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 Bill Bonnell - Executive Vice President, Risk Management Diane Giard - Executive Vice President, P&C Banking Jean Dagenais - Senior Vice President, Finance

Steve Theriault - Eight Capital Gabriel Dechaine - National Bank Financial Robert Sedran - CIBC Capital Markets Sumit Malhotra - Scotia Capital Meny Grauman - Cormark Securities Scott Chan - Canaccord Genuity

Thank you and good afternoon, everyone. I would like to welcome you to National Bank's investor presentation for the second quarter 2018.

My name is Linda Boulanger and I'm Vice President of Investor Relations. Presenting to you this afternoon are Louis Vachon, President and CEO; Ghislain Parent, CFO and Executive Vice President, Finance and Treasury; and Bill Bonnell, Executive Vice President, Risk Management.

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 and Marketing; Martin Gagnon, Executive Vice President, Wealth Management; Denis Girouard, Executive Vice President, Financial Markets; and Jean Dagenais, Senior Vice President, Finance.

Before we begin and on behalf of those speaking to-date, I refer you to Slide 2 of your presentation providing National Bank's caution regarding forward-looking statements. With that, let me now turn the call over to Louis Vachon.

Thanks, Linda. Good afternoon everyone and thank you for joining us.

Today, we are pleased to report another strong quarter by National Bank with net income of $551 million, up 12% from the last year. Our performance was driven by solid growth in all businesses segments, effective cost management and strong credit quality.

As in the past several quarters, our continued execution of the bank transformation translated into strong operating leverage across all businesses. During the quarter the bank delivered a return-on-equity of 18.7%, one of the highest in our industry on a global basis.

We are carefully managing our capital to maintain strong capital level. Our CET1 ratio was at 11.3% at the end of the quarter providing us with flexibility to invest in business growth and return capital to shareholders.

Credit quality remains strong in overall portfolio reflecting a prudent approach to lending. We continue to benefit from favorable economic conditions in our core Quebec market.

After getting momentum for several years, the Quebec economy is in a very good place, the unemployment is at a historical low and now the second lowest of our province in Canada. Looking forward, there is good visibility for same growth in the province supported by tax relief for household and small businesses, as well as large scale government infrastructure projects.

Now let me share some highlights of our businesses during the quarter. Our P&C segment delivered good results this quarter with net income up 8% on a comparable basis.

Our performance was driven by revenue growth in both retail and commercial, increased net interest margin and continued efficiency improvement. In personal banking, we are seeing good volume growth.

We are maintaining target volume growth rate of approximately 4% for 2018 as we complete the transition of our distribution model. In commercial banking, we have strong momentum with revenues up 9% with growth in both lending and deposits.

We strive to achieve the right balance between prudent risk management and sustainable growth. Our objective is to position National Bank to perform well throughout this complete cycle.

Looking forward, we will maintain our overweight position in the province of Quebec, as well as in secured loans which review us favorable in the current economic environment. Turning to wealth management; our strong momentum was sustained in the second quarter with a 19% increase in net income.

We are benefiting from the diversification of our business model with strong performance in every business line, very good cost management and a positive impact of higher interest rates on our margins. Our wealth management business is in good shape and the outlook is positive for the remainder of the year.

Our financial market segment had another strong quarter, our second highest after Q1 of this year. Net income was up 11% from last year driven by solid growth in our trading and lending activities.

Our consistent performance from quarter to quarter reflects our continued focus, diversified revenue mix, focus on client driven activities and strong team work. It also reflects our flexible approach to balance sheet allocation, providing us with the ability to seize opportunities as markets evolve.

Over the past quarters we have seen attractive opportunities across markets which resulted in strong revenue growth in our securities finance business, both in Canada and outside of Canada. Despite a challenging quarter for capital markets industry-wide, corporate and investment banking performed well as shown by increased lending revenues and market share gains in equity underwriting.

Our fourth business segment, U.S. specialty finance and international delivered an outstanding second quarter with net income of $63 million, up 58% from last year.

Credigy is delivering strong results while we continue to see a strong growth trajectory for Credigy overtime, we expect a slower pace of growth for the second half of the year based on current market conditions. ABA's strong performance continues and net income is well ahead of expectations.

ABA Bank is expanding it's branch network with the addition of 16 new branches this year. Loans and deposits volume have grown by approximately 50% year-on-year and we continue to see solid growth opportunities for ABA.

At this point in time, we're expanding our moratorium [ph] on significant additional investments in emerging markets until the end of 2020. We are very satisfied with the performance of Credigy in ABA and we will concentrate our efforts and our capital on those activities.

Now let me reconfirm our capital deployment strategy. Our first priority is to maintain strong capital ratios.

Our second priority is to invest in business growth in our core markets. Our third is to invest to continue to capture significant efficiency gains and generate operating leverage close to 2%.

And our fourth priority is to return capital to our shareholders to sustainable dividend increases and share buybacks while maintaining a CET1 ratio above [indiscernible] quarter. During the second quarter we repurchased 1.5 million common shares, this morning we announced the new NCIB program to purchase upto 8 million shares.

We also announced a 2% increase in our quarterly dividend to $0.62 per share. To wrap up, I'm very pleased with our second quarter results.

We delivered solid growth in all our business segments, continued efficiency improvement and strong levels of capital. In the current environment we are exercising discipline with a focus on protecting margin and maintaining strong credit quality.

Looking forward, we have strong momentum and the operating and economic environments continue to be favorable, especially in Quebec. I would like to end my presentation with some acknowledgements.

Today marks Jean Dagenais [ph] last conference call and I wish to recognize our leadership and great service and performance to the bank since he joined us in 2011. I would also like to thank Lynn Jeanniot who is retiring after a very successful career with the last 10 years as EVP, Human Resources & Corporate Affairs at National Bank.

On that, I'll turn things over to Ghislain Parent.

Thank you, Louis and good afternoon everyone. My comments today will focus on two areas; efficiency and capital beginning with Page 7 on the slide deck.

As we mentioned earlier, we reported excellent second quarter results underpinned by very good performance across all businesses. During the second quarter we generated strong supplying growth of 10% while keeping strict discipline in managing every cost.

This resulted in all bank operating leverage of 4.4% with positive leverage across all business segments. P&C, wealth management and financial market delivered strong operating leverage of 3%, 6% and 3% respectively.

Our investments in our digital tools and transformation continue according to plan and we are seeing tangible results. We continue to implement and improve digital solutions for our clients.

We also continue to work on many initiatives to increase the automation of our operations and to simplify our internal process throughout the bank. Together with the transformation initiative we are keeping the discipline on cost management and all of our employees are contributing to this in their day-to-day activities.

All of these initiatives are resulting in additional revenues and lower costs and are allowing frontline staff to spend more time with customers. This translates into improvements of 210 basis points in our efficiency ratio on a year-over-year basis.

In the last two years we have showed consistency in our ability to generate positive operating leverage and better efficiency. Looking ahead, we will continue to invest our growth while capturing additional efficiency gains.

We are benefiting from a good momentum and our team is fully committed to deliver a positive operating leverage. Turning to Slide 8 for the capital overview.

We ended the first quarter with a strong CET1 ratio of 11.3%, a slight improvement over the last quarter. This was driven largely by strong internal capital generation which added 40 basis points.

It is partly offset by a common share buybacks during the quarter and an increase in risk weighted assets due to business growth and higher volatility. At the end of Q2 the Bank's total capital ratio stood at 15.6%, we are pleased with our recurring capital position which provides optionality and flexibility to invest in business growth and returning capital to shareholders.

On that, I'm turning the call over to Bill for risk review.

Merci, Ghislain, and good afternoon everyone. Credit conditions remain benign in the second quarter supported by good underlying economic factors, particularly in our home province of Quebec.

Details of our loan portfolios performance are provided on Slide 10. Provisions on impaired loans referred to as Stage 3 under our [indiscernible] accounting were $78 million or 23 basis points.

Of the $22 million increase from the same quarter last year, $21 million was generated at our Credigy subsidiary. As expected and as discussed on previous calls, provisions at Credigy rose through the first half of this year following the growth and seasoning in their unsecured loan portfolio.

In the second half of the year we expect Stage 3 provisions to stabilize around this level while Stage 1 and 2 provisions should decline as the portfolio amortizes. Excluding Credigy, provisions on impaired loans were unchanged year-over-year at 15 basis points which demonstrates well the stable conditions from which our Canadian loan portfolios are benefiting.

Total provisions for credit losses were $91 million or 27 basis points in the quarter. The increase from last quarter was generated by some seasonal impacts in personal lending, as well as provisions on performing loans in corporate and commercial following continued growth in these portfolios.

Looking ahead, we maintain our target total bank PCL range of between 20 to 30 basis points for 2018. While we haven't given specific guidance on Credigy provisions, I want to remind you that the Credigy business is incorporated in this total bank PCL guidance and I can reconfirm the three major points I communicated at the beginning of the year.

First, we expected the conditions in our Canadian portfolio to generate low and stable provisions for credit losses during 2018. Second, we expect the Credigy's portfolio to generate higher provisions in the first half of the year and lower provisions in the second half of the year.

And finally, we guided to the midpoint of the 20 to 30 basis points PCL range with potential for some noise from new IFRS 9 accounting. So far this year credit performance is tracking our expectations and there is no change in our guidance.

Turning to Slide 11, gross impaired loans were stable at $586 million or 42 basis points. Lower formations in personal and at Credigy were partially offset by higher formations in commercial.

For additional color, the increase in commercial impaired came from a handful of small files, only one with a balance greater than $8 million spread amongst a few sectors in regions. Credit quality and performance across the commercial portfolio remains strong and we don't see signs of that changing in the near-term.

Please turn to Slide 12 for a review of our residential mortgage and HELOC portfolio. Good performance continued with provisions for credit losses declining to 1 basis point during the quarter.

Insured loans account for the largest share of this book at 43% followed by HELOCs at 32% and uninsured mortgages at 25%. The geographic distribution was unchanged with mortgages in Quebec accounting for 55% of the portfolio.

We remain very comfortable with our overweight in Quebec as underlying strength in the economy and healthy conditions in our housing market continue. The average LTV for uninsured mortgages in HELOCs was about 59%, and exposure to the GTA and GBA remain modest.

With that, I'll turn the call back to the operator for Q&A.

Operator, we are ready for the Q&A. Operator, are you still listening?

We ask everybody to hold-on and we will try to rectify the situation. Is the line open for the analyst?

Please hold on a second.

It's Louis speaking, we're just asking people to be patient. We're just getting set up with the operator here.

If someone is ready for the first questions, we'll be ready -- we can take the first question, otherwise I think you need to queue in for the number as usual. So is there anyone ready for a first question?

So as you can see the operator is experiencing technical problems, just bear with us another minute or so while we fix it. Thank you.

So for me, last question on mortgages; last quarter you flagged mortgage growth as you transitioned to the third-party activity to paradigm suggest that that situation would stabilize in Q2. But it looks like mortgages are still growing less than 2%, just wondering maybe for the end -- are there any issues here in getting the ball rolling more quickly?

And how quickly do you think you will be up to the growth levels you would like to be at on the mortgage side?

Steve, the situation in fact has stabilized in Q2 this year. What we've seen is -- if we look 12 months back, we had about $1.1 billion less in authorization, that's a 2% hit to our mortgage growth.

In Q2 this year, we had a 7% increase in disbursement and if you compare this quarter to the same quarter last year and these results do include the impact of B20 which we estimated to be at about 4% negative impact on originations this year. So going forward into the rest of the year, we still expect growth to be at nominal GDP in the 4% or 5% range if you include the mortgages done in wealth management.

The negative impact of B20 will be offset by the introduction of 240 mortgage specialists that we put in our branches, as well as the addition of 40 mobile development managers that we've added in Q1 this year. So the productivity level of these new officers is continuously improving and should reach their full potential by year end.

So we are continuing with the same forecast and we continue to favor as I said many times before, a very disciplined approach in our growth strategy by balancing market share gains, margin improvements, as well as risk management.

Sorry, you said the mortgage specialist; they were in the seat around Q1 of this year?

Yes. What we did in fact is, we converted 240 generalist to mortgage specialists and on top of that we added 40 new officers in the field.

So in total today we have about 570 employees that are 100% dedicated to secured lending.

Turning to Credigy; it sounds -- it certainly -- listening to Louis and listening to Bill; and this is a being consistent [ph] with your message this year that Credigy losses picking in the -- first half of the year Louis, you said you expect a slower pace of growth in the second half of the year. So I guess the question is without -- are there any new agreements in the harper and without any new agreements do you still think you can grow or do you think you can grow the Credigy earnings in the back half of the year or does peak credit losses also coincide with maybe peak earnings for Credigy as well?

It is obviously dependent on portfolio acquisitions to make up for the peak portfolio at lending club but the more we see from the team and the feedback we get from them; I think that we're confident that we'll still be able to generate earnings growth in the second half of 2018 but obviously a lot of them were paced and what we've seen over the last 6 to 9, 2 to 12 months, that's why we're not forecasted strong double-digit earnings growth, I think we'll be able to maintain the same level and grow at a slower pace than where we've seen last 6 to 12 months.

I have a couple of number questions, more than a couple actually. And just to confirm, Ghislain when you said disbursement up 7% for the quarter, you mean the originations in uninsured mortgages, up year-over-year 7%?

7% and the origination in total mortgages.

What about uninsured specifically?

I don't have that in front of me. I'm sorry.

We'll get back to you on that Gabriel.

But probably positive because the trend in uninsured has been generally across the industry.

I know that general, I know not specifically for the last three -- the last quarter but I know that in fact the total originations for the last 12 months were actually higher in uninsured than insured.

I'll move onto capital markets; I just wanted the trading business, the great quarter -- that's not -- the point of my question here is that the makeup of the revenues have shifted quite a bit. If I go back over the past four quarters, it's predominantly trading other income, smaller amount of trading, NII; if I go back several years, it's the opposite.

Like the trading NII was multiple of the other trading revenue; maybe you can walk through if there is an accounting thing going on there or just the nature of the trading operations has changed just to give a little bit of context.

What I was told by the business Gabriel is that with the increases in the interest rate, especially in the U.S. rate, it costs more to fund an asset.

Initially the revenue on these assets goes into other income when they are swapped or a thing like that. So the revenues go into other income while the funding of those assets are part of the net interest income.

So with the increase of funding cost we see a reduction in net interest income and an increase in other income.

Maybe it's worth more end up discussion I want at a later date. Then the international flash credit G business, couple of things here; the margin which in I go from sub-5% to -- we're not pushing 7%, I assume that's probably driven by Cambodia.

How high can that go and then the change in the expansion of the moratorium on M&A. I get that -- how much of that is -- you've got enough -- I guess allocation to fund the organic growth of credit G, and Cambodian, and particular versus -- you just want to stay on a conservative side of things.

So on margins, yes, I think it is related to ABA. What's happening there is ABA is generating more and more transactional deposits, checking account deposits and those are costing zero; so that's leading.

Very normally the assets are growing but our transactional deposits are growing. So there is margin expansion on that front from there.

So where the limit is, I'm not sure; I think we still have some momentum on that but obviously at some point there will be a limit to that expansion. On the other question is, I think we're quite clear; we had a target to get to about 10% and we're roughly there right now and -- so we have two assets that are doing very well, namely Credigy and ABA were at 10% and that's why you know, I think we're -- we achieved our objective of diversifying little bit our activity [ph] using Canada with two operations were doing very well, that's why going forward at least till the end of 2020, we don't see the need to do anything else or to do more acquisitions.

We're quite happy, we're just operating these two assets and making sure that the departments continues to be as good it has been in the last two years. So that's why we're basically reconfirming that we're on pause for at least the next two years.

Just on regulatory capital, just looking at your supplement in -- just a few moving pieces helping to get a better color on and your credit risk weighted assets, it looked like book quality improved in that as nice 25 to 30 basis points to set one. And on the flipside, your market risk weighted assets kind of jumped quite nicely and I guess that ties in with your trading revenue increase in general.

So just wanted to get some color around that and if there is a conscious effort to maybe pull away from risk on the credit side and put on a little more risk on the market risk side or any color around that would be helpful.

Mostly edging of some risks that we have done during the quarter, so it reduce obviously the risk on the credit type. As far as the market side is the volatility that had increased in the market, so increasing the VAR [ph] and having an impact on the capital.

No on your second point, now there is no conscious decision to reduce, we're being prudent in our increase in allocating credit but we still -- I think we've been selective but we still think we'll be generating some increase in risk weighted assets, particularly in commercial and corporate banking as we have done in the last few quarters we think it's going to continue. And then on the -- as Jean mentioned on the trading side, it depends on volatility so that the VAR you know, the way the VAR methodology works, if you have higher volatility at some point, it will reflect into higher risk weighted assets and that's why we're keeping a little bit of buffer there because it's especially when you have volatility that you want to be able to deploy balance sheet and capital.

I mean, it just seems on the equity trading in particular, just to pick on that one but it looks like your growth was quite significant. I mean, when I look across your peer group, you're head and shoulders above everybody else in terms of growth.

Can you unpack in terms of what really drove that this quarter?

In equity trading, it's mainly really RATF [ph] and option business that we're doing through the volatility period. That is quite volatile in the end of February and the beginning of March, and those two activity, ETS trading market making and the option book with our clients were very, very active and this is why you see a good jump in revenue there.

Clear to say, I mean, volatilities come back a bit here, so I mean this is going to jump around but with volatility down are we fair to assume that this comes down in the back half?

Not really because right now the way we're pushing ourselves is that we're very long volatility, very long Vega [ph], and in the market when it was going up -- Vega [ph] is going up, then we're making money and you see underwriting revenue going down. Then one supplement the other one, and when the working is going down, then you see underwriting revenue going up, then this is why we have that kind of ways to look at the market.

We have an insurance policy when markets are getting volatile but when it's not we have the underwritings picking up and you know that in Canada we're quite strong in underwriting.

And then just lastly on Credigy, decent bump in non-interest income sequentially, going from $3 million to $16 million, just hoping to understand was there anything unusual in there? What really drove that?

Thank you.

So Credigy and other revenues -- it varies from quarter to quarter as shown in the previous quarter you may see it in 2017. So it depends on portfolios performance and fees that we receive.

So honestly, there was nothing special of Credigy this quarter, only normal activities.

Now in the past, we've sold portfolios like we sold Puerto Rico in late '16 -- '18; there were no sales of portfolio that created a special gang [ph].

Louis, I want to take you back to ABA for a second. I mean, can we get a little bit of color on what is driving 40% volume growth?

I mean, for a Canadian bank analysts these numbers are pretty big; so any color you can give us in terms of what they are doing and why you think it's going to continue as you said for a while? I'm assuming there are some pretty significant market share gains in there as well?

First of all, you're dealing with a market that has -- that's growing at double-digit every year. So the average of the market, given the fact that still today I think only about 25% of the population in Cambodia has a bank account and the economy as you know has been growing -- this year it's still growing but last few years have been growing steadily at 7% real GDP.

So when you combine that with the low, an increasing level of utilization of banking products, you have a general environment that's very, very positive. So that's one.

Two, yes, they have been gaining market share. When we took our first investment, we had about 4% to 5% market share in retail banking in Cambodia.

Today 3.5 years later or 4 years later, they are getting closer to 8% in terms of market share, both in terms of deposits and landing. And where they have been growing very nicely as I mentioned on call earlier is because their branch system has been expanding and frankly, they have what we think and they think is the best mobile banking application in the country.

They have been getting a lot of transactional deposits and checking account deposits. So they have been driving that business forward on that.

And -- so it's been a good combination. So far Rob, it looks like a very good purchase on our side, we're very happy with the results but ultimately we want to see -- as I said in previous calls, we want to see a complete business cycle before we give the final verdict but so far I think it looks good.

And how active are you in the management of this bank? I am thinking specifically on the systems and support side because I would imagine that this level of growth would put quite a level of strain on back office, middle office and all of that as well?

The areas where they are most involved with are obviously governance. We have people in compliance from Canada in the region, and we have people from technology also from Canada in the region.

So you're right, that's where we have some expat and we're applying daily supervision to these levels.

And just a quick numbers question; I know everybody probably calculates it differently but the consolidated net interest margin seem to up pretty meaningfully this quarter. Is that some treasury activity or is there something else going on in there that you could explain?

And I understand if this one has to go offline.

I'm looking at [indiscernible].

What we have looked -- when you send a question to Linda, we have a look at it. One improvement is obviously a corporate banking.

I've seen it's margin increase and the volume also which increased net interest income. We have more net interest income as you can see from Cambodia also which is good; and some of it is from Treasury and also you had deposits that improved their margin in wealth and everywhere else.

So it's mostly just business activity that translates into the segment levels as well?

Exactly.

There was nothing special that we can point to.

First, a couple of numbers questions to get started. First one is on your trading revenue breakdown.

You gave us in your supplement the usual product breakdown of equities, interest rates and then FX and commodities; so I'm just looking forward here. And then there is a piece that gets allocated to other for trading that's outside the financial markets.

Could you just remind me what that piece relates to?

I think it's usually numbers.

Exactly, that's treasury mostly. There is other business that could have some trading activity like insurance but the biggest portion is treasury.

And does that not go through the financial market segment, it goes through like other segment?

Yes, other segment.

And then on Credigy, I believe at the Investor Day you had mentioned that now more than 90% of the assets were U.S. dollar related; so this is probably going to be pretty selfish inventory but just want to confirm, tax rate was materially lower in Credigy this quarter; I'm assuming that's tax reform benefit and that's the new run rate number going forward.

Yes, correct.

Let me go to my real questions. First on capital, so you finished the 6 million share in CIB and you're -- you've increased it now to 8 -- just running some quick numbers.

It looks like that would be about 70 basis point allocation of capital over the next year. Still, that leaves you at a pretty level and obviously, you're going to generate more going forward.

So what are you thinking here Louis in terms of what the opportunities are available to the bank acts of the buyback itself? It certainly seems like your RWA growth is picking up; is that the most obvious use we should think of as more of the business goes towards business lending as opposed to mortgages, we're just going to see more capital required in normal course operation from an RWA perspective?

Yes. That part saw the commercial and corporate lending, and the other one as I said we always keep little bit of a buffer on market risk related RWA.

It's such that especially when volatility goes up, VAR goes up, capital requirements goes up that you have the better opportunities. So we keep ourselves little bit of buffer to have room like we did in the second quarter to take advantage of opportunities [ph].

So that's essentially what it is. On the acquisition front, I think we're quite specific and on the international side we're on pause for the next two years and frankly, maybe longer.

I think if everything turns out the way it's turning out with Credigy and ABA, I think that maybe the long-term structure of our international division for a longer period of time. And the rest, we don't see frankly -- there is not much in the market right now given valuations that excites us in North America.

So that's about where we are.

So 70-ish to the buyback if I guess completed in organic growth is where we should expect the rest to go? So, clean and clear on capital?

Yes. And as you know, we still have 1 million to go on our 6 million.

And by then we'll see we'll -- I think what we wanted to signal is that we'll -- I think at some point move from 1.5 million a quarter to 2 million a quarter, and then see what's going on risk WA and then from there we'll decide what's the pace of returning capital to shareholders.

Last one for me is around the topic of operating leverage and efficiency. I think it was in one of slides -- it was a number there that talked about 2% operating leverage.

Just to confirm, is that more the aspirational run rate goal because obviously in the first half of the year your numbers are more like 4.5. Let me ask that for us, that target operating leverage that you had on Slide 7, that close to 2% is for what time period?

Well, the 2% target is really the mid-term objective for the operating leverage. At this stage of the year it is reasonable to think that we will exceed the 2% with the results of the first part of the year.

And that's where I want to wrap this up. I think Louis, the focus on efficiency and operating leverage across the sector and certainly become a bigger part of the story in the last couple of years, at least compared to my time earlier in the seat.

And it feels like after a bank takes a restructuring charge like you did at the end of 2016; you go through a period where the operating leverage looks very sizeable and you had now a year and a half of that coupled with a good revenue environment. As you look forward, has some of the initial benefit of the restructuring initiatives run it's course and now you're going to return closer to that run rate level or is there still more remaining in terms of cost containment or expense growth containment that we're going to see heading into 2019.

I think, we -- as I said, don't expect any major big restructuring charges going forward. That being said -- controlling costs and being efficient I think is something we wanted to do a long-term.

Some of that will be just requisitioning the way reengineering from the business -- are you looking at cost savings without involving technology. Then there is a fill where -- you know, still in middle of significant investment and technology which by themselves will bring further productivity improvement.

Yes, we want to continue to work on this. Dan, anything to add before we move onto with higher…

I think what you need to know is that the strategy is -- it still is true for us to save time for our advisors by eliminating centralizing, automating and digitalizing or forms reported processing. We've said that and we haven't completed onboard.

You need to know that we still have close to 25% of a branch personnel that is responsible for mid or back office work. While we don't expect to eliminate all of the administrative task in the process [ph], we're continuing to hope to work on these initiatives to reduce them going forward.

Now all we've done in 2018 but we do have work for '19 and '20. Also for our operations department, they do have targets for automation and also digitalization.

So in terms of automation, they are halfway there and in terms of digitalization, they are about two-thirds there. And the plan is to hit target for '20 or '21.

So as you see, we still have room to grow in terms of efficiency while -- or decrease our cost because of the fact that we will simplify our processes, we will reduce the number of products that we have and also originate products online and etcetera.

First, a quick question [Technical Difficulty] We think the total provisions at the Credigy will -- are expected to go down.

I will be more clear. On a total bank basis, could recoveries on the lending portfolio actually drive recoveries overall?

I'm not so sure about that.

How would you respond to the notion that with this very strong growth we've seen in ABA similar to what's happening now at lending club at some point, the PCLs emerge and then the benefit of the loan growth you already had, the PCLs emerge and then you start to see the real profitability of the business. Is that a possibility or would you say that IFRS 9 and the forward-looking nature of IFRS 9 is appropriately capturing them?

I think in most scenarios that we look at Mario [ph], the growth of the business should continue to allow us to grow earnings even when there is more maturity within the loan portfolio. That being said, that's why Mario [ph] look at the transcript; every time I talk about ETA I said looks good for now.

We want to see the complete business cycle before we give the final verdict on that business. So we are conscious the we're dealing -- everybody looks good when the economy is growing at 7% yield as you know.

So let's have a slowdown and then we'll see. I think now why we see so far -- if there were serious issues, we've been in that business for four years, I think on some of the cohorts -- some of the oldest cohorts we would see issues in terms of our credit and we're not seeing that but I think we'll reserve complete judgment when we see an economic slowdown.

You continue to emphasize strength of the Quebec economy and it actually seems like it keeps getting better. And just wondering if you feel like you're fully taking advantage of this environment and given the regional SKU sort of an advantage that you have and I want to suggest maybe in the credit card business that growth could be stronger given the macro look but I'm thirsty for your thoughts if there is air of the business that you feel are -- you like to see more from given the economic backdrop in your province specifically?

I think yes, generally I think we're very happy. If you look at our performance in wealth management, we're benefiting from greater wealth in Quebec, I think we're doing that.

In credit cards, I think we're growing double-digit. So for us, you know, we -- in my 11 years as CEO, we did not always grew at double-digit in credit card, so I think we're seeing some benefit.

I think the one area that I think we want to pick up a little bit is our mortgages, and I think we -- Jean will explain that part. The rest I think we're quite happy with.

Credit card is actually up 12% year-over-year and that's due really to an increase in active customers, that's 4% up in the number of active customers which is not insignificant. Then we had also an important increase in purchase volume, that's about 12% up which also drove obviously the interchange of 9%, and the average loan portfolio is up 3%.

So all KPIs around credit cards are actually looking quite good. So I think and we don't expect this to go down, we expect this to continue the same momentum throughout the year.

I did explain what's happening on the mortgage front and we do have the vast majority of our mortgages coming from Quebec and that's also is still continuing and also our commercial book is growing healthy and with healthy results in Quebec.

I just wanted to follow-up on a point you made earlier on your mortgage specialists. I believe you mentioned about 240 employees were converted from generalists to specialists and I was wondering if you could provide some color on whether the compensation structure would change as well with that; will they go from salary, a base plus variable to 100% variable commission structure?

Actually we did and we're transitioning them into full-fledged commission based officer, much like our mobile officers. But we're transitioning this and we'll see how the results will be and we won't -- we're not expecting our cost structure to go up with that as well.

So I guess the reason I asked that question was because that likely has a benefit to your non-interest expense and it should help you reach your offering leverage target. Is there any way you could maybe quantify how transition workforce from base plus variable to more of 100% commission might contribute towards your efficiency targets?

Yes, we have in fact that in -- because all of that is slowly transitioning in and we'll see what the results that we have. So currently it hasn't really impacted our cost structure, not for this year anyway and we'll see how that evolves and as productivity increases, we will be working towards a more commission based but making sure that obviously there is some benefits to all of the stakeholders involved.

Just going back to trading; maybe can you quantify how much of the trading revenue would have benefited from the collapse in reimbursed wall funds early in the quarter?

Pretty tough to answer that. On the trading also, we have to be -- we spoke a lot about volatility but also in the trading we have what we call our cyclic [ph] -- something business that is there, that is also very full in terms of revenue and catching up for that.

There is nothing to do with the market really, it's really secret funding.

And we certainly did when that occurred but over the quarter, I think we'll have to get back to you on that one.

Let just very quickly for Diane or -- I mean are you keeping pace with the growth in the commercial business in Quebec or does it feel like there is intrusion from competition now?

I think we're comfortable that we keep in pace. You have to look at -- when we look at -- and I think I mentioned that to you before.

I think I look -- because the way we're segmented between commercial and corporate, and we probably have in our corporate segment -- we probably have quite a bit of clients that would meet the commercial definition and our competitors. I always look at business loans on a combined basis.

And that's why when I look at that on a combined basis, I think we're doing very well and you will get to meet the [indiscernible] over the next few months and I think he will be as optimistic as I am about our capacity to grow that franchise going forward.

I think Louis you've been -- I think crystal clear about being very selective about the type of risk you want to take on as an organization and I think you even mentioned being a more secured lender and what have you; so can I -- do you have a sense of where you believe your mix of businesses in aggregate right now between secured and unsecured, so we could keep track of that overtime?

I think Bill -- I'm looking at Bill right now. I think we certainly keep track of that.

Bill?

I think on Slide 20 you will see that. We talk about being underweight secured, if you look at our retail lending, 91% of the lending is secured.

So when you're talking Louis about being a secured lender, you mean in the context of retail only?

Correct. I think the way business is done in Canada on the commercial side, I think we tend to be secured lenders, that's pretty much a tradition here.

So I am looking very much on the retail side.

So will that mean that -- I mean Diane, just to come back to the P&C, I mean it's been three quarters I think of relatively stable but flat margin, so does that mean that the more SKU you have to secure -- the larger the overhang if you will under NIM?

Pretty much. We're expecting flat towards the second half of the year.

Scott Chan from Canaccord Genuity. Just on Case 5 as a supplemental, I've noticed a significant increase quarter-for-quarter in terms of the employees outside Canada and I just want to maybe go back to what Louis what you said, does that relate to the 16 branches that you opened at ABA or is it something else than that?

It is 100% ABA because I think Credigy is flat in terms of headcount, so it is 100% ABA.

And the 16 new branches help you keep the volume growth that you're doing?

Yes. I mean, even -- I think a good mobile blanking application is important but we -- what we found at least in Cambodia is that the physical location still matters, the street corner location streets still matters and there were a number of provinces of Cambodia that were not present and now with the new branches many of them will be in capital.

But I think about the time we're done at the end of this year, we'll cover -- we'll have at least one branch in every province in Cambodia. So we'll have a complete national coverage from the country and then we're opening branches obviously in areas where we see the fastest growth.

And just quickly, how many branches do you have right now there just to get a relatively impact approximately?

65.

Thank you, everyone and sorry again for the delay in answering the questions. And talk to you next quarter.

Thank you very much.