National Bank of Canada

Linda Boulanger - Vice President of Investor Relations Louis Vachon - President and CEO Ghislain Parent - Chief Financial Officer Bill Bonnell - Chief Risk Officer Denis Girouard - Co-Head of Financial Markets Stéphane Achard - Co-Head of P&C Banking Lucie Blanchet - Co-Head of P&C Banking Martin Gagnon - Head of Wealth Management Denis Girouard - Co-Head of Financial Markets Jean Dagenais - Senior VP, Finance

Nigel D'Souza - Veritas Investment Research Steve Theriault - Eight Capital Meny Grauman - Cormark Security Gabriel Dechaine - NBF Sumit Malhotra - Scotia Capital Mario Mendonca - TD Securities Sohrab Movahedi - BMO Capital Markets

Good afternoon. And welcome to National Bank 2018 Fourth Quarter Results Presentation.

Presenting to you this afternoon are Louis Vachon, President and CEO; Ghislain Parent, Chief Financial Officer; and Bill Bonnell Chief Risk Officer. Following our presentation, we will open the call for questions.

Joining us in the room for the first time is Denis Girouard, Co-Head of Financial Markets. Also joining us for the Q&A session are Stéphane Achard and Lucie Blanchet, Co-Head of P&C Banking; Martin Gagnon, Head of Wealth Management; Denis Girouard, Co-Head of Financial Markets; and Jean Dagenais, Senior VP, Finance.

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

Thanks, Linda. Thank you everyone for joining us today.

This morning we reported strong fourth quarter results capping off a very successful year for National Bank. As I look back on the last year, I am very pleased with the Bank's overall performance.

I am also very satisfied with the progress made in positioning the Bank for long-term success through our ongoing transformation and growth plans. In 2018, the Bank generated record net income of $2.2 billion, up 10% from last year.

Across the Bank we achieved solid growth, while managing cost effectively and maintaining strong credit quality. This translated into a return on equity of 18.5% among the highest in our industries globally.

Credit quality remains strong in our overall portfolio reflecting a sound economy and a prudent approach to lending. The economic backdrop in Canada was favorable and we continued to benefit from additional tailwind with a strong activity in our core Quebec market.

Through disciplined capital management, we consistently increased our common equity tier 1 capital ratio to 11.7% providing us with flexibility to invest in growth initiatives and return capital to shareholders. During the year, we raised our dividend twice for a combined increase of 7%.

We returned close to $500 million to shareholders through buybacks, a significant acceleration compared to the prior year. The Bank has delivered industry-leading total shareholders' return of 16% and 15% over the three and 10 year periods ended October 31, 2018.

While meeting our midterm financial objectives, we achieved solid progress on an ongoing digital transformation and cultural evolution. We are making substantial investments in technology and digital initiatives to create a unified client experience and drive efficiency.

Significant milestones were achieved in the past year, which translated into improved client satisfaction and strong efficiency gains. In an environment of rapid change, people and culture are more important than ever.

We strongly believe that this cornerstone of our transformation is the evolution of our culture into an agile and adaptable organization. This is in line with our Bank wide mission statement that puts people first and everything we do.

Now, let me share some highlights on our business segments. Our P&C segment ended 2018 with positive momentum.

In personal banking, we completed the repositioning of our distribution model translating to higher levels of mortgage originations and renewals. In both personal and commercial banking, our loan volumes accelerated for the year combined with a strong increase in deposits.

We remained disciplined in striking the right balance between volume growth, healthy margins and credit quality. Our objective is to position the Bank to perform well through the complete cycle, and I am very pleased with our performance in that regard.

Looking forward, we will maintain our overweight position in Québec, in secured lending and in commercial banking, which we view as favorable in the current economic environment. In terms of our digital transformation, we delivered a constant stream of new digital services throughout the year.

This includes the deployment of a new secure online portal with unique external account aggregation features and a new online origination experience for core products, such as the deposit accounts, mortgages and credit cards. On assisted channels now account for over 90% of our core transactions either online via ATMs or through our leading mobile platforms.

Our success has been recognized through five Ipsos Financial Service Excellence Awards, including ATM banking and mobile banking excellence. Turning to wealth management, our strong momentum would sustain in 2018 with earnings of about $500 million, up 17% from last year.

Our wealth management segment has grown significantly in recent years, accounting today for 24% of our revenues, exceeding those of financial markets for the first time. This segment is delivering double-digit growth through a differentiated business model that responds to client needs for choice and unbiased advisors.

Our focus on distribution are positioning as Canada's largest manager of managers and the diversification of our business model allows us to be very confident in our future growth. Our financial market segment delivered strong and consistent performance again in 2018, reflecting the diversification of our business mix, our focus on client driven activities, our leadership in selective niches and our flexible approach to balance sheet and capital allocation.

In 2018, corporate and investment banking performed particularly well as we reap the benefits of a clear strategy and focused investments over past few years. Our investment banking franchise had a record year in merger and acquisitions and increased its share in equity capital markets.

Moving into 2019, the pipeline is solid. We will build on our solid base a number one investment bank in Quebec and our leadership positions in government debt underwriting, ETF structuring and trading, structural product and equity derivatives across the country.

Moving on to our fourth segment, we are satisfied with Credigy's performance in fiscal 2018. As communicated last quarter, in the short-term, we expect a slower pace of growth based on current market conditions.

Looking forward, our strategy remains for disciplined growth with the same return objectives and risk box. ABA Bank had another very strong year of growth and became the fourth largest bank in Cambodia, in fact, number three according to some benchmarks.

ABA earnings contribution is up 38%, while achieving a return on equity of 30%. The outlook is very positive for the coming years in a significantly under bank market and a rapidly growing economy.

As we pursue rapid expansion in Cambodia, we will maintain our moratorium on significant new investments in emerging markets until 2020. Overall, all our business segments are well positioned for growth.

As a super regional bank with leading market shares in Quebec, we are well positioned to benefit from the strength of the Quebec economy. Unemployment has been at historical lows for several years, business confidence is high and the province has recorded three consecutive budget surpluses.

There is good visibility on large infrastructure investments that should fuel GDP growth for at least the next three year with foreign investments and integration adding further stimulus. In addition, Quebec households have higher saving rates and lower average debt than their counterparts in the rest of the calendar due to better housing affordability, full employment of the prime age population and a large proportion of women in its workforce.

With approximately 60% of our revenues derived from Quebec, activities we see our geographical positioning as a competitive advantage in the next few years. Turning now to capital deployment, our strategy remains the same.

Our first priority is to maintain strong capital ratios. Our second is to invest in business growth in our core markets.

Our focus continues to be on organic growth initiatives with the objective to enhance client experience and generate an operating leverage between 1% and 2%. And our third-priority is to return capital to shareholders through sustainable dividend increases and share buybacks.

On that note, this morning, we announced a 5% increase in our quarterly dividend to $0.65 per share. As usual, we will review our quarterly dividend every other quarter.

On share buybacks, our plan is to complete the current program early in 2019, initiate a new one to provide flexibility. To wrap up, I am very pleased with our performance in 2018 and the momentum we are creating for the future.

We delivered strong growth, continued efficiency improvement and ended the year with strong capital levels. The resilience of the Québec economy gives us comfort at current stage of the business cycle, and remain vigilant in balancing our objectives on sustainable growth and sound risk management.

We are heading into the New Year with prudent optimism, driven by clear strategic priorities and a highly engaged team. In times of profound change in our industry, I want to thank our more than 23,000 employees for their commitment in helping our clients and communities thrive.

I also want to thank our customers and shareholders for their trust. And at this time of the year again, I would like to wish everyone the best for the holidays and a very successful 2019.

On that, I will turn things over to Ghislain for the rest of the presentation. Ghislain?

Thank you, Louis, and good afternoon everyone. My comments today will focus on efficiency and capital, beginning with Page 8 on slide deck.

We ended the year with strong results for the quarter and full year with all segments contributing to our performance. We generated solid top line growth while maintaining strict discipline in managing our costs.

This translated into all bank operating leverage of 2.5% above our target of close to 2% for the year. For the fourth quarter our efficiency ratios stood at 44.6% or 54.6% rather, an improvement of 130 basis points for the year, while our operating leverage was slightly positive due mainly to seasonality and high variable compensation.

For fiscal 2018, all our businesses delivered strong efficiency ratio improvement. In P&C, we reached the low end of the three-year efficiency ratio target of 53%, set up our 2015 P&C Investor Day.

The P&C segment also achieved strong operating leverage of 3.1%. Wealth management, financial markets and international segments also delivered substantial improvement on their respective efficiency and operating leverage for fiscal 2018.

Over the past few years, we have shown consistency in our ability to generate strong positive operating leverage and better efficiency. We are investing with the objective of delivering sustained benefits on a regular basis as we are progressing in our transformation journey.

Our goal is to be more efficient while keeping clients at the center of everything we do, and also positioning the Bank for long term growth. With the execution of our transformation, we are confident that we will continue to improve our annual efficiency ratio in a steady way in the coming years.

We continue to be highly committed to our transformation and our disciplined approach on cost. For fiscal 2019 as we just mentioned, we are targeting an operating leverage of between 1% and 2%.

Turning to Slide 9 for a capital review. We ended fiscal 2018 with a strong CET1 ratio of 11.7%, 50 basis points higher than a year ago, and 160 basis points increase in the last 24 months.

Besides since the end of 2015, we have bought back 9.5 million shares or close to 3% of the outstanding shares. During the fourth quarter, the 21 basis points increase was driven largely by strong internal capital generation, which added 42 basis points, partly offset by the buyback of 3 million common shares and a slight increase in risk weighted assets.

At the end of the fiscal year, our total capital ratio stood at 16.8% percent and our liquidity coverage ratio at 147%. We are pleased with our current capital and liquidity position.

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

Merci Ghislain and good afternoon. Please turn to Slide 11.

Before I begin a review of the fourth quarter, I'll make a few comments on the full year of 2018. We finished 2018 with full year total PCLs up 23 basis points which was at the lower range of our guidance as a result of continued benign credit conditions and the solid quality of our loan portfolio.

Our Credigy portfolio performed well and right along expectations. Excluding Credigy, our PCL on impaired loans were 15 basis points remaining close to cyclical lows.

And finally, we had 2 basis points of PCL non-performing loans during the year. Overall, we were very pleased with credit performance.

Looking now at the fourth quarter, PCLs on impaired loans were $83 million or 23 basis points, which is quarter-over-quarter improvement driven by lower provisions in commercial banking and Credigy. Stage 3 provisions in the other business lines remain pretty stable.

Total PCLs declined by 1 basis point to $73 million or 20 basis points, primarily due to $15 million recovery of POCI and Credigy, reflecting better collections performance. Looking ahead to expectations for credit performance in 2019, there are a few factors which we balance.

First, we recognize that we are late in this economic cycle and see several macroeconomic uncertainties from geopolitics, rising interest rates and volatile energy prices. A disciplined approach to lending remains warranted.

Second, many macro indicators are still quite positive. Unemployment rates remain very low and GDP growth remains good, which indicates that benign credit conditions could last a while longer.

And finally, our overweight in the province of Quebec and underweight in unsecured consumer debt feels like the right defensive position to have in this economy at this point in time. Weighing those factors, we've maintained our 20 to 30 basis point guidance for the full year ahead and expect to be close to the middle of that range.

Turning now to Slide 12. Our gross impaired loan ratio improved one basis point quarter-over-quarter to 43 bps.

Formation declined by $43 million from last quarter to $89 million, driven by net repayments and commercial lending. I would note that year-over-year numbers here are not comparable since IFRS9 requires recognition of impaired much faster for government ensured loans even though credit losses were not expected.

On Slide 13 details of our retail mortgage and HELOC portfolio are provided. PCLs were stable at 1 basis point.

Ensured mortgages accounted for the largest share of the portfolio at 42%, followed by HELOCs and uninsured mortgages at 33% and 25% respectively. The distribution across provinces remained fairly stable with Quebec representing 54% of the total.

Uninsured mortgages and HELOCs and GTA and GVA represent 9% and 2% of the total portfolio and had LTVs of 52% and 47% respectively. Given the recent volatility in oil prices, we’ve added a couple of slides in the appendix to provide updates on our direct and indirect exposures.

Three points I would draw your attention to are: First, the portfolios have been meaningfully rebalanced since 2015; drawn loans declined in the oil and gas producers and services sectors; have been brought down significantly since the peak in early 2015 and now represents 1.7% of total loans versus about 3.6% at that time: Second, aligned with our overall corporate lending strategy, relationships in this area have been refocused on larger well capitalized oil and gas producers and deepened with large investment grade pipeline clients: And finally, our exposure to consumer lending in oil regions remains very modest. For example, unsecured retail loans in Alberta amounted to only 0.1% of total loans.

We are very comfortable with the size and quality of our loan portfolios in this region. With that, I‘ll turn the call back to the operator for the Q&A.

I just wanted to follow up on last comment you made regarding your oil and gas exposure. So I noticed on Slide 25 of your presentation there, and thanks for that disclosure.

There is about $2.5 billion of O&G loans outstanding. When I look at the average balance in your personal and commercial segment about $1.6 billion for Q4, so that difference there is that balance sitting in your financial markets segment?

How should we think about it?

Just to review, what slide were you looking at?

I believe its appendix 11, Page 25 of your presentation.

Yes, the remainder would be in the corporate book.

So should we expect PCLs in that relative segment then to move higher because the financial market segment it seems essentially no build up of credit losses at least in last few quarters. So how should we think about the loans that are not in your P&C segment related to oil and gas?

Well, overall, if you look at -- I think it’s the slide before, our geographical breakdown and you can see we did quite a few details on our loans in both in the retail secured and unsecured, as well as commercial and corporate. Overall, I think it’s pretty clear that we’re underweight in that region given our geographical focus in Quebec.

And I think overall at the Bank and the -- our future looking estimates of credit losses aren't impacted as much, because the position in that region is smaller.

And just last quick question for me is on appendix 9, Page 23. I appreciate the breakdown between amortizing and non-amortizing HELOCs.

Could you just provide any commentary on what's driving substantially higher year-over-year growth rates in the amortizing HELOC book versus your res mortgages or non-amortizing loans?

Maybe I’ll start it off and Lucie may have some comments on it. But I think our overweight position in Québec is probably what's driving that, savings rate in Quebec is the highest in the country and we’re seeing consumer behavior -- very good consumer behavior, pay downs on debt and switches from variable to fixed.

So I think that's -- if there's a difference with their peers, I am sure that the situation of consumers in our home province is probably driving that. Lucie, do you have anything to add?

Yes, the amortizing portion has increased over the past year in 2018 we’ve seen that as consumer prefer to lock their rates with the rising rate environment.

Maybe starting with Bill, just on Credigy. Bill, how should we think about the losses for next year?

I guess, that’s two parts, the stage one losses and how that progresses as the lending portfolio seasoned and then runs off. And then POC line, it was a pretty big number this quarter, it’s jumped around, it’s been anywhere from 0 million to 15 million.

What's the outlook for that, in particular? And if you could also layer in -- I don’t think you’ve been doing the impaired purchases for a while.

So maybe just remind us of the duration and the size of that book?

As you pointed out the Stage 3 sales in Credigy has come down. So as we talked about, 2018 was an unusual year in Credigy given the Lending Club purchase agreement peaked at around $1.3 billion at beginning of the year.

And as we have guided to and as actually the portfolio performed, we saw Stage 3 peak in both the middle part and second half of the year and Stage 1 and 2 start to decline. So looking forward, we expect the amortization of that portfolio, the Lending Club portfolio to continue, that will drive Stage 3 losses to continue to decrease slowly.

Stage 1 and 2 losses we expect to follow the amortization as well and have some decline. Offset a bit by new activity, new purchases of portfolios in the Credigy.

So that covers the Stage 1, 2, and 3. On the POCI it's hard to give guidance for that.

I think as we said it's been a pretty recurring fact over the last number of quarters. Typically, it's driven by performance and collections being better than what was initially estimated when that portfolio was purchased.

I think there have been continued purchases though of POCI, maybe not sizable enough to see and probably offset by the decline in the Lending Club but it's been an ongoing activity for ever…

I think -- Steve, it's Louis. I think they've always remained active in non-performing but it was clearly overshadowed from a P&L standpoint from the large portfolio purchases and the performing space but they've always been active and remain active in that space.

Now depending on what occurs in the U.S. economy in the next few quarters, they may actually be more involved in the non-performing space, which again would lead to deadlines being remaining active from an accounting standpoint.

And if we think of your -- Bill, of your guidance or your sense for where credit loss is, I think you said the mid-ish point of that 20 to 30 basis points. And the midpoint is where you were this year.

And so to wrap Credigy all up, would it be reasonable to go forward thinking that the Credigy losses are in the same ballpark then?

I would say that for 2018, we expect it to be around the midpoint of the guidance. We ended up being a little bit below that for 2019, because of the factors I described.

Credigy losses probably will be a little lower. And I think the performance hopefully we did have a performance like last year.

One more for me if I could on expenses. The overall operating leverage in Q4 was close to breakeven, but in the P&C division still very strong at 2.4%.

So maybe it'd be helpful to have a little bit of an outlook. You have your new 1% to 2% operating leverage target.

Would you expect the P&C division to migrate into that range, or is there still gas in the tank to keep the operating leverage above that level?

I think as revenues -- its Stéphane here. I think as we see revenues probably knobbing as strong in an uncertain or more uncertain economic environment, we should see the operating revenue leverage fall closer to what the Bank has been doing over 2019.

So we don't necessarily give guidance by segment. But of course P&C will continue to do very well, and of course it's included in our 1% to 2% guidance.

Wondering what you're assuming for energy in your PCL ratio guidance for 2019. And on a related question I know that oil and gas sectoral from 2015, 2016 experience that disappeared under IFRS 9.

But I'm wondering if losses were to start to increase in that book. Is that relevant at all or is it ancient history and not relevant to the way you will recognize provisions in 2019 in the scenario where energy becomes a bigger issue?

On the first, in terms of looking forward, I think there is a lot of volatility in prices recently, a lot of that was after the quarter. I think we'll probably talk more next quarter about how the market view is on energy prices for the remainder of the year.

For the -- just on your comment on the sectoral, upon and Jean probably you can jump in and help here. But upon transition to IFRS9, the sectorial and reflective allowance is they don’t exist anymore but they form and now we have the allowance for credit losses under our IFRS9.

At the time, we of course develop new model in IFRS9 to generate the expected credit losses. We established management overlays as well based on our assumptions for the -- forward-looking assumptions for the portfolio.

So the sectoral, while it doesn’t exist anymore in IFRS9, the concept is the same and we feel that we were conservative in assessing our allowance for credit losses in our IFRS9 allowances and continue to think that our allowances are conservative.

Exactly, and you can see the general and the sectoral allowances have been replaced by the Stage 1 and Stage 2 allowance that you see in our financial report.

First on Credigy, I hear there is a bit -- more of a toned-down outlook for growth. But on a sequential basis, we saw the balances up for the first time since last year.

I’m wondering if we hit a trough on where you expect the loan balances to be at Credigy and maybe there is some growth that we’re maybe underestimating next year.

I am realistic out here…

All right, efficient…

I think the -- just I may add some points. But I think the recent volatility in markets creates a more positive environment for Credigy.

And I think that’s how I would describe it. Ghislain, anything else to add on that?

No.

Okay, then on -- for the near -- in the trading business, I think I must have heard equity derivative is about 20 times this earnings season, implying that the other banks are shifting away from FIC. Is that closed down and doing a lot more on the derivative side?

How is that affecting your business and that’s been a big growth driver for you historically in trading? Do you see other alternatives developing or opportunities as the -- how are you positioning vis-à-vis that potentially in terms of competition?

We're always looking at opportunities in the market, that’s the first thing. We’re always looking at niches, and equity derivatives is one of them and we’re not -- competition is stronger, but we’re still very involved in all the FIC group.

And even if there's slowdown in some areas, there is other in the FIC group that are doing well. And we’re very pleased with the mix that we have right now.

And looking at what happened this year but last year was obviously -- there're some out there did very well and some others didn’t do well. And that’s the well balanced business that we have and we continue to have in the years to come.

And we’re not too concerned about the competition here, we’re just concerned about what we can find as opportunity and we’ll be very, very closely watching the market and be sure that we hack -- when we can hack and there's opportunity, that’s it.

And then my last one would be for Martin, wealth. I think the -- and this is really about the rate outlook, non-interest income in your business is up almost 20% during the year, I think largely attributable to the rate hikes we saw over past year plus if it wouldn't -- BOC didn't hike today obviously, and if we see a more subdued pace of rate increases how do you think that revenue line looks going forward?

So I would say that Q3, Gabriel, was really an interest rate quarter. The last one for Q4 is more of a volume quarter overall.

And if you look at our net interest income, it was 50-50 due to rate and due to volume. In terms of outlook, I don’t call interest rates, obviously, I don’t control that but we do have some interest rate betas -- and we’ve different levers to play for 2019.

But now we have 30% of our revenues coming from net interest income, so it is significant and we have different levers to play in order to capture that going forward.

So in short, even if rates stay flat assuming volumes both on the lending and deposit side are -- is that upward trajectory there that can keep it in positive territory?

Yes absolutely.

Just a question first in the financial markets segment, and more specifically investment banking revenue. Most of the Canadian dealers seem to have had a weaker investment banking backdrop as far as Q4 was concerned.

Although, your numbers continue to look quite strong. Just specifically, I was thinking your franchise in the investment bank has being more domestic focused.

Anything that was out of the ordinary in terms of advisory mandate that contributed to that number? And maybe bigger picture we're hearing the words late cycle a lot as far as credit is concerned.

Late cycle often also involve some uptick in M&A activity. Just curious as to your outlook for that particular part of the financial market segment in 2019?

Yes, you’re right, Sumit. For 2018, all the investment that we made in the last two years paid off.

And remember that for a few quarters, I keep saying that the overall portfolio alumni was quite big and some of them materialized nicely at the end of the year and we’re quite pleased with that. I will tell you that for 2019 as we mentioned earlier, what we’re seeing so far is very stronger right at the end cycle, we can see a lot of those M&A activity but again, it is related to the climate that we’re going to see at the stock market and things are getting volatile right now.

Although, this will materialize, we don’t know but we’re very well positioned and things are stabilizing and maybe you’re going to see those transactions realize in the course of the year. But we are very active right now and -- many, many case files that we’re working on since -- positive but cautiously positive depending on what the market will do.

And Sumit, just to add to -- I think it was as Denis mentioned it’s our general franchise as you know has grown in all aspects of investment banking. But on the geographical side, it was all U.S.

related -- it was Canadian related. It was no U.S.

involved for us. As you know we are very domestically focused.

So when U.S. slows down, we don't have the impact of some of our peers have in terms of their results.

And then somewhat relatedly, I mean it could just be the time a lot of us have been in this year. But you think back to the last real downturn that we had 10, 11 years ago.

The conditions certainly felt a lot different at least for me in terms of the level of frothiness, particularly in credit markets. When I look at again your financial market segment, there's been some differentiation between the sector and the level of corporate loan growth.

If the numbers at least in my model here are right, you've got about $16 billion of corporate loans at the end of the year and that is up 15%. How would you categorize the lending conditions or the credit conditions when it comes to the capital markets business?

Are you seeing -- I'm not going to -- I don't think you've said that about your 15% growth. But are you seeing counterparts starting to reach for deals in terms of the covenants we're seeing?

Or is the growth that your business and others have exhibited more in line with the level of activity that's in the market?

I'll take a first crack at it and then if Denis, Laurent or Bill want to add anything. So our growth has been essentially all Canada.

Most of it very close to all of it in the corporate book has been investment grade. And as you know, that's been the focus and I think we've been quite transparent on that.

The one area we've seen deals getting more aggressive has been certainly on the leverage finance side. Some deals brought by private equity sponsors are getting probably a little bit more aggressive.

Is it as bad as '06, I don't think so. I don't think we've got the same levels of '06, but certainly it's been -- we've seen some levels of more and more -- more aggressive covenants and people trying to gain market share on that front.

But that's why not being a significant player in the U.S. market has been I think a plus for us, because we don't have to play in those games and if we -- in those deals if we don't feel comfortable.

And our mission in the U.S. market has been to accompany our Canadian clients in deals south of the border, which we have done but we don't feel the need to participate in all of them.

If we feel that the covenant package and the pricing and risk structure is not appropriate. So that's why we like our -- frankly, from a risk standpoint, we like our strategic positioning very well.

Anything else to add, Bill?

Only thing I’ll add is the growth in the corporate book has been diversified, so it's been broader across the country and across industries, so I think that's something to recognize in the portfolio.

And frankly, your energy slide does indicate -- even in the last few years, I think your level of investment grade in that portfolio is a lot better than it was in 2015. So that speaks to some of it.

Last one for me. In and around the operating leverage outlook, Louis, we had a couple of conversations of late on the trade-off, if you will, between the investments in the business and the efficiency that the market wants to see.

I am not going to put too fine a point on it. Your operating leverage is, on an all bank level, somewhat lowers as a target.

Although, I mean your numbers there have been amongst the best in the industry. Am I correct to say this has more to do with just your comparisons for revenue growth get more challenging than it does that you have a big step up in investment spend coming.

And so that’s maybe the just of it. Is there any change in what you've communicated to the market in terms of the investments required in the business, or is the operating leverage at a less robust pace just revenue numbers on math?

I think that’s -- your second part of your statement is the right one. I think we remaining very focused on expense discipline.

We’ve been -- we feel we’ve been on the level of expenses and investments in our core franchisees from a technology and marketing standpoint, which is not sustainable for the last few years. So it’s not acceleration that level.

It’s more -- and on a more conservative outlook on revenues for 2019.

Bill, could we go to one of your comments early on when you suggested that we are late cycle? Without asking about timing, because I don’t if anyone can offer us anything convincing on when the cycle turns.

Could you speak to, from your advantage point, where you think the losses will materialize? Do you see this as consumer led, because an over leverage Canadian consumer.

Do you see this as more commercial as in commercial real estate or something else?

Well, thanks for the question Mario. And I would agree with you that I have no ability to predict when and I would say it’s difficult to say exactly where the losses will materialize first, because it depends on the events that happened.

What I can say is -- as I said in my prepared script, it certainly feels like our positioning is defensive with overweight Quebec underrate unsecured consumer. And it feels defensive with a Canadian focus in commercial and corporate.

I don’t know if that answers your question, but…

And maybe just let me just take it one first. You sort of answered the second part of my question, because I was going to ask why National might be an outperformer in the next cycle.

Let me ask maybe more specifically within commercial. You said you think it’s an advantage to be overweight commercial.

Given where the level of losses are in commercial in this year 2018 just for, even say your commercial loan losses averaged about 11 basis points. Given where we sit today in commercial, why would a commercial overweight be advantageous given where the losses have been in the past?

And I think my comments was that overweight Canadian and commercial incorporate, so I think the Canadian focus is important in that. But the indications -- the commercial -- the corporate book is diversified across the country, the commercial book still has a strong Quebec focus.

What we’re seeing in Quebec economy is quite encouraging and it’s -- I’m a credit guy, I don’t like to talk positively the lots of things to worry about. But it is impressive -- the indicators in Quebec that give lots of signals that the good performance can continue in commercial in Quebec.

I was going to say 11 basis points make sense for you then for commercial book in Canada with the overweight of Quebec that feels like about the right number?

I don’t think we’ve given indications that the PCL is down at each of the segment levels. But overall, think about overall bank ex-Credigy at 15 basis points that is cyclical low.

Could it continue in the range of cyclical lows? It could continue for a little while longer.

I just wanted to pick up where Mario left off here. If we looked at -- Bill, you’ve got a chart I think or Ghislain you guys have a chart in here on Page 22 that gives a regional breakdown of your loans.

And I think about 57 or so percent of your loans are in Québec. If we were going to fast forward a year, is Québec going to be a higher proportion than it is this year?

You should ask the question to Mr. Achard.

I think Stéphane is in charge of business development for commercial across the country…

No, we shouldn’t expect that proportion to change substantially, A, economy is really good here. The public finances are healthy.

There is plenty of infrastructure projects. So we will continue to invest here.

If you look at our growth in commercial outside of the province, it does project higher percentages than it has in 2018. But I mean the math that we have out there is not sufficient to unbalance the portfolio substantially, so you should expect that positioning to be relatively the same level.

I was actually more trying to figure out if it's going to become more skewed towards Québec, and you're saying not necessarily…

No, not necessarily. It should stay the same.

And Bill, I mean, when every one of your counterparts talking about their IFRS9 provisioning and they talk about the macro drivers. I mean, given the Québec focus that you have, I assume you have slightly more fine-tuned to macro drivers than the peer group.

It’s like -- is yours more sensitive to the Québec unemployment rate or you still take stuff at the national level?

I don’t know whether I would be able to answer at that granular level. Certainly, what I could say in terms of the scenario -- certainly, what I can say is when looking at the output of the model, the portfolio's concentrations with product and geographies certainly do have an impact and we would expect that to play through with the scenario the actual economy turn more pessimistic.

And then last one, just Louis, you I think once upon a time had said that we need to be at least 10.75% CET1 before we do buybacks. Obviously, you’re well clear off of that, you’ve done the buybacks.

Ghislain noted that you're up over the last couple of years in CET1 I think a 160 basis points. I think just as importantly your ROE has been up.

Just want to get a reminder as to where you see the ROE going and where you see the capital levels settling in that over the next, call it, 12 to 18 months maybe?

So, in terms of the ROE, I think I’ll stick to the guidance that we’ve provided. I think we've been I think in the last -- since the last recession, we’re pretty much within that guidance and we’re still operating on a pretty high level.

So as long as we don’t have any recession, I think we see operating at 15% plus certainly. In terms of capital, we're doing our best to bring down our level of capital but very unsuccessfully as you can see.

So we've accelerated the buyback. We've increased the dividend.

But I think at the same time, you'll notice we've been very prudent in terms of balance sheet deployment. And you see that on the LTR.

We planned for the LTR to stay that high. But given that the balance sheet is pretty flat and we're not going to deploy liquidity just for the sake of deploying liquidity.

If we're not meeting our target margins, our target RAROCs for business, we're not deploying the capital. So we're giving ourselves some dry powder, because we're hopeful that either good economic conditions or volatile market conditions will provide us with the ability to deploy more capital, would it be through in our financial markets, commercial or Credigy.

So that's why we we're keeping at a comfortable level of capital, not because we're looking at -- we're not very active right now looking at acquisitions as you know. So it's more for us to keep some dry powder for organic growth opportunities that should arise.

And then we'll see where we know how the year evolves in 2019.

So is this at all a byproduct of the decisions you've made not to pursue growth basically at dilutive rates Is that fair?

To some extent, yes. I think that's where I think we're and certainly I would say in Q3 and Q4 and I'm looking at Slide 4 for visual validation.

But I think our risk weights have been growing not as quickly as we thought we would, because we felt that there was some -- there were less opportunities to deploy capital. We certainly saw that in Credigy.

I think we've been sort, I think we've been very vocal on that. And that's how we saw a little bit of the same phenomena with financial markets.

So let's just see what opportunities the market will provide us in 2019.

So thank you everyone for your time and we'll talk to you for next quarter. Thank you very much.