National Bank of Canada

Linda Boulanger - Vice-President Investor Relations Louis Vachon - President and Chief Executive Officer Ghislain Parent - Chief Financial Officer and Executive Vice-President, Finance and Treasury William Bonnell - Executive Vice-President, Risk Management Jean Dagenais - Senior Vice-President, Finance Diane Giard - Executive Vice-President, Personal and Commercial Banking

Meny Grauman - Cormark Securities Steve Theriault - Dundee Capital Markets Sumit Malhotra - Scotiabank Global Banking and Markets Robert Sedran - CIBC World Markets Doug Young - Desjardins Capital Markets Gabriel Dechaine - Canaccord Genuity Mario Mendonca - TD Securities Peter Routledge - National Bank Financial

Good morning, everyone, and welcome to the National Bank Q4 2016 investor presentation. My name is Linda Boulanger, and I’m Vice President of Investor Relations for the Bank.

Presenting to you this morning 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; Martin Gagnon, Executive Vice President, Wealth Management; and Denis Girouard, Executive Vice President, Financial Markets. 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 for joining us today. In the fourth quarter, National Bank achieved very good results driven by strong performance in all business segments.

On an adjusted basis, net income was $463 million, up 11% from the fourth quarter of last year and return on equity was a solid 17.4%. For 2016 as a whole, the Bank achieved positive operating leverage in our common equity Tier 1 capital ratio ended the year at 10.1%.

We raised our quarterly dividend twice during the year when annualized dividend increase of close to 7%, which contributes the solid returns for our shareholders. The fourth quarter completes a year of repositioning for the Bank.

Throughout the year, we took significant actions to position the Bank for sustained success. Earlier this year, we proactively addressed the deterioration of conditions in oil and gas loan portfolio by recording a $250 million sectoral provision.

Conditions in the sector have improved in the latter part of the year, as evidenced by several energy prices and a reopening of capital market financing. In the overall portfolio, credit quality remains strong and continues to benefit from good economic conditions, especially in Central Canada.

The mid-year appointment of a Chief Transformation Officer was a major development this year. The CTO was responsible for accelerating the transformation of the Bank.

We have a clear roadmap for the deployment of major back-office changes and digital initiatives that will result in significant efficiencies, while stimulating tangible business growth opportunities. In that context, the bank recorded a restructuring and intangible impairment charge of $175 million in the latest quarter, and we expect to generate approximately $120 million in annual savings from our actions.

While such a decision is never easy, I’m confident that we are now in a strong position to deliver on our efficiency plan at an accelerated pace. We made significant progress in 2016 on many fronts.

The Bank is well-positioned to drive shareholder value. Our priorities are clear.

One, deliver sustained growth in our core markets; two, reduce our costs to become much more efficient; and three, transform into a more digital bank to respond to our customer’s changing needs. Now, let me share some highlights on the performance of each of the business segments.

For fiscal 2016, our P&C segment posted a pre-tax pre-provision earnings of $1.261 billion, up 5% from last year, benefiting from good volume growth in personal and commercial loans and deposits, while maintaining tight cost controls. Our P&C transformation and efficiency program continue to progress well and as planned.

As we begin fiscal 2017, we’re in our acceleration mode, focusing on three key priorities; advisor productivity, process simplification, and premises optimization. Our goals are to permanently reduce and transform our cost structure and to significantly enhance our clients’ experience to better position ourselves for the long-term growth.

Turning to Wealth Management, the fourth quarter was strong with adjusted net income of 21% year-on-year. For the full-year, our platform delivered good performance with adjusted net income of $347 million, up 8% from the previous year.

This segment – the segment success is based on strength of our clients’ relationships. In 2016, this translated into strong volume growth and acceleration of asset migration to fee-based accounts.

In addition, for the second year in a row, National Bank direct brokerage received the highest score in the J.D. Power Canadian Self-Directed Investor Satisfaction Study.

For 2017, we will continue to leverage our complimentary distribution channels, as well as our distinctive open architecture model to maintain leadership in Quebec and to continued to grow our market share across Canada. The Financial Markets segment also finished the year off a strong – with a strong fourth quarter with revenues and net income up 19% and 18%, respectively.

For fiscal 2016, adjusted net income was $720 million, up slightly from the previous 12 months. The past year was characterized by a weakened economy, a high degree of market volatility, as well as sustained low prices for oil and many other global commodities.

This environment created opportunities in new equity issues and many activities and resulted an increased demand for risk management products, as well as balance sheet support to our larger corporate clients. In fiscal 2016, National Bank ranked number one in Canada for all debt underwriting.

For fiscal 2017, we will continue to enhance our focus on larger corporate accounts across the country, while strengthening our leadership position with mid-market clients. The results of the Financial Markets segment in Q4 and for the year included Credigy, our U.S.

consumer specialty finance subsidiary, which continues to perform very well and above plan. For fiscal 2016, Credigy generated revenues of $324 million, up 50% from last year with strong EBIT margins.

Based on the strength of Credigy’s business model and a recent purchase program signed with LendingClub, we’re well-positioned to continue to generate strong growth and solid returns from this business. Finally, a few comments on our international activities.

Since our acquisition of a controlling interest in ABA Bank of Cambodia last May, ABA’s performance has been very good and better than planned. I would like to highlight that ABA Bank was recently named Best Banking Cambodia in 2016 by Euromoney, Global Finance and the Bankers Magazines.

These awards are testimony to the strength of our operations and the quality of the management team. My colleagues will provide more details about Q4 and 2016 performance.

But before you hear from them allow me to make a few comments on how to see – we see the year ahead. For 2017, we expect the Canadian economy to grow at an approximately rate of 1.8%, up from 1.2% in 2016, driven in part by fiscal stimulus relatively good labor markets in Ontario, Quebec, and British Columbia.

More specifically, the Quebec economy has strong momentum with a budget surplus, very large investment in infrastructure projects, and a jobless rate added historical low rate of 6.2%, and the employment to population ratio at a record high of 74%. National Bank remains heavily geared towards Central Canada.

This favorable defensive positioning should support good performance on a relative basis. As we enter a New Year, let me reconfirm our capital deployment strategy.

Number one, strengthening our CET1 ratio remains a priority; secondly, investing to stimulate business growth in our core markets is also very important; thirdly, investing to capture significantly – significant efficiency gains and generating a positive operating leverage for 2017; and lastly, maintaining solid dividend growth and generating superior shareholders return. On that note, we have increased our quarterly dividend by $0.01 to $0.56 per share in the first quarter of 2017, and we will continue to review the dividend payment every other quarter.

We are targeting the following mid-term objectives EPS growth between 5% and 10%, ROE between 15% and 20%, CET1 ratio above 10%, a leverage ratio above 3.5%, and a dividend payout ratio between 40% and 50%. To wrap up, I’m satisfied with the progress we made this year, but the work is far from being done.

Increasing our CET1 ratio remains a priority. The entire organization is focused on cost management and we are accelerating our transformation.

I’m confident that we have the right strategies in place to continue to deliver a long-term value to shareholders, given our leadership in our core markets, our clear capital deployment strategies, and our strong execution capabilities. We are starting fiscal 2017 with strong momentum.

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

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

On an adjusted basis, we had a very good fourth quarter with total revenues of over $1.6 billion and net income of $463 million, both up a 11% from last year. Diluted EPS stood at $1.24, up 7% from a year ago.

As pre-announced to the market on October 27, 2006, the Bank recorded specified items of negative $175 million pre-tax as a result of a restructuring charge of $131 million and write-off of intangible assets of $44 million. Total specified items for the quarter was negative $156 million after tax.

Now, on Slide 7, for a review of fiscal 2016 financial performance. On an adjusted basis, revenues totaled $6.3 billion, representing an increase of 5% and total expenses were up 4%, resulting in a 1% positive operating leverage.

Net income amounted to $1.6 billion, or $4.35 per share, down 7%, due to the $250 million pre-tax sectoral provision on the oil and gas portfolio recorded in the second quarter of 2016. Turning to Slide 8, each business segment contributed to revenue and net income growth in the fourth quarter.

Thanks to good loan and deposit growth in P&C Banking, increasing net interest income and fee-based revenues from Wealth Management and strong growth in most activities in Financial Markets. Turning to Slide 9.

For fiscal year, 2016, the increase in revenues of close to $300 million was well-balanced among the three business segments, each contributing between 20% and 30% percent to the growth. Note that the increase in other segment was related to the acquisition of our controlling interest in ABA Bank.

The sectoral provision on the oil and gas portfolio explains the lower contribution of P&C Banking to net income at 25% for the year. Before turning to next slide, I would like to confirm that the bank will disclose a fourth reporting segment, beginning in Q1 2017.

The new segment will be named U.S. specialty finance and international and will include our subsidiary Credigy in the United States, as well as our activities in Cambodia and other emerging markets.

The objective of the new segment is to provide more transparency on those activities going forward. Please note that restated financial information will be disclosed by the end of January 2017.

Turning to Slide 10 for the expense overview. For the quarter, operating expenses were up 10% on a year-over-year basis and operating leverage was positive at 1%.

Higher expenses were largely driven by variable compensation, collection fees in Credigy, and continued investments in the business, as we are accelerating the Bank’s digital transformation. Higher expenses compared to last year were also related to the consolation of the new ABA Bank subsidiary.

Our operating leverage was also positive for the year and we expect the same in fiscal 2017. In 2016, we improved our efficiency ratio by 40 basis points to 58.2%.

Management continues to be highly committed to maintain tight control over expenses, with the acceleration of our transformation, we are confident that we will continue to improve our efficiency ratio across all segments of the Bank. Turning to Slide 11, we are providing some details on the restructuring charge record this quarter.

For the Bank’s fourth quarter results include a restructuring charge of $131 million to accelerate the initiatives we began last year, as part of our transformation plan to meet the changing needs of our clients and achieved greater operating efficiency. It also included $44 million of impaired on intangible assets, mostly related to the system and application decommissioning due to modernization of the bank’s infrastructure and recent investments in digital banking and data analytics.

We expect to realize run rate annual savings of approximately $120 million pre-tax in 2018 from the recent charge, of which $100 million will be realized in fiscal 2017. Approximately, 60% of the expected savings will benefit P&C, 25% Wealth Management, and 15% Financial Markets.

Together with the charge we took in 2015, we have recorded charges of $260 million pre-tax over the last year or so. For 2017, we expect to realize cumulative savings of approximately $135 million, including savings of $35 million resulting from the charge recorded in 2015.

For 2018, we expect to realize cumulative savings of $155 million. The restructuring charges were part of our effort to capitalize on the shift towards a digital economy, which requires us to be even more agile and efficient.

Our restructuring initiatives relate primarily to increasing productivity optimizing premises, as well as simplifying structures and processes across the Bank. These strategic efforts will contribute to the improvement of the Bank’s efficiency ratio in fiscal 2017, and will position the Bank for long-term growth and sustained success in key markets.

Turning to Slide 12 for a capital overview. The Bank’s CET1 ratio reached 10.1% at the end of the year, up 20 basis points on a sequential basis.

The improvement in the CET1 ratio was driven primarily by a strong internal capital generation, as well as tight control of the risk-weighted assets, partly offset by a 14 basis points negative impact of the restructuring charge. The risk-weighted assets decreased by $325 million and added 8 basis points to CET1 during the quarter.

As a result of stable credit risk, lower market risk, the implementation of advanced models for some financial assets, partly offset by business growth. We are satisfied with the improvements in our capital position during 2016.

And as we mentioned earlier, we will continue to be focused on increasing our CET1 ratio, as we enter a New Year. On that, I’m turning the call over to Bill for the risk review.

Merci, Ghislain, and good morning, everyone. I invite you to turn to Slide 14 for the loan portfolio overview.

In the fourth quarter of 2016, gross loans and acceptances stood at $127 billion. Mortgages, HELOCs and other secured retail loans account for 49% percent of the total loan book, while credit cards and unsecured retail loans represent just 8%.

The wholesale portfolio represents 43% of total loans and as well diversified across industrial sectors. Ron exposure in our oil and gas portfolio was $2.1 billion, or 1.7% of total loans.

Energy prices stabilized at higher levels during the second-half of the year and producers took advantage of receptive capital markets to raise capital and pay down bank debt. Given the more stable market conditions and having proactively addressed the challenges in the portfolio through the sectoral provision taken in Q2, we’ve moved the detailed oil and gas slides to Appendix 4 of the investor deck.

On Slide 15, we have the regional distribution of our Canadian loan portfolio, where we can see that loans in Central Canada represent more than 81% of the book. Our unsecured retail exposure in the oil region is less than half of 1% of the book.

So although, we saw increased delinquencies in some retail products in the oil region, most notably in credit cards, it did not materially impact the solid performance of the rest of the portfolio. On Slide 16, additional details of our mortgage portfolio were provided.

61% of our residential mortgage in HELOC portfolio is based in our home province of Quebec. Conditions in this provinces housing market have remained healthy, with stable house prices supported by good employment growth and improving affordability.

Alberta and B.C. each account for just 6% of the portfolio.

About 43% of the portfolio is insured and the average loan to value on uninsured mortgages in the HELOCs was unchanged at 59%. Turning to Slide 17.

In the fourth quarter, provisions for credit losses were $59 million, or 19 basis points. Retail provisions declined to $36 million, or 24 basis points, up 3 basis point improvement from the same period last year.

Commercial Banking PCLs rose to $18 million, or 23 bps in the quarter, and we registered $4 million of provisions at Credigy during the quarter. As was described at our Investor Day in September, Credigy has built a portfolio of performing loans, which continue to perform well and these incurred losses are well within our expectations.

No provisions were taken in corporate banking and $1 million was registered in Wealth Management. The oil and gas sector allowance now stands at $204 million, following the transfer of $9 million to specific provisions during the quarter related to one new impaired loan.

Stable conditions in Central Canada and our modest exposure to unsecured retail exposure lead us to maintain our guidance for PCLs at 20 to 30 basis points for the next two quarters. Based on current conditions, we would expect to remain around the lower-end of that range.

On Slide 18, gross impaired loans increased to $492 million, while the GIL ratio of 39 basis points was stable on a year-on-year basis. There was one new oil and gas formation and a few small commercial loan formations.

Retail impaired loan formations remained within the range of the past year. And the corporate banking portfolio had no formations again in the quarter.

In Appendix 6, you’ll find highlights of our market risk exposure. Average trading VaR declined to $5.2 million in the fourth quarter and we registered four days with trading losses.

Now, I will turn things over to Jean Dagenais for the business review.

Thank you, Bill, and good morning, everyone. Slide 20 presents the Personal and Commercial Banking segment.

Revenues were $740 million in the fourth quarter of 2016, up $19 million, or 3% from the same period last year. Personal Banking revenues at $349 million were up $2 million year-over-year, due to strong loan and deposit volume 4% and 7%, respectively, and mortgage prepayment fees, partly offset by lower margins due to decrease in prime cost of funds spread and the yield curve impacting deposits.

Commercial Banking revenues were up 3% year-over-year at $269 million due to a 6% increase in loan balances, excluding the oil and gas portfolio and a 15% increase in deposits, partly offset by lower non-interest income, including lower BA revenues from energy sector. Credit card revenues at $93 million increased $5 million, or 6% from Q4 2015, due to higher balance and improved loan margins.

Insurance revenues amounted to $29 million, 16% higher than the same quarter of last year, due to higher premiums and a gain on disposable of securities. Operating expenses at $418 million, were up 2% from the same period last year due to technology investments, partly offset by efficiency initiatives.

The operating leverage for the quarter stands at 1%. The provision for credit losses amounted to $54 million, down 10% year-over-year due to the good quality of the credit of the portfolio and lower PCL in retail and the oil and gas portfolio.

Overall, P&C posted net income of $196 million in Q4, up 7% year-over-year. P&C’s key metrics for the quarter show that loans in Bas, excluding the oil and gas portfolio continued to grow at a good pace, up 4% on a year-over-year basis, with retail loans increasing 4% and commercial loans were up 6%, excluding the loans to the oil and gas sector.

Volume from deposit also showed strong growth rising by 11% compared to Q4 2015, mainly from commercial deposits. Net interest margin was 2.26% for the quarter, a 1 basis point improvement year-over-year and on an sequential basis, mainly from higher margin in commercial and credit cards.

Finally, the efficiency ratio improved by 50 basis points from the same quarter in 2015 by 56.5%. Please turn now to Slide 21, for the Wealth Management review.

Revenues increased by 10% to $375 million year-over-year, mainly due to a strong increase in net interest income attributable to higher balances and a 9% growth in fee-based revenues. Expenses were up 5% to $250 million due mainly to variable compensation, generating a 5% positive operating leverage.

The efficiency ratio was 66.7%, the 330 basis points improvement on a year-over-year basis. Net income accounted for $91 million, up 21% from the corresponding quarter in 2015.

Loan and BAs at $9.4 billion increased 4% from last year, while deposits increased 19% year-over-year to nearly $20,000. Asset under administration and asset under management, both showed strong growth of 11% and 15%, respectively, on a year-over-year basis.

Now, I’ll invite you to turn to Slide 22, for the Financial Markets review. Revenues increased 19% compared to the same period last year from nearly all business activities.

Trading revenues were $222 million this quarter, 14% higher than the same quarter last year, due to increases in equity and fixed income trading. Banking services revenues increased 15% to $91 million due to solid balance sheet growth with Corporate Banking loans increasing 22% year-over-year to $13.4 billion.

Financial Markets fees were up 30% to $74 million due to a strong performance from investment banking with active market for new equity issues and M&A. Gain on securities were $5 million in the quarter compared to a loss of $10 million for Q4 of 2015, when impairments were recorded.

Credigy’s revenue at $80 million in Q4 of 2016 were up 14% year-over-year due to portfolios acquired during the year. Expenses at $213 million were up 16% from the same quarter last year, due to higher salaries, increased variable compensation, and collection expense at Credigy.

The efficiency ratio stands at 44.3% for the quarter compared to 45.5% in Q4 of 2015. Financial Markets net income for the quarter at $191 million showed a strong 18% growth year-over-year.

That concludes my remarks. I will turn the call back to the operator for the question period.

Hi, good afternoon. I just want to start off by asking about your decision to leave the independent mortgage broker channel, and what’s driving that decision specifically right now?

I would have thought with maybe some of the changes going on in the mortgage rules that that market would have been looking a little bit better from a competitive point of view these days?

Jean will answer, Meny.

Hi, Meny. Well, first of all, let me say that the agreement is final for us.

We’ll originate, underwrite and service broker more – broker channel mortgages on our behalf under the Merix Financial brands. We believe the arrangement with the Q, Paradigm Quest provides the best economics for the bank and this is part of our efficiency program.

But most importantly and strategically, it allows us to redeploy our resources mainly our IT spend in creating e-mortgages capabilities, and that’s obviously to satisfy our clients evolving needs. The first iteration of our e-mortgage is expected towards the end of this fiscal year.

We’re still committed to the brokerage channel and understand that this transition from broker to digital facilities will take sometime. But we wanted to go ahead with this and make sure that we’re there when clients change their behavior.

Our goal is definitely to originate the same volume as we are today in our current model.

So that is, you’ll have some color – you’ll originate the same volume, but you’re – you’ll be able to see some expense savings. And I guess, the question is, is that, are those savings already included in your guidance in terms of cumulative savings, or is that on top of anything that you’ve guided to?

That’s included, Meny.

Okay. And then on the margins, do you expect any impact on margins from that change?

No, we’re not.

Okay.

We’re expecting flat margins for next year.

Okay. And then if I could just ask a second question just on the very strong growth, the strong loan growth in your Financial Markets business, and just a little bit more detail in terms of, are there certain sectors that you’re targeting specifically?

Yes, Diane will answer them. Diane?

Yes, we’re deploying – our strategy right now is deploying more and more capital to large capitalization in terms of loan growth. And we want to have access to more insured business coming from those big capitalization.

In the previous year, we were very, very strong in mid-cap and small cap, and now it’s our new strategy to put in place since the beginning of 2016 that are starting to materialize in terms of benefits, and we will continue for the coming years to invest more and more capital in that sector of the activity.

Okay. Thank you.

Thanks very much. A couple of questions, maybe starting with capital probably for Louis.

So a couple of times on the call has been mentioned strengthening CET1, but a good job getting to 10.1% sooner than expected. But in light of the potential headwinds with the pigment of risk weights, I’m wondering if you can update us on where you think you want to be?

At what point you’d be comfortable suggesting you had some excess capital, when we’d start to hear about buybacks again, just maybe refresh us on that?

Thanks, Steve. So I think to be more specific, I think, we want to get to 10.5% pretty quickly, so either by the end of Q2 or Q3 at the latest.

Once we get there, I think, the first thing we’ll do is, I think, we’ll be a little bit more generous in terms of dividend increases instead of being the $0.01, we may look to increase, especially if earnings are – growth are in line with our midterm objectives and then after that, we’ll see once we get there. But that would be – the first step would be to get 10.5%.

Okay. That’s helpful.

And then for Diane, it looks to me like the biggest driver of Capital Market strength this quarter is equity trading and that’s a lot different relative to peers, where that’s been more subdued this quarter. So maybe just some more detail there wondering if there was a trade, or a number of equity derivative trades maybe that that led to that outcome this quarter?

In fact, it’s well diversified. It’s not only into the [indiscernible] equity that did very well.

In fact, we had a spectacular year, again, it’s because we change the way we’re approaching the market. We’re getting closer to clients then it’s providing a more solid revenue stream.

But also we were very strong in the Financial fixed income and on the swap side loan derivative business. All of that business is really client oriented, and this is why you’re seeing good growth there, and then market was receptive.

And we saw quite a lot of volumes coming from clients.

So would you say on, sorry, would you say on the equity side it was more, we saw some of those lumpy trades that happen from time-to-time, or there was more sustainable flow?

More sustainable is a big word. It was a good business coming from all kind of different clients, not lumpy transactions, not at all.

Okay. And then just to check in while have you on the total return swap runoff, my impression has been it’s not as big an issue nearly for National.

But do you – is there enough exposure on the books that’s running off next year that will notice it at all in the numbers, or is that not the case?

I think, we’ll – we felt pretty much what the guidance was. We talked about a 1% EPS negative impact for 2016.

I think that’s pretty much where we went through. I don’t think, Diane, I don’t think we expect anything worse for next year, no, not at all.

Okay, that’s fair. And just to wrap it up maybe for Ghislain, in the insurance there was a mention of a gain on disposal of investments.

Is that about securities gain, or some maybe an obscure asset sale, can you quantify that impact? And is it within the AFS securities gains, or somewhere else in the P&L?

I will let Jean to answer your question.

Sure.

It is normal. It happens every year when we rebalance their portfolio they sell some securities, it is part of the available for sale security $2.5 million, it’s not a big amount.

It happens from time to time, and it’s part of the gain on securities.

Okay. Thanks very much.

Thanks. Good morning.

First question is for Bill, maybe for Louis, things move pretty fast. Just six months ago that you set up the reserve for the energy book.

And as you mentioned with prices having rebounded somewhat and capital markets being helpful to some of your clients. You haven’t had to use a lot of that sectoral so far and impairment migration hasn’t been as fast as we had seen earlier.

So I think my direct question would be at what stage would you be able to ascertain as to whether you have overprovided in setting up the sectoral? What has to happen for you to make that decision?

Thanks for the question. It’s Bill.

And just want to remind you that we wanted to be proactive in addressing the deterioration in that one portfolio and feel that creating a sectoral allowance did just that. The stability in prices and the continued pay down of loan balances certainly makes us even more confident that the size of the allowance was prudent.

But it’s only been two quarters and it feels a little early to talk about reversals. Let’s see what these positive conditions hold into 2017, and I expect that you’ll ask the question again next quarter.

No, I certainly agree that it’s early in the game. But is it price that’s the key determiner, or are we looking at the trend in gross impaireds?

I’m sure it’s going to be a combination of above, but they’re all the above, is there anything specific that has to occur for you to to determine that it’s something that could be released?

It’s a combination of all of the above, as well. There’s files over the next few quarters, which are in the resolution stage, which will expect to get done in the next three to four months and that will impact it as well.

All right. And my second question is going to be on revenue growth in personal and commercial banking so for Diane.

3% increase in revenue this year, when we look at fiscal 2017 getting started, so few moving parts, you talked about the exit from the third-party mortgage broker channel, interest rates or five-year rates were up about 40 basis points in the last few months, and you’ve had the new mortgage insurance rules that were introduced in October. Along with that, I think, you’ve talked a lot about how the energy portfolio has impacted revenue in this segment as well?

When you put these factors together, what is your outlook for revenue in the banking segment, because expenses you’ve given us a good idea. I’m just curious how all these moving parts impact your outlook on revenue?

Okay. Well, going into the next year, we expect an increase of revenue in the mid-single range and we continue to be committed to our Investor Day targets, if you remember the CAGR between 15 to 18 was 5% to 6%, so we’re committed to those.

And the growth specifically will be coming from three main areas. Number one, commercial, where our volume growth will continue to be strong and that’s thanks to our specialty vertical strategy, along with some added capacity, remember that, we’ve been adding bankers across the country, as well as some prevailing good market conditions.

Second is, we believe that hedging activities of our commercial clients will actually be more prevailing in the next year, due to largely to the volatility in the market. So we should see some other revenues pick up in derivatives and foreign exchange.

And third is, we will look at enhancing our cross-selling activities that’s generated by our new CRM that was recently deployed in our call center, as well as in our branches. So we expect revenues to be coming from insurance, cards, and mutual funds from that cross-selling activity.

So for the first part of your statement, it sounds like you’re expecting revenue growth in 2017 will be faster in this segment than you saw in 2016, is that a correct?

That is correct.

Thank you for your time.

Hi, good morning. Bill, I apologize if I’ve already forgotten something from the Investor Day.

But the loan loss at Credigy that, I think, I heard you say that that was just incurred loss. A, was that the case?

And B, is there any component of expected loss at this portfolio grows in terms of just setting up a collective reserve, or will it all just be kind of pace you go and it will come and go as losses arrive?

Maybe for the second question, I’ll let Jean answer. And for the first part of your question, I think, it was about the nature of the portfolio.

So Louis mentioned that at Investor Day, we mentioned that they’ve been building a performing loan portfolio. So in the past, when they had primarily already defaulted loans, non-performing loans, I’d hope there was no credit losses from default.

So the portfolios that they’re building is in prime loans. Weighted average life of 700, sorry, weighted average life of 700 and weighted average life of 20 months, it’s unsecured personal lending and so the margins in PCL rates that reflect that.

And just to confirm, we’ve incorporated our expectations for these loan losses into our guidance of 20 bps or 30 bps. For the second part of the question, Jean?

Yes, for the second part, the $4 million expense is incurred loss. And as you know, until we move to IFRS 9, all the losses are always incurred loss, we’re not in the expected loss model.

However, we include that portfolio with all the other portfolio when we evaluate the collective allowance, and if needed, we’ll adjust the collective allowance. But up to now we have been able to maintain the collective allowance stable with that new portfolio being taken into account.

So these losses are just going to kind of come and go as they arrive. They don’t look like, I mean, it’s not that they’re all that large this quarter.

But just kind of arrive as they do and bounce in and out of the P&L, is that fair?

That’s correct. Yes.

Okay. And then just a quick one, the – when I look at the trading revenue by product, the other categories, Jean, is that were the CVA/DVA lives?

No, the CVA/DVA is part of all the other product in Financial Market. The other is – this is related to treasury.

So from time to time treasury, we do have some trading revenues and this is the one that we showed you.

Okay. Thank you very much.

Thank you.

Hi, good morning. Just wanted to first make sure I understood how the cost savings will come through next year.

So maybe just simplistically the way I think of it is you take non-interest expense adjusted for 2016 for the unusual items, you put through a 3% call it inflation and then you’re back at the $100 million. Is that, I’m sure it’s more complex than that, but is that a fair way to think of it?

And is all of that expected to hit the bottom line, or is there additional investments that you’re thinking of making?

Every year we make investments. So your equation will be a bit more complex.

You take the 2016, you add increase in salary, you add increase in contracts, you add amortization of technology that we have spent, you had new projects that we will invest in and then you subtract the savings something like that.

And so what I mean, what is the normal inflation rate that you would think, excluding the savings that would go through? And has that deferred materially, or are you expecting that to differ materially versus past years?

Should not differ materially, and usually salary increases, including promotions things like that runs between, I would say, 3% and 3.5%. And then you have variable compensation, which is related to the – obviously, the volume and the activity that could be fluctuate faster.

The rest will depend on contract that were signed years ago.

And then so the $100 million is expected to flow through there is…?

Yes. But you don’t have – you cannot take 2016 and subtract a 100.

No, that’s fair.

I tried that didn’t work.

Fair enough. And then, Bill, just a minute or Bill or Ghislain, just on the CET1 ratio, it looks like there was a model refinements that added about 14 points in the quarter.

I think, it made, I think you referred to it in your prepared remarks, and I apologize, I didn’t catch what it related to. But can you enlighten me as to what that related to?

Yes, Doug, this is Ghislain here. You know that from time to time, we are reviewing our capital and we try to optimize our capital.

So and we will continue to do so in the coming quarters. So this quarter part of this optimization, we have a 15 basis points coming from a new advanced model.

The new advanced model is on the way that we calculate exposure and default for our counterparty risk for financial institutions.

First finance – just for financial institutions?

Yes, only for financial institutions.

Okay.

This is a permanent change for these assets. And as I mentioned, I mean, it’s part of our global optimization of capital.

And is this, I mean, I guess, you’re doing oncoming and ongoing reviews, is there any other additional items that you’re currently working on that may have an impact over the next year?

No, there’s nothing in the plate for now, but I’m not saying that there will be none in the coming quarters. We’re still, as I mentioned, we’re still – we continue to optimize the capital.

So we’re looking for ways to do it, and of course, reviewing models are going to an advanced model is one of the option.

Okay. And then just lastly well I have just on the tax rate, I guess, it’s bounced around a little bit.

I mean, what should we be thinking about in terms of in our models for tax rates over the next two years?

This is Jean Dagenais. The normalized tax rate is 27% on the tax equivalent basis.

But we have a few revenues from outside, let’s say, revenue in Credigy in the United States are taxed more and some revenue from outside are taxed less. So between 25% and 27% is a reasonable rate.

Okay, great. Thank you very much.

Good morning. I just want to talk about the restructuring and the anticipated cost saves out of that.

And there’s a bit of a crude analysis I’ve done. I look at total charges taken by all the banks and then anticipated cost saves.

And it looks like that ratio cost saves to charges taken for National it’s about 60% and the other banks are quite a bit higher than that. And one way of looking at that would be, you’re not giving as much bank for the buck.

The other way is that, you’re under promising that over deliver, how do you think about the anticipated benefits from these charges?

Well, thank you for the question. This is Ghislain.

So first of all, in the charges that we took especially this year, we have write-off of intangible assets. Of course, there’s less savings in the coming years coming from this.

So I think that’s your calculation. If you subtract the write-offs then you would probably arrive to a percent that’s similar to the other banks.

Right.

This is the first thing. For the rest, we are very, very confident about our capacity to deliver.

We are well-positioned right now to realize the savings in 2017 and 2018, so pretty confident about it.

Right. Is there a ratio or bottom line contribution versus reinvestment that you have in mind?

No, no.

Okay.

And this not the way that we see it. So essentially, we’re looking at our expense targets for 2017, 2018, also our efficiency ratio target.

And then this is the way that we see it and we work it internally within the Bank.

And then like, Rob, I forgot some stuff from the Investor Day, can you remind me what the ABA contribution was expected to be this year? It looks like it exceeded your guidance there?

I think you did a little bit. But I think we’ll have to get back to you on this one.

Okay.

I think it was a little bit above. I think, Jean, is pulling out his mind as we speak.

So let’s find it, okay.

If you can wait a few seconds…

Must be there, new branch and anchor what?

Yes.

Okay. All right.

No, that’s you can follow-up offline. Thanks.

We’ll follow-up offline, Gabriel.

Thank you.

Thank you.

Good morning. A couple of related – questions related to previous questions.

First on expense growth. 10% year-over-year, I imagine a good amount of that relates to ABA.

Could you help us think through what the expense growth was if you remove that the change in the ABA ownership?

Yes, Mario, Ghislain here. So first of all, as you mentioned, some of it is coming from ABA, so it’s about $10 million in our results.

And also, if you look at our revenues, our revenue increase in the quarter, so it also increase variable compensation. I also mentioned in my previous remarks, the collection fees from Credigy.

And we also continued to invest in through the transformation. So all of it, we’ve been able to deliver a positive operating leverage of 1%.

So essentially, it’s based on revenues, variable compensation. It’s based on ABA, the new subsidiary, and some collection fees from Credigy.

But do you have a number in mind of what the expense growth would be pulling out some of those more variable components in one-off components like ABA, or variable comp?

Yes, I know it’s difficult to answer that question, because it depends on the revenues We have variable expenses, so it depends on the revenues. But as we mentioned and also I said it in my remarks, we’re – we want to achieve a one or a positive operating leverage over 1% next year.

So essentially, this is the way that we see it delivering positive operating leverage.

Okay. So secondarily, also related in domestic P&C, the revenue growth – fee income growth, I mean, I appreciate that it wasn’t positive, it was marginally negative.

But that’s still a fair better than we’ve seen over the last couple of quarters. And I think you’d sort of guided us there that you thought this quarter could be a little better results that I have in my notes.

Could you speak to what really improves? Why did not decline more than it did, given how we could have been in the previous two quarters?

What changed?

On the revenue side?

Yes, fee income in particular?

Fee income. Well, it depends on, if you look at it with or without energy.

And most of the negative impact was generated by the reduction in balances on the BAs for the energy portfolio. And also – you also saw a – although, we do have strong pipeline on the commercial, but the volume on commercial was not as strong as we had expected, because some of that is actually just planning for Q1.

But so some of our loan fees are actually haven’t been that high. And then the third one was mortgage penalty if that was actually lower.

That – I’m familiar with what caused it to be a little weak in prior quarters. What I’m getting at is, this quarter the result, in fact, wasn’t that bad, certainly, it was better than the declines we’ve seen in prior quarters.

What I’m getting at is, did energy come back, or was there something else that was a little stronger this quarter?

Energy did not come back when it started going. It stopped going down, Mario.

That’s essentially just the delta wasn’t so bad?

That’s right. So at some point we’re hitting, I think, hitting this quarter or next quarter, we’re hitting a low in terms of energy.

And as you know a lot of the financing in energy was done through BAs. So instead of showing up in the net interest in line, it was showing – a part of it was showing up in the fee income.

So we just hit bottom on the energy side like I have just said full story.

Thank you.

Hi. I thought just quickly for, Jean, the question regarding Credigy loan loss reserves you mentioned IFRS 9.

What happens to the Credigy loan-loss reserves when you move to expected loss?

Well, the first thing, Peter, is that, we’ll have to reassess how much the allowance is required as of the end of 2017. And we’ll create the new allowance under IFRS 9 divided into three buckets; bucket one, when you would create a new loan; bucket two, there’s a deterioration; and bucket three, there is a default.

So let’s start with that, and then it will move depending on the credit quality of the portfolio, the economic condition, and the difference will go into P&L.

Is it – will it be more or less volatile than today in their current method?

It could be more volatile than today. Obviously, I’m pretty sure that...

That’s been under IFRS 9, Peter, so it’s nothing to do with Credigy. No.

I know, I understand, that’s why I’m asking it.

So that it’s – I don’t think Credigy itself is not big enough to cause a significant change in terms of the loan, in terms of volatility. The change in accounting method, I think, we will see, we’ll simulate, but on a simulated basis, it does appear to increase some volatility.

Okay. And then since I have you Louis or for Martin, with building capital, are you – is National Bank still thinking of being an acquirer in Wealth Management, and if so where you’re looking?

Oh. Well, right now we are not working on anything.

There’s nothing in the works. And I think we’re satisfied with the most of businesses they are now.

We’re seeing good organic growth. Some of the prices that are being talked about out there are not appealing to us at the moment.

Okay. So for now nothing, but you wouldn’t rule it out?

No, no, we wouldn’t rule out. But as Martin said, there’s nothing eminent either on the wealth side.

And as I said none – also none on the international side. We still on our Q3, Q4 whole period for international.

And there’s nothing in the pipeline right now in that front. So the priority is definitely taking care of organic growth and reaching 10.5% as soon as possible.

Okay. Thanks very much.

Thank you, everyone, and happy holidays, and we’ll talk to you in February. Thank you very much.