National Bank of Canada

Thank you, operator. Good afternoon everyone and welcome to National Bank's investor presentation for the second quarter of 2019.

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.

Also joining us for the Q&A session are Stephane Achard and Lucie Blanchet, Co-Head of P&C Banking; Martin Gagnon, Head of Wealth Management; Laurent Ferreira and 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.

Merci, Linda, and thank you everyone for joining us today. Earlier today, we reported another solid quarter with earnings of $558 million and an EPS of $1.51, up 5% from last year.

On the back of favorable economic fundamentals, our performance was driven by positive momentum in our businesses, disciplined cost management and strong credit quality. This translated into an industry leading return on equity of 17.8%.

We are maintaining strong capital levels with our CET1 ratio at 11.5% providing us with flexibility to invest in our business and return capital to shareholders. Credit quality remains strong across our portfolio reflecting our disciplined approach to lending.

The economic backdrop remains favorable in Canada and we continue to benefit from the strength and diversification of the Quebec economy. The unemployment rate fell below 5% last month in Quebec, the lowest level on record.

Labor force participation rates reached record highs of 89% for prime age workers and 87% for women. With very good housing affordability, Quebec consumers have been able to maintain higher saving rates and lower debt levels then the rest of Canada making the provinces economy more stable and resilient.

Consumer business confidence remains strong reflecting a favorable cyclical backdrop and sound public finances. Looking forward, the economic outlook remains favorable.

Budget surpluses in Quebec enable the government to finance some election commitments. This combined with a large infrastructure plan compared to what was presented a year ago translates into Quebec’s economy being supported by fiscal stimulus in 2019 and 2020.

Now, let me share some highlights on our business segments. Our PSE segment delivered strong results in Q2 with net income up 9%.

Our performance was driven by continued momentum in both retail and commercial on both sides of the balance sheet with good cost control translating to an operating leverage of 3%. We continue to focus on balancing volume growth, margins, and credit quality.

Looking forward, we are comfortable with being overweight Quebec and overweight secured lending which we view as favorable in the current environment. Our wealth management segment has grown significantly in recent years.

Good volume growth, favorable market conditions, and our focus on advice and distribution supported another good quarter. Looking forward, based on the strength and diversification of our business model, we are confident that our wealth management franchise can deliver double digit earnings growth over the cycle.

Turning to our financial market segment. Corporate and investment banking delivered a solid performance.

Our lending book continues to grow and remains in good share. Improved market conditions during the quarter were conducive to better ECM and DCM origination.

Our overall new issue and M&A pipeline remains strong for the second half of the year. During the second quarter, our global markets franchise generated low revenues against a record quarter in the equity business in 2018.

The shortfall is mainly driven by our revenue mix and lower equity trading activities, particularly in the first half of the quarter. Over the past two months, investor sentiment has been improving and activity picked up significantly supporting our optimism for the reminder of the year.

Moving on to our fourth segment, our strategy for Credigy remains for disciplined growth with positive outlook looking forward. ABA Bank had another very strong quarter with net income up 81%, loans up 53%, and deposits up 80% year-over-year.

We are very satisfied with Credigy and ABA’s performance and we will concentrate our efforts and capital on those activities. As I have mentioned in prior calls, we’re maintaining our current moratorium on significant additional investments in emerging markets until the end of 2020.

Turning now to capital deployment, our strategy remains the same, maintaining strong capital ratios; investing in business growth in our core markets, our focus continues to be on organic growth initiatives with the objective of enhancing our client experience and generating a positive operating leverage. And thirdly, returning capital to shareholders through sustainable dividend increases and share buybacks.

On that note, this morning we announced a $0.03 increase in our dividend bringing our dividend per share to $0.68, up 5% from the previous quarter. We also announced a new NCIB program, which will allow us to purchase up to 6 million shares over the next 12 months.

To wrap up, I am pleased with our performance in the first half of the year. Our credit quality is excellent.

We have strong capital ratios, and cost management remains a priority throughout the organization. Our transformation is progressing well.

We are investing strategically in our people, our brand, and in technology to position the Bank for long-term growth. In the current environment, the resiliency of Quebec’s economy gives us additional comfort, and we remain disciplined in balancing our objectives of sustainable growth and prudent risk management.

In that context, and based on the strength of our overall franchise, our outlook remains positive for the remainder of the year. On that, I will now turn it over to Ghislain.

Thank you, Louis, and good afternoon everyone. My comments today will focus on efficiency and capital, beginning on Page 7.

The Bank delivered a solid performance driven by good business momentum, disciplined cost management, and our strong credit quality. Over the years, we have showed consistency in our ability to manage our costs effectively and achieve meaningful efficiency improvements.

At the same time, to further enhance our customers’ experience and generate efficiency gains, we have made major investments in our people and in technology. As we are progressing through our transformation journey, maintaining the right balance between investing to generate future growth, while managing our cost prudently remains a key priority for the Bank.

For the second quarter of 2019, our expenses were up 3.4% year-over-year, and flat quarter-over-quarter, reflecting our continued focus on managing our costs throughout the organization. For the first half of the year, our expenses were up 1.8%.

This low level of expenses shows our ability to adjust cost rapidly in a lower revenue growth environment. Turning to operating leverage by segment, P&C and Wealth Management segments delivered solid revenue and expense performance translating into operating leverage of 3% and 1% respectively.

Financial Markets delivered lower revenue this quarter translating into negative operating leverage. Looking forward, we are not overly concerned as our Financial Markets business remains a highly efficient franchise with a low-cost structure.

Financial Markets efficiency ratio was low at 44% in the second quarter. In addition, this segment has seen good revenue momentum towards the end of Q2 carrying into Q3.

Looking ahead, we are confident this business is positioned to deliver good revenue growth and positive operating leverage. As for our international segment, efficiency ratio was below 42% in the second quarter.

Operating leverage at ABA Bank was robust given very strong revenue growth, which outpaced network expansion related expense growth. The negative operating leverage at Credigy was mainly revenue driven considering the maturity and repayment of certain portfolios, as well as the mostly fixed nature of the expense structure.

With two quarters behind us, we are now targeting a positive operating leverage at the bank level for fiscal 2019. This is supported by first, a strong outlook for financial markets in the second half of the year; and second, a continued disciplined approach in cost control.

Now, for the capital review on Page 8. Our CET1 ratio remained strong at 11.5% supported by a solid internal capital generation of 38 basis points over the quarter.

Our risk-weighted assets increased by approximately 2 billion during the same period or 24 basis points of CET1, mainly as a result of a larger book size in commercial and corporate lending. We expect the sale of Fiera shares to add approximately 25 basis points to our CET1 ratio in Q3.

At the end of the quarter, our total capital ratio stood at 16.2%, and our liquidity coverage ratio at 141%. During the quarter, we bought back 1 million common shares, bringing total share buyback to or was 6.5 million shares over the last 12 months.

We are pleased with our capital and liquidity position, which provides flexibility to invest in our business and return capital to shareholders. On this, I’m turning the call over to Bill for the risk review.

Merci Ghislain, and good afternoon everyone. Credit performance continued to be strong in the second quarter and the general teams will remain the same.

First, our credit portfolios are well positioned with an overweight Quebec and underweight unsecured consumer lending profile. Second, the Quebec economy continues to perform well with strong employment and healthy housing market, a good fiscal position, and high levels of consumer confidence.

Third, credit performance in our Credigy portfolio continues to meet or exceed our expectations. And finally, we continue to see opportunities to prudently grow the portfolios in a disciplined manner.

Looking at Slide 10, PCLs on impaired loans totaled $84 million, an increase of 2 basis points from last quarter. Higher positions in commercial banking were partially offset by lower provisions at Credigy, which benefited from the ongoing and amortization of the lending club portfolio.

I would note that, while there was an increase in commercial PCLs from last quarters very low level the increases was related to a couple of files in different sectors and we see it as normal lumpiness in a commercial portfolio, not a change in the trend of credit performance. Excluding the Credigy and international segments, impaired PCLs across our Canadian retail and wholesale loan portfolios were just 18 bips in the quarter and 16 bips year-to-date, pretty flat to the year-to-date 2018 level and remaining close to cyclical lows.

PCLs on performing loans were $10 million lower in Q2, again helped by lower provisions at Credigy. Excluding the Credigy and international segment, performing loan PCLs amounted to $9 million or 3 basis points, mainly due to portfolio growth.

Total PCLs were $84 million or 23 basis points in the second quarter, lower by 1 basis point quarter-over-quarter and 4 basis points year-over-year. Overall, we remain very comfortable with the performance, the quality, and the mix in our credit portfolios.

Turning to Slide 11, our gross impaired loans ratio was flat year-over-year at 42 basis points. The 1 basis point increase quarter-over-quarter was due to higher formations in commercial banking following a couple of quarters of net repayments, partially offset by lower formations in retail banking and at Credigy.

On Slide 12, you will find details of our retail mortgage and HELOC portfolio. The product in geographic mix of remain stable with 40% of the portfolio being insured mortgages and Quebec accounting for 54% of the portfolio.

Uninsured mortgages and HELOC's and the GTA and GVA remains modest at 10% and 2% of the portfolio. In conclusion, we’re pleased with the performance across our portfolios and feel well-positioned for continued prudent growth.

Looking forward, we maintain our total PCL target range of between 20 basis points to 30 basis points for 2019 and expect to be close to the middle of that range. With that, I'll turn the call back to the operator for the Q&A.

Hi, good afternoon. Question on the Fiera disposition, really two parts, why now and why not just sell the entire stake, what’s the advantage of keeping a small stake that you have in Fiera capital?

So, look as we've said repeatedly in the past, Fiera is a great partner for us in managing assets. They manage more than 20 billion off asset for us, but as you saw with the impact on CET1 and earnings, holding shares of minority like this is not optimal from a balance sheet point of view.

So, that’s why we did it and they remain a great important partner. We have a commercial agreement with them till the end of 2022, and the share - holding shares was not strategic at this point.

I think Meny is that the timing and the size of the transaction was driven by the buyer of the assets, namely Natixis who approached us. So, in terms of timing and amount that was driven by the buyer and not by us necessarily.

We just reacted to an approach by a buyer and [indiscernible] has already explained our strategic background to this.

Just to follow-up to this strategy, is there any advantage you see in holding the stake that you have now or is it just more an investment rather than something that really is important for your wealth management business as a whole?

No, the equity ownership as I said is not strategic. And as we've said in the press release, we currently have no plans, but we may reduce that from time-to-time going forward.

Okay. And then if I could just ask, I notice you mentioned a CRA reassessment for 2014 and just hoping to get a little bit more color in terms of do you have any sense of when you will have more clarity on this and I think you’ve also been reassessed for the years 2012 and 2013, but are there any other years that can potentially, that the CRA can potentially come back to you with?

This is Jean. Yes, we have these assessments.

It is really early in the process. We have no visibility on how long it will take before this is being cleared with the CRA and it is possible that other years maybe also reassessed.

It’s all the same issue that the CRA is looking with all the Canadian banks.

Thank you.

Thanks very much. Couple for me.

Louis, last quarter it sounded to me at least like you were – you had pulled back on the buyback because of the volatility that was going on during Q4? And it sounded, I kind of came away thinking you would be more aggressive, or get back to a higher level of activity in Q2, but it looks like you sort of kept pace with Q1.

So, has there been any change in your thinking in terms of the use of the buyback?

Not really Steve. I think if you look at our buyback activity, we’ve been running at roughly 2% of outstanding.

So, in and of itself, I think that’s pretty much our speed of buyback. In the sense that, I think you and I discussed this in the past, buybacks are a good complement to growth, they’re not a substitute to growth.

So, my sense is, you know in the context of a mid-term target of growing our EPS by 5% to 10%, if the buyback component is more than 2% of that, you don't get the credit anyway. So – and the second thing is, we’re not, as you know looking at much in terms of acquisition, but we may need to react in case of increases and organic growth in terms of changes in RWA in terms of potential growth in activity.

And so, on that sense we want to keep ourselves some flexibility. Thirdly, I think over time when we model what could be the volatility of IFRS9 on our capital, I think you should expect over time that, you know, our capital ratio will slowly keep creeping up over the next two quarters, and I have said many times, I’m not -- we’re not forecasting a recession; we’re not thinking we are able to forecast a recession.

But that being said, I think we get the sense that we are later as opposed to sooner in the business cycle, and we just don't know how, you know, IFRS is going to impact our capital in terms of volatility. So, I think you should expect, you know, capital to slowly creep up over the next two quarters.

Would that translate into – you talked in the past about 10.75 as a CET level where – above which you’re active with the buyback. But what you just said there translate into a slightly higher number.

Conceptually, yes. I think you’ve seen that – you know we’ve been a little bit more conservative by that sense.

You never know what may happen if there’s, you know, an acquisition, but again, acquisition, as I just said, is a low probability event for us for the next two quarters certainly. With the exception of the 10% of the ABA Bank, that's available, and as we, I think, already disclosed, it’s a 2% or 3% -- 2 basis point or 3 basis point impact on our CET1.

So, it’s a late cycle and I think generally, you know, either on our capital management, on our liquidity management, we’re not – you know we’re not getting ready for a recession, we’re just being a little bit more prudent and that includes also a level of capital and buybacks.

Okay. Thanks for that.

My – one more thing for me was turning to Credigy, it’s down about 6% in the first half with the Lending Club running down, can you just spend a few minutes or a minute or so to refresh us on how competition and pricing is looking? Where your focus is?

And within your plan, would we see Credigy growing this year?

I think Ghislain will pick it up and may add something to that.

Yes. Steve this is Ghislain.

So, the plan has not changed for Credigy. So, it’s prudent growth that we’re looking at.

You know it's not the right time to be too aggressive. So, we saw more activities, I would say, in the last two months of the year and the team is very active on different opportunities.

So, we remain confident, you know, in our ability to grow the balance sheet over the next 12 months to 18 months. But in the current, you know, liquidity conditions, we think that it’s better to stay prudent.

And so, that likely translates into a flat to maybe slightly down for this year as you hit the pause button a little bit?

Yes. I would say flat and may be up a little bit a year or so, so I would flat or a little bit positive.

Thank you.

It’s slightly up for this year and I think it looks – as Ghislain mentioned, given the volume that we’re being closing the last few weeks and last few months, it looks a bit better for 2020 than it did last quarter, I would say though Steve.

Okay. Thanks for that.

Thank you. Good afternoon.

Louis, I actually wanted a follow-up on both of Steve’s questions. I guess the first one on the capital.

Are you thinking on a relative basis or an absolute basis when you think about your capital position? Because pro forma the Fiera you are at 11.75 and it sounds like you want to see that continue to drift higher.

I’m wondering if you get concerned at a point that you’re sort of setting a floor on the capital ratio that may be higher than you'd like it through the cycle?

Good question, Rob. No, I think we’re – I think we’re looking more and not so much on the relative basis, but on absolute basis.

But again, that’s very subjective as I said. But for the reason I just explained, I think we’re very comfortable at [11.5], but over time, for the next few quarters, I think slowly and it’s not going to be a big increase, but slowly, I think, you know, we’ll continue to let it go up a little bit, and that’s not going to prevent us from doing anything we want either in terms of organic growth or dividend increases or buybacks.

So that's why we’re quite comfortable given where we are, and we think it's the prudent thing to do over the next few quarters.

Okay. And just like for Bill, on the Credigy, the impact on the stage one and two, the provisions on performing of the Lending Club running down, can you just refresh us a little bit.

It’s just – I know that IFRS 9 has volatility to the loan loss line period, but does the nature of your Credigy businesses – should we be prepared to accept a little more volatility in your provision line because of Credigy? Or is that Lending Club issue more of a specific to Lending Club and other business that may come on or off won’t be quite as impactful?

Thanks, Robert. I think it’s the latter – your second answer.

The PCL that you’ve seen through 2018 and 2019 are really mainly related to the Lending Club portfolio, and if you remember, the size of that portfolio peaked in late 2017 at around $1.3 million and has been amortizing down and I think on previous calls, we’ve talked about the impact of that and impaired losses and losses on performing stage one, stage two declining. We are very pleased with the performance.

It's been right on our expectations. This quarter is actually a little bit better than expectations, but I would say that you could expect for the rest of 2019 to continue to see a slow decline in the PCLs there.

Looking forward, it will be – it will depend on the type of assets of how the portfolio grows. We are seeing more focus on secured rather than unsecured, so I think in 2020, probably less volatility in PCLs is what we would expect.

Okay. Thank you.

That answers your question Robert?

It does and I appreciate it. Thank you.

Thank you. Good afternoon.

Louis, just to go back to some of your comments like capital, obviously the Bank is in very good shape, especially on a pro forma basis in relative and absolute terms, but one of the themes that we've heard across the sector this quarter is that the greater RWA density is leading to a less robust pace of organic capital growth, if I can call at that, and specifically with national, I think because your numbers have been higher. There hasn’t been as much of an issue, but just kind of looking back at the trend over the last nearly two years now, you had a number of quarters in which the organic build sequentially has been, you know, more in the range of 5 basis points to 10 basis points than the 15-ish we were used to.

In your view, and maybe this is for Bill or Ghislain as well, is this specifically relating to that RWA density with some of the changes that have happened in the shift in loan mix? Or is there something more specific the national has led to a less robust [RWA]?

I’ll start and then I’ll pass the… do you want to?

Yes, maybe I could start Sumit, just on the density aspect. I think on – in terms of RWA density, in an environment where in the past you had higher growth in retail than commercial, you would expect less RWA density, particularly given that our growth has been more focused on secured on mortgages and HELOCs, and if commercial and corporate has higher growth than retail than maybe that accounts for some of the RWA density.

In terms of the net capital generation, I’ll pass that to Ghislain.

Well, of course, Sumit. You know I think that we still have the potential, you know, to grow our capital [RWA] to generate 15 bps of capital, you know, of organic net income and RWA.

So, I think that this is the right number. If you looked at the – you know the last three quarters and a couple of quarters, in the last two, three years, you know, the 24-basis points impact of risk-weighted assets in the CET1 this quarter is not different than what we have seen before.

So, I would say that the 15, you know, basis points is …

A quarter.

A quarter, a quarter of course. It’s probably a good number, you know, that you should keep in mind.

And so, Bill, I think your answer is going to speak to it. And in your view, it's just – and then this is another quarter that’s an example of the year-over-year business loan growth was very strong in your consumer was pretty flat, so it's really the loan mix that’s affecting them more than anything else in your view?

I would think so. And remember we had a number of years where the growth in mortgages was higher than the growth in commercial.

So, I think you would have expected to have lower RWA density there.

And Sumit, this is Ghislain again, so of course, if you look at this quarter, you know, it's essentially based on commercial and corporate book, you know, this – you know we grew our books and the RWA impact came essentially from this. Of course, from time-to-time, quarter-to-quarter, you may have some impact from the pension funds or model changes, but this is why I told you that to me, you know, organic CET1 growth of 15 basis points a quarter is the right number.

Okay. One quick, this is maybe for Jean Dagenais or Ghislain.

There was a question on taxes before, one, I don’t ask about the other segment, the tax, we’ll call the tax recovery that you book in there or the tax benefit that you book in that segment, it has been very consistent around $80 million for the last couple of years. It did increase this quarter, sorry if I missed it, but was there anything – was there a specific item that resulted in a – that number moving up to a [100] in Q2?

Yes, of course. This is Jean.

If you look at it, the last eight quarters, the tax equivalent basis adjustment was around $60 million and now its $80 million, and therefore, in the second quarter of 2019, that $20 million variance comes from the reversal of the tax equivalent basis adjusted.

And is that – I usually think of that one as tied in somewhat to the capital markets or trading business, where I was going to go next is that – so is that the right tie-in that it was related to some of the activity in the quarter [indiscernible].

So, it was up for non-taxable revenues in the Financial Markets, so it’s closed up in the Financial Market and reverse back into the other segment. And this quarter was a good quarter for tax exempt revenues.

Alright. And last is going to Financial Markets, and I’ll [indiscernible] just by saying I think you guys put it in your presentation, and it’s true.

Your efficiency ratio in this business has been at the low-end of the group for a while, so I’ll start with that and then ask the question. Usually you’ve done a better job in having expenses flex, if you will, with the level of revenue.

If we look year-over-year for this business, revenues are down $30 million, but expenses were actually up a little bit. Is there anything in terms of – we’ve heard some of your counterparts talk about investment in capital markets, particularly outside of Canada.

I don't think that's a national issue, so just wanted to ask specifically why did that tie-in of expense and revenue dynamics not flow as well as it usually does for national in Q2?

Sure, this is [Louis]. I think our expenses are pretty much under control.

You're right; we don't have any expenses or any growth initiatives right now outside of Canada. I think there are specific items in our expenses and maybe I’ll pass it on to Ghislain I think.

Yes. The variable compensation has been adjusted.

However, we had some cost from support services that has increased and some other one-time expenses for professional fees and other services provided by external partners that went into the quarter.

Does that answer question?

Yes. Bill, based on your operating leverage comment it would sound like those are unlikely to repeat in the back half of the year.

It’s correct. They are small, but since it’s very stable, it [shows].

But, Sumit, keep in mind that, you know, the efficiency ratio for the quarter was 44%, so just very little.

Thanks for your time.

Thanks.

Thank you. Good afternoon.

I had the two questions. First was more broad-based and I wanted to circle back on a comment that was made earlier in terms of expectations for a lower revenue growth environment.

I was hoping if you could provide just some more – I guess some goalpost around and a point of reference what you’re referring to? Just a general environment or do you expect lower revenue growth in the back half of this year versus what you did in the first half or versus last year?

Any color would be appreciated.

Ghislain will answer that one.

Well – yes, this is Ghislain. So, I mentioned it in my comments at the beginning.

Essentially, it was related to Financial Market in the first half of the year. So – and what we’re – as I mentioned, what we’re looking for – what we're expecting for the second half of the year is better revenue growth, you know, higher revenue growth than what we had in the first part of the – the first half of the year.

So, my comments refer to essentially to Financial Market for the first half of the year.

Thank you. I appreciate that clarification.

And the second question I had is, I might just refer you to, this is your gross impaired loans disclosed in your supplement and that's Page 18, if you want the reference, and I noticed that there's two sectors really driving higher formations as wholesale and agriculture, and I just wanted to get some color on you, if any of that might be related to what we are seeing on the trade front? Is there anything more, I guess, macro driving that?

Is that purely driven by just some counterparty risk that you had in those areas?

Yes. Hi, it’s Bill.

Thanks for the question. No, it’s not really related to trade, and our agricultural portfolio is important one for us.

As you know, it's an important sector in Quebec. An important part of that portfolio is government insured and sometimes you’ll see more volatility in the gross impaired loans in that sector quarter-to-quarter than in others.

If you notice, we didn't take provisions for those new impairs; we do not expect to take any loss or so. That’s one sector that typically has got volatility in gross impaired loans, but very, very low loan losses.

And in wholesale, no, it’s just a file in commercial normal course business, nothing related to trade.

Okay. Thank you.

That was very helpful. I appreciate the color.

Hi, thank you. I just wanted to go back to the – to the capital question again.

Bill or Louis, when you had kind of talked about a 10.75%, I guess that would have been a different – I know wasn’t that long ago, but it would have been a different type of environment. You were talking about something a little bit higher.

I mean since you probably put that 10.75% yardstick in there, you know, obviously has increased the domestic stability, buffer requirements, the semi-annual review is coming up. Like is this an anticipation of probably just, you know, higher capital – regulatory capital requirements coming at the industry?

Not really because we don't – we don't have, at this stage, all the visibility on what the impact of [Basel III] will be. So, I would say it’s more related simply to the fact that, a, I think we – you know we've seen more uncertainty entered at the global macro-economic environment, particularly as related to trade.

And also, to the simple fact, so – you know every year, we’re, you know, we were into the economic expansion. And, you know, I would think that somehow somewhere there’s probably an increased probability of a down cycle.

And the last one, as I mentioned earlier, is when you start modeling, you know, some IFRS9 volatility, and what the impact could be on your capital, you know, I think you want to have a little bit more capital as opposed to that. But fundamentally, as I said, it’s not changing our speed in terms of the buyback; it’s not changing our speed in terms of the dividend; and it's not changing our plans in terms of organic growth, in terms of being opportunistic and just growing the business.

And as you know, it's easier for us in the context that we don't have an aggressive acquisition agenda right now aside from, you know, acquiring the last 10% of ABA. It’s not that we’re not looking, but we frankly don't find much of anything that's interesting at this stage of the cycle, and with the valuation that we’re seeing.

So, we’d rather be prudent, work on investing in our brand and our franchise and grow organic growth. And, you know, just deploy capital for the sake of deploying capital is not a good idea.

So, we’d rather led it creep up a little bit. But – you know, so we’re not – I want to reassure everybody, you know, we’re not going to [the 13] or anything like that.

I mean it’s – some of our peers are already a little bit higher than us. I think we’re going to, you know, keep slowly going up toward [11 in two quarters].

I just don't want people to think that because we, you know, we got automatically an extra 25 bips from the Fiera sale that we automatically [on the] buyback that extra capital, it’s not going to be that simple.

Okay. Fair enough.

So, Louis, just to be crystal clear though, like I think the way I'm picking up the commentary, you expect more – collectively, you expect more of the growth to come probably out of the corporate commercial as opposed to the consumer and of the portfolio. I think, Bill, has already highlighted that that tends to be a little bit more capital intensive.

So, I suppose what you're saying is part of this buildup is in anticipation of just more capital-intensive growth, although, I would ask you is this good growth given the commentary you’ve provided around, you know, being – every quarter being a quarter closer to the end of the cycle?

So, it’s a good question Sohrab, but keep in mind, I think we have – I think we – you know as you can see from our numbers, we’ve been quite discipline in terms of growing the balance sheet. I think we’ve had – I think as a team, we’re very happy with the balance we have between volume growth, margins and good risk management, and I think you should expect us to continue to do that.

That being said, we do have two businesses, one being capital markets and the other one being Credigy, which is somewhat optimistic and tends to performed very well in an environment of greater volatility. So, I also wanted to be in a position where we can deploy capital in these businesses if opportunities do occur.

That is very helpful. Thank you very much.

Hi, thank you. Just two questions.

First, the tax changes around exchange traded ETFs having an impact, wondering if it's going to impact your business at all.

We are looking at – this is for – obviously the impact will be on client and not on us, but it could determine how we will have to do business, so we are looking at how we will do business to take into consideration those tax issue.

So, it’s too early to determine if there’s going to be an impact?

Of course, it’s pretty complex.

Okay.

Are any other views on this?

No, no. Too early to determine at this point.

Okay.

Too early.

Yes. Second question, it sounds like you're backing away from 2% operating leverage for the year.

Yes.

So, you know, the way I’m trying to reconcile this though is that you sounded optimistic that revenues are bouncing back in your Financial Market – in the wholesale business. You had very strong operating leverage out of the retail business.

So, I would have thought that operating leverage could be very strong in the back half of the year. So, is your commentary that overall, we should not think about 2% anymore?

Or is it also somewhat driven by the personal commercial banking business not generating a strong operating leverage in the back half of the year?

No. I don't think you should look at that as a forward looking, you know, vision our performance in P&C.

I think, Darko, for the 2% is clearly for 2019 given the fact that we've had year-on-year reduction in revenues on the business that represents 35% of our revenues. You know the simple math is, it makes it a lot harder for us to achieve 2% operating leverage.

So, that being said, we are more confident for the second half of the year. That's why, I think, we still are very much in the running for positive operating leverage for 2019.

But realistically 2% is not in the cards, and even 1% would be, I think, not impossible, but probably difficult to achieve. So, I think given the fact that we had, you know, negative growth in revenues for the first two quarters of the year and capital markets, I think, we’re focusing on this.

And generally, I think some of the comments we’ve made, we’re very satisfied the way we’ve managed expenses. I think that the issue is not there, it's really related, as Ghislain mentioned, in the opening statement.

It’s really more making sure that we have the revenue growth on capital markets. The rest of the business we’re quite satisfied with.

So, we need the capital markets business to renew with year-over-year growth for Q3 and for Q4.

Okay. Thank you very much.

Thanks. I want to follow-up on Sumit’s question, if could on the equity trading line in TEB, it throws me off a little bit that equity trading was weaker or lower and the TEB adjustment was significantly higher.

So, is there anything you can tell us about the inter-play or the lack of inter-play of those two things this quarter?

The TEB adjustment, this is Ghislain, the TEB is only related to tax exemp revenue, it doesn’t create those deal and the profitability is dependent on many other elements.

But does a fair bit of that TEB line not manifest in the equity trading line?

Yes, it does.

Yes.

But there is other things also that do. Cost of funding, and many other elements that they have.

But very simplistically Steve, I think in the context where our revenues were down in Canada and they were flat to up in Ireland where we have a lower tax rate that’s basically what occurs there. That’s the TEB, but I think they were some of that too.

I think there was some fact that Canada was slower than previous years and in Ireland has been a little bit stronger and up with the tax rate that was effectively lower.

I was going to say, the ETF hedging business, is that relatively stable through the revenue line, or is there other things that drive, that’s obviously been a growing business and an important business for National Bank, or is there anything that drives volatility or is that kind of a smooth contribution in aggregate?

I could talk about this, it is Louis Vachon. But you have all seen the numbers, the equity trading business was weak across the industry.

So, in terms of ETF hedging that was pretty stable, but what we’ve experienced in the case of our equity business is lower, Canadian equity volume in the areas of focus, which resulted in lower revenues for us. Our structured product sales were down, especially at the end of Q1 and the beginning of Q2.

And we also saw lower pricing levels in less opportunity in equity finance. And given markets, we really took a defensive approach towards the end of Q1 and beginning of Q2 at deploying balance sheet and taking risks.

So, I don’t know if that answers your question?

That’s helpful. And while I have you, I can’t remember who made the comment about the last couple of months giving you a little more confidence, is that the last couple of months of Q2, so March-April, or more April-May?

It’s, you know second half of Q2 and definitely we’re seeing that also continue in the beginning of Q3.

Yes. April-May is the answer.

Thank you.,

Thank you everyone and had a good quarter and will talk to you at the end of Q3. Thanks again.