.

With respect to capital and the pension hit this quarter, is it possible that in Q1 we see more? What I mean by that is some banks have told me that a fall in interest rates will hurt the pension liability, but they may be forced to change assumptions in Q1.

Is that the same for National Bank? And would you anticipate that it could be a bit of a challenging Q1?

I think these discussions are ongoing, but frankly I don't know where that lands. But as I said, I think, Darko, we've been very conservative and we were too conservative talking about Q4 2017, but now we have visit better visibility in terms of regulatory inflation in terms of capital.

And including I think – I'm looking at the slide here on the pension fund – and I think we are very comfortable with our Q1 2017 for the 10% target. So I think that's not what we see right now.

And as I said, given our past history, recent history in terms of capital, we tend to be more conservative than not. So I think we should be able to hit the 10% target for Q1.

Okay. That's helpful.

And then just my last question, Louis or anyone actually, just overall when I look at the efficiency ratio in your investment bank and it’s really the only bank that shows in efficiency ratio that's not better than last year. And so the question is with respect to your restructuring initiatives, from what I've noticed so far in the third quarter for the other banks, the wholesale businesses took a fairly big hit with respect to restructuring, but it doesn't appear to be the case for you.

And is that a question of timing or is it a question of your restructuring just doesn't hit the investment bank as tough as it is at the other banks?

I think the answer is, I think you should go back to history and I think as you know, Ricardo pretty much operated on the basis of permanent transformation from 2009 until 2015, and he was requestioning business models, he was requestioning anything. So that's why we were constantly requestioning costs and looking at our cost structure.

That being said, Darko, as you know, even at today's target, we’re extremely efficient for Canadian-only institution, our efficiency ratios remain very, very good. So the deterioration from last year was really a mix of business.

As Ghislain mentioned, we have fewer investment gains as we did last year and those tend to have very low payout. So the mix of business will impact.

I think we've been very, very steady and very disciplined and over time trying to control compensation so that it's not a straight line function with revenues, and I think we've done a pretty good job there. So we are always re-questioning and Denis will do the same.

We’re all re-questioning everything here and there, but I think one area that's been I think constantly in transformation in the last few years that's been capital markets. That's why there's no special focus on that right now [indiscernible] because it's been pretty much permanently on the restructuring basis.

Okay. Thank you.

Thank you. Two quickies.

I don't know if Ricardo is there, but I was curious if he could share with us any early reflections he's had in his new capacity as the Chief Transformation Officer and where there might be some incremental opportunities.

Good point. No, no he's not with us right now.

He is in his bunker working very hard. But I appreciate your question and I think we may invite the Mr.

Pascoe at the next quarterly conference call.

Okay, and just for clarification. On a couple of occasions in the Q&A today we've talked about the growth in P&C balances, sometimes excluding oil and gas, sometimes including oil and gas.

But just to be clear, you haven't exited that business. That is still a business that you're in.

So I’m just curious what’s the rationale for thinking about it excluding the oil and gas.

You're right, it's just that from a quarterly basis, as you know, as we were going through the last three quarters with the changed environment, we were managing risk in that portfolio as you know and that did lead us to manage a portfolio. What Bill I think said quite clearly in his remarks is that in terms of the decline in balances in that portfolio, we feel we're getting to the bottom of how low we want to get in terms of oil and gas.

So most of the decline should have taken place by now. It could be more, but now we're starting to see new players coming in with new players who want to take advantage of the current situation with strong balance sheets, and we’ve started to deploy capital and debt to some of these players also.

So is it this quarter or the next quarter, but over the next few months we expect that one will cancel out the other and that the balances in the oil and gas book should start growing again. But the fact is the strong decline, especially in the last three to six months, in that particular segment has kind of masked the rest of the very strong growth in the rest of the commercial portfolio across Canada.

So that's why I think we were just making that clarification.

Okay. I appreciate that Louis, but I guess for some of us who are acclimatized to higher growth, it was probably because of a faster growth in oil and gas in prior periods that got us acclimatized to higher growth.

Is that fair?

Not the last 2, 3 years. I think probably 4 or 5 years ago I think that's when we had the stronger growth in energy lending, but last 2 or 3 years I would say, as you know, we did I think in 2015 and early 2016 we still had the industry-leading numbers in terms of long calls, and it's not because the energy book was growing.

In fact it started to flat line and even declined a little bit there.

Okay. Understood.

Thanks for your time.

No problem.

Louis, just a follow-up. I don't know if I heard you say this before, but last call it sounded like you're putting on hold your acquisitions in the international space indefinitely, and now you're saying until Q3 2017 anything goes after that.

Is there any particular reason you shifted that commentary? Is there anything on the horizon that we should look forward to?

There's nothing on the horizon, and I'd like to pull out my transcript, but I'm pretty sure, Gabriel, that we did state last quarter that we were taking a twelve-month pause, but not a permanent pause.

Okay, 12 months, yeah.

So we’ve talked about our 12 months break. But that being said, your question is still very much relevant.

But, no, there's nothing imminent anyways on the emerging market side.

Are you going to talk about future plans at the Investor Day?

We will, but I think we'll focus very much on what we have today, which are the two things which are a lot more material, namely Credigy, which you've known for a while, and now the new 90% positions in ABA. We will discuss some of the other investments, but frankly we're not at the stage – and that's why we're comfortable taking a pause right now – we're not at the stage where we have plans or be comfortable enough to increase our positions significantly over the next 12 months or so.

I think a lot of investors want to see like the proof-of-concept before going on any more, I guess, adventures or whatever. But thanks for that.

Yeah, that includes the investors around this table.

Okay, well talk to you then. Have a good afternoon.

Yeah.

Thank you all for your time and we'll talk to you for the next quarterly conference call. Thank you very much.