National Bank of Canada

Thank you, Operator. Good morning, everyone.

And welcome to our second quarter presentation. Presenting this morning are Laurent Ferreira, President and CEO of the Bank; Marie Chantal Gingras, Chief Financial Officer; and Bill Bonnell, Chief Risk Officer.

Also joining us for the Q&A session are Stephane Achard and Lucie Blanchet, Co-Heads of P&C Banking; Martin Gagnon, Head of Wealth Management; Denis Girouard, Head of Financial Markets; Ghislain Parent, Head of International; and Jean Dagenais, Senior VP, Finance. Before we begin, I refer you to slide two of our presentation providing National Bank’s caution regarding forward-looking statements.

With that, let me now turn the call over to Laurent.

Merci, Linda, and thank you, everyone for joining us. This morning we released strong quarterly results with earnings per share of $2.55.

Adjusted pretax pre-provision earnings were up 11% from last year, supported by contributions from all of our segments. We delivered an industry leading return on equity above 20%, reflecting our continued focus on profitable growth, our disciplined approach to capital deployment and strong credit quality.

The environment in which we operate during this – we operated during the second quarter was marked by an increase in uncertainty and market volatility. The Bank’s consistent performance in this environment underscores the resilience of our franchise and a diversification of our earnings streams.

Over the past few weeks, the macroeconomic and geopolitical environment has continued to evolve and new uncertainties have been introduced. Interest rates are now expected to increase more rapidly than anticipated and market consensus relative to the possibility of an economic slowdown has increased.

While this is not our base scenario, these risks are more present and are being taken into account in our decision-making process. That being said, in the current context, we take comfort in our overall strategic position.

First, our domestic focus, Canada’s underlying fundamentals are strong. Our economy is well positioned on a relative basis due to several factors, including the importance of natural resources, high commodity prices and unemployment rates at historical lows; second, our unique business mix, underpinning our strong and resilient earnings power; and third, our discipline when it comes to capital risks and cost management.

The Bank is in a solid position. We generated positive operating leverage in Q2, our capital levels are strong and we continue to carry significant credit reserves, which along with our prudent positioning, gives us comfort in the current environment.

We ended the second quarter with a robust CET1 ratio of 12.9%, providing ample flexibility to invest in our businesses and to actively return capital to shareholders through sustainable dividend increases and share buybacks. This morning we announced a $0.05 or 6% increase to our common share dividend, bringing it to $0.92.

We are committed to delivering sustainable dividend increases to our shareholders, demonstrating the earnings power we see in our business model. During the second quarter, we repurchased 2 million shares.

National Bank has a strong record of delivering superior value to its shareholders over the long-term and this remains a priority going forward. Turning now to our business segments.

Personal and Commercial Banking performed well with pretax pre-provision earnings up 10% over last year, supported by strong balance sheet growth and client activity. On the Retail side, mortgage loans were up 9% year-over-year.

With monetary policy continuing to tighten, we expect our exposure to the Québec market to be favorable both from a growth and credit perspective. This is based on the relatively strong economic fundamentals of the province, housing affordability and successful social measures put in place over the years.

On the Commercial side, lending activity remained strong with commercial loans up 18% year-over-year. As we look ahead, the outlook is favorable.

We will, nonetheless, remain very disciplined in balancing growth, margin and credit quality, especially in the context of rising interest rates and evolving macroeconomic trends. Our Wealth business generated a solid performance with revenues up 7%, against record transaction revenues in the same quarter last year.

We saw particularly strong growth in full service brokerage, as well as higher net interest income on the back of volume growth and interest rate hikes. Expenses are up 10% from Q2 last year, reflecting a significant shift in revenue mix and continued investment in the business.

Financial Markets delivered very strong results again this quarter, with revenues of $632 million. The performance of global markets was strong, with continued momentum in structured products.

Corporate Investment Banking generated good results again, excuse me, against a quarter of record performance last year and in the context of a slowdown in equity underwriting and M&A activity in the market. Over the last few years, we have demonstrated the strength and resiliency of our Financial Markets business.

Over time, we have diversified and expanded its earnings power by investing in our people and technology, and by developing new targeted revenue sources. We are confident that the expertise of our team and our disciplined strategic focus positions us well to consistently deliver growth through market cycles.

Turning now to our International segment. This quarter, once again, ABA Bank delivered strong results.

The economy in Cambodia is progressing well towards pre-COVID levels. Healthy GDP growth is anticipated this year and next, while longer term projections are among the highest in the region.

The country remains underbanked and also benefits from strong demographics. All these factors will continue to support growth for ABA.

Turning now to our Specialty Finance business in the U.S. Credigy delivered a solid performance this quarter with revenues of $120 million, reflecting strong underlying portfolio performance across asset classes.

This was partly offset by the impact of rising interest rates on asset at fair value. Total assets declined from last quarter, reflecting maturity of certain loans and reduced client activity in the context of heightened uncertainty and interest rate volatility.

In the current environment, the team continues to exercise strict discipline where opportunities do not meet our risk reward objectives. Credigy remains highly selective and will not compromise on risk, returns and ROE only over asset growth.

As such, investment levels should moderate over the next few months, which may impact revenues in the second half of the year. We remain confident that this environment will, nonetheless, create opportunities for Credigy.

The business is well-positioned to deploy capital and grow assets once attractive opportunities materializes. In conclusion, while we are mindful of the uncertainties ahead, the Bank’s strategic positioning and performance track record through market cycles gives us comfort.

Our balance sheet is in great shape, with strong capital levels and substantial credit reserves. Our franchise is strong with attractive growth opportunities across our business segments.

With that, I will now hand it over to Marie Chantal, who is joining us on the call for the first time and who has been CFO since April 1st. Marie Chantal has over 20 years of experience with the Bank where she held leadership positions across the organization.

Marie Chantal welcome and over to you.

Thank you, Laurent. I am very excited to be here and I look forward to maintaining and building strong relationships with the investment community.

Now turning to our results on slide seven. The Bank delivered a strong quarter once again supported by the resilience and diversification of our businesses.

Revenues increased by 9% year-over-year with all segments performing well. Pretax pre-provision earnings grew 11% year-over-year and we achieved positive operating leverage of 1.4%.

The waterfall chart on this slide outlines our expense growth category. Let me provide some color on the main item.

First, the increase in operational costs is tied to our business growth. Specifically, since the beginning of the fiscal year, we have invested in people in line with the growth of all segments.

The pace of hiring has moderated significantly entering the second quarter and we estimate that we are now close to sailing level. In addition, over the past few quarters, we have increased salaries and repositioned certain roles in order to retain and attract the best talent in a highly competitive environment.

Second, our spend with regards to strategic technology investments has increased. We have been successful in expanding transversal capacity in the execution and delivery of projects aimed at growing and protecting the Bank.

Let’s now take a look at our main investment areas. In Personal Banking, investments are directed towards enhancing and personalizing the client experience to accelerate acquisition, as well as increasing our overall client engagement and satisfaction.

In Commercial Banking, we are modernizing our payment engine and investing in our cash management platform. In Wealth Management, we grew our investment envelope significantly over the past two years, driven by foundational projects to increase end-to-end process efficiency and scalability, as well as projects to enhance client experience.

In Financial Market, we continue to expand activities in areas of expertise and diversify our revenue streams. Other areas of significant investment pertain to the evolution and automation of our operations, to cybersecurity, and to addressing and evolving regulatory landscapes.

As we look forward, we are excited by the topline growth and efficiency gains made possible by these investments. National Bank has a strong track record of delivering superior PTPP growth and our investment position us well to continue delivering strong performance.

As illustrated on slide eight, expense management remains a priority. Our teams are a very disciplined and some of our segments achieved best-in-class efficiency ratios again this quarter.

In addition, the team constantly works on identifying and realizing efficiency in our expense base, especially in an inflationary context. We have been successful at balancing revenue and expense growth over the year.

We maintain our positive operating leverage target for fiscal 2022. Now turning to capital on slide nine.

We ended the quarter with a robust CET1 ratio of 12.9%, up 14 basis points sequentially, reflecting strong internal capital generation. Our solid capital level provides us with flexibility to support business growth and return capital to shareholders, especially in the context of macroeconomic uncertainty.

Looking now at our second quarter results in more detail. Net of dividends, the Bank generated 54 basis points of capital.

We repurchased 2 million common shares under our NCIB program, which reduced our CET1 ratio by 18 basis points. Strong organic RWA growth representing 33 basis points was partly offset by the following two items.

First, we recognized favorable rating migration, representing 17 basis points, primarily following the review of non-retail portfolios and from derivative exposures in our counterparty credit risk. Second, model updates added 3 basis points to our CET1 ratio on a net basis.

In conclusion, the Bank delivered a strong quarter with solid organic growth, industry-leading ROE and high capital level. The Bank is also well-positioned to navigate an uncertain macro environment and to support continued growth.

With that, I will now turn the call over to Bill.

Merci, Marie Chantal, and good morning, all. I will begin on slide 11 to review our provisions for credit losses.

The exceptional credit performance that began in the latter half of last year continued in the second quarter. PCLs on impaired loans were just $28 million, $4 million increase from last quarter.

At 6 basis points, this level remains well below our normal pre-pandemic impaired PCLs and just 2 basis points above the cyclical low in the fourth quarter last year. The strong credit performance was evident across all our domestic retail and non-retail portfolios.

In the International sector, impaired provisions remained stable at Credigy and increased by $4 million quarter-over-quarter at ABA Bank as the end of pandemic related deferrals led to some migration to Stage 3. In the second quarter, PCLs non-performing loans were a net release of $27 million.

The primary drivers were positive performance trends and credit migration, which were partially offset by an increase in our management overlay to account for increased uncertainties in the macro environment. Looking ahead, our outlook for impaired PCLs for the full year has improved.

This is supported by both the excellent performance year-to-date and by strong underlying trends that are generating low delinquencies and positive credit migration. Accordingly, we revised our target for full fiscal year impaired PCLs to below 15 basis points.

At the same time, our outlook for performing PCLs has become more cloudy, as uncertainties in the economy’s future path have increased in recent weeks. Inflationary pressures, supply chain challenges, geopolitical risks and the speed of interest rate increases have all contributed to greater uncertainty.

In these uncertain times, we remain very confident with our defensive geographic and business mix, as well as our prudent level of allowances. Turning to slide 12.

Our total allowances for credit losses declined by 3% to just over $1 billion in the second quarter. Performing ACLs of $821 million remain elevated and represent nearly eight times the last 12-month impaired ACLs and 2.6 times our pre-pandemic level of impaired PCLs.

The small release of performing ACLs this quarter takes our cumulative release of pandemic build to 50%. We continue to believe it is appropriate to carry these significant credit allowances in the current macro environment.

Turning to slide 13. Gross impaired loans were stable last quarter at $611 million or 31 basis points.

Lower formations in our domestic portfolios were offset by higher formations at ABA. We mentioned on the Q1 call that the expiry of pandemic related deferrals in Cambodia began to generate higher formations and that performance was matching our expectations.

That has continued in the second quarter, with ABA formations increasing to $37 million. Since it’s been quite a few quarters that we discussed our Canadian pandemic related deferrals expiring, I think it would be helpful to provide a little color on ABA’s deferrals.

ABA loans under deferrals peaked in the third quarter of 2020 at about 17% of total loans. Similar to the peak we saw in mortgage deferrals in Canada.

In Q2, the percentage of loans still under deferral was down to 7.4%. The vast majority of deferrals were on principal payments only, meaning that clients continued to pay interest during the deferral period and of those deferrals that have already expired, about 90% have returned to current status or have been fully repaid.

All remaining deferrals will expire before the end of 2022. As they expire, we expect formations to increase and should peak in the second half of this year then decline going into 2023.

These loans are well-collateralized, well-provisioned, and so far, the performance has been right on our expectations. On slide 14, details of our RESL portfolio are provided.

The portfolio remains overweight Québec, which benefits from resilient characteristics such as relatively affordable housing, lower consumer debt levels and a high percentage of dual-income households. Employment and demographic trends remain supportive of continued good performance across the portfolio.

In summary, we are very pleased with the performance of our portfolios in the second quarter. While uncertainties in the path forward for the economy have increased, employment conditions and economic growth remain supportive of continued good credit performance.

We remain very comfortable with our portfolio’s resilience, the diversification of our earnings streams and our prudent approach to provisioning. With that, I will turn it back to the Operator for the Q&A.

Hi. Good afternoon.

Question on Commercial loans, very strong year-over-year growth and if I look sequentially, it does look like it’s decelerating and compared to the peer group on a sequential basis, more towards the lower end of the peer group in terms of growth. And I am just wondering, is that in any way a deliberate move, any way driven by some risk considerations that you may have in terms of the outlook for the commercial lending business?

Hi, Meny. It’s Stephane.

Good question. Actually, it’s not related to that entirely and I will go back to the risk side.

But it’s purely because our commercial numbers, as you know, include our Governmental business. And there’s been changes in some of the Governmental funding strategies in many areas.

So we have seen a large decline in volumes, largely because also Governments are receiving much more tax revenues than anticipated. So if you exclude Governmental Banking, the sequential Q-over-Q in Commercial business is actually 3.5% growth which is very robust.

This being said, in the environment and the uncertainty, we remain very prudent from a risk perspective and very selective. So being middle of the pack is what we like.

That sounds good. And then if I could just ask around a capital question, because why not, and the CET1 at 12.9% on a pro forma basis is at the top end of the peer group.

And so really begs the question, just to revisit your outlook for M&A. Specifically, I am wondering if the current environment is an environment where you would rather not do M&A, where you feel that keeping the powder dry is the prudent thing to do and then I have a follow up.

But to your question – thank you for the question. But to your question on M&A, we haven’t changed our approach.

So I will repeat what we consistently say. We like our businesses.

We like the strategic choices we have made. So we are really focused on organic growth and then obviously returning capital to shareholders.

But, yeah, we always keep an eye on the market in terms of M&A and the market could potentially be more interesting in the future. But we are – there’s also a lot of uncertainty in the market.

So prudence is the guiding principle here. So – but – so I don’t know if that answers your question, but...

In terms of your outlook for a floor where you would be comfortable taking the CET1 down to, does the current environment changed that thinking? Is there a specific level?

Is 11% too low in your mind to theoretically take down your CET1 ratio? What’s the right kind of floor…

Well, I think…

… comfort level in this environment?

Yeah. No.

So thank you again. So, given the current uncertainties in the market, I -- we obviously were very happy and comfortable with our current capital levels.

So, yeah, I think, 11% of that would – is not a level that we are thinking about or striving for.

Okay. And then just, I know you have – you still have the moratorium on the International M&A, but what’s the justification for that?

I mean, just given how strong your capital levels are? And then also given the fact that the ABA business in particular has gone through the big test and has – it looks like it passed with flying colors.

What’s the consideration there to keep that moratorium?

No. It’s a question of focus, Meny.

We really like our businesses right now and we are going to keep focusing on them. We see, obviously, growth ahead with our – with both ABA and Credigy.

So we are not going to change that strategy for now, so we are going to keep our moratorium.

Thanks, Laurent.

Thank you.

Thank you. Good morning.

So throughout your commentary, you have referenced the uncertain economic outlook, which I think we can all agree on. And then, Laurent, you said its impacting your decision-making and actions right now, and I think, Credigy is an obvious example of that.

Maybe your answer on Commercial loan growth also an example of that. Are there other examples of where you are pulling back a bit on risk?

Thank you for your question. No.

I think the risk appetite is the same. Our strategy is the same as you can tell that there’s good momentum in the market.

It’s a bit – it’s a strange world, right? You have a strong economic backdrop and the business in terms of pessimism about the potential recession.

So I think what’s important is remaining prudent in how we deploy capital and I think the reserves that -- our credit reserves where they are at, at this point in time, I think, is the right thing to do. So I think the overall strategy doesn’t change.

Do we keep an eye on, interest rate sensitive areas, obviously? Do we keep an eye on leverage in the system, obviously?

So those are maybe some color I could add.

Okay. Second question is with respect to Financial Markets, another strong quarter there and better than most of your peers.

We talked about strategic investments and why you should grow through the cycle, but wondering if you can point to what factors drove the strength, particular strength in this past quarter?

Thank you, Paul, and thank you for the question. Diversification, it’s all about diversification and how we manage the risk and how we develop the business through the course of the cycle.

Then, this time around, once again, we were good in terms of how we manage the volatility of the market for the last two quarter. Well above the same revenue and equity if you compare Q1 to Q2.

But at the same time, there’s some other businesses that slowdown a bit, because of the volatility, but that -- those business we believe that they may come back down the road and we keep investing in some niches here and there to be sure that we have that equilibrium that over the years, you pay off for National Bank, then, not a big change of strategies, it’s just one step at a time and we continue to invest in our business through any cycles.

Okay. Last question for me relates to slide 12, which provides a good perspective on where you are performing ACLs have been and where they sit today.

When you run your stress tests, let’s say, for a mild type recession, how much would those performing allowances need to increase roughly between the $821 million today and the little over $1 billion as of Q1 2021? I imagine they don’t need to go all the way back to Q1 2021.

But can you give us a sense of how much they might have to increase between now and then what that prior number was?

Thanks. It’s Bill.

Thanks for the question, Paul. I will try to approach that.

I think if I understood the question, one was in terms of, if there was a mild recession, what the impact would be on performing ACLs. Is that one...

Correct.

Want to correct me, if I – okay. Yes.

So I think the – you can see a description in the MD&A notes about our pessimistic scenario. And I think there’s some sensitivity numbers shown there where if our pessimistic scenario became 100% wait, then it’s around $300 million, I think, in the sensitivity.

So that’s a ballpark and that would be expected to happen over time. Now when I think about the size of the allowances and the prudency, I often think about it and we talk – you see it in the slides and we talked about it about in relation to impaired PCLs and run rate.

So just for a little history on our IFRS 9 performing allowance build, if you remember, we started off in IFRS 9 in 2018 from already a pretty good position. We had our sectoral allowance in 2016 that wasn’t fully used.

So we started off at a pretty good point and I think the ratio of our performing allowances to run rate PCLs in 2019 before the pandemic was around 1.8 times, 1.9 times. Translating that meant we had allowances that would cover two years, almost two years of impaired PCLs.

At the end of 2020, after the significant build, we had that brought up to about 3 times of the impaired PCLs in the last 12 months and that ratio included the impact on the denominator, because we had some of the pandemic impaired PCLs that were elevated. And now here in 2022, if you look at the – that ratio over the last 12 months, impaired PCLs is really high, but that’s because the denominator is really low.

So we refer to it in the slides and we think about it more in terms of our run rate pre-pandemic and you will see on the slide we are running about 2.6 times that rate. So that feels like a pretty comfortable level.

It gives some room to absorb potential negative events in the future if the outlook changes and we also think about one difference from pre-pandemic to now is in terms of business mix. So if we look at our portfolio now, we have less consumer unsecured because of the prepayments and high pay downs on the credit cards.

And we had more growth in the mortgages, which is the lower consumer. So it gives even a little more comfort with that number being high.

So I hope that helps. But in the potential paths ahead, I mean, our base case is still for lower, but good growth and we have a pessimistic that you can see is for a downturn and we think that if the – our outlook shifts in terms of a greater proportion of a downturn or even worse than a downturn, we will be happy that we have started with the good allowance levels that we have now.

That’s a helpful answer. Thank you, Bill.

That’s it from me.

Thanks, Paul.

Operator, are there any other questions for us?

Thank you. Maybe one question first for the team, maybe Laurent can answer that, once upon a time, I think, you had said that this U.S.

International Banking – the U.S. special pre-financing of International Banking segment had a few years ago, I think, there was a target of maybe 10% or so of the total Bank earnings.

It obviously has had pretty good growth. I am not giving up ABA and Credigy.

I am just looking at it in totality. Maybe it’s closer to 16%, 17%.

Is there any revised or renewed guidance worth sharing as to what sort of overall proportion of the Bank comfortable letting these two businesses get to?

It’s Laurent. Sohrab, thank you for your question.

And when you – if we said in the past, a certain percentage, often it’s an initial target of where we want to end up. But maybe we don’t manage our businesses by setting targets or percentages.

If you look at the performance of our business mix and we – that’s really the way we look at it. The balance between our Wholesale business, Retail, Commercial, Wealth, and the strategic choices that we make and it’s really about the overall performance and that’s the way you should look at it as well.

So, where we see growth momentum, we invest and right now we like all of our businesses, and as you can see, I think all of our businesses are contributing and that’s it. So, we don’t have like a set target.

As you know and we talked about our strategy, we have our focus of growing our Canadian Banking franchise. We think that there are tons of opportunity in Canada and the team is focused on that.

And a lot of the investments in technology and people are towards growing our business in Canada as well. So, without setting targets, we are really – we really like all of our businesses and we want to grow all of them.

Okay. So maybe target was the wrong word, but you are comfortable, I suppose, as a team, if this segment continued to provide above average growth and continued to drift higher as a proportion of the overall Bank earnings.

Absolutely.

Okay. And then – and maybe it’s for you, Laurent, maybe it’s for Bill, maybe it’s for the – again, for the team, I am not sure.

But prior to the pandemic, I think the Bank would talk about how you are making some really risked decisions and not pursuing growth, loan growth in particular, I think, you would have talked about, because rather than was competitive pricing or maybe it was because of the structures or the terms of some of these available opportunities, that showed quite a bit of discipline. As you sit here today, I think, you answered this partly to one of the earlier questions, but is there any need to show restraint here right now or are you just not seeing the types of, I will call it, factors that you had seen back pre-pandemic that would have necessitated moderating loan growth?

Hi, Sohrab. It’s Bill.

Maybe I can start off on that one. The – you are right about what we – our approach pre-pandemic as we were getting late in the cycle that we talked about holding the reins.

And – but just generally on the approach, and I think, you have heard about – heard it often this week, it’s not to change specific underwriting criteria. So we try to be very stable and disciplined in those through the cycle.

But there are a couple of levers that can be pulled, one of them more longer term, but I think it’s an important one and those are the decisions on business mix. So what businesses we are in and not in and what we are overweight and not overweight.

And those are very, very impactful decisions and those are more aligned with long-term risks and opportunities. And then the other one I will point out in terms of near-term impacts is, is how we allocate balance sheet and capital in limits as an important lever.

And pre-pandemic, when we talked about holding back the reins, that means that we didn’t necessarily say no growth, but we gave room for a little bit of growth and keeping the growth may be less than what the opportunities were that were out there. And as you pointed out, a discussion about Credigy, that’s a discipline and that approach is happening now.

And the other important comment I will make, Sohrab, is that what gives one the ability and makes it easier to use those levers is the diversification of the franchise so that there are always different earnings streams that can continue to grow the customer base and franchise even if you are holding back on certain areas.

Does that answer your question, Sohrab?

It does. Can I just say – I don’t want to chew up the time too much.

If I can just quickly follow up on that, Bill, like, sometimes limits are set, like you say, short-term and the like. Are there instances where as a collective team you are seeing – you are guiding the businesses to create room without increasing limits for them or are you comfortable increasing limits for them in the current environment?

Yeah. Well, I think, again, given the benefit of our broad or diversified earnings streams, there are certainly areas that are continually growing very, very nicely.

You have seen that performance here. I’d flip it around a little bit and say, when we are – when the uncertainty in the future is greater, what we really try to do is, as a team, think hard about what…

Yeah.

… we can’t predict exactly what will happen, but we can be very rigorous in understanding what the potential impacts are if those happen. Some of those thoughts and discussions will lead to maybe holding the reins tight.

Others will be giving insight into opportunities that we think we would like some dry powder to seize later. So it’s a mix, Sohrab.

Thank you.

Thank you. Good morning.

I had a quick clarification question first for you on your LTV disclosure on slide 14. When I look at the HELOC component, you have an LTV that’s below your uninsured LTV and based on the footnote there, the LTV is calculated on the authorized limit, not the outstanding balance of the HELOC.

So I just wanted to clarify. Am I interpreting that correctly, includes the mortgage balance and the LTVs are lower in the uninsured portfolio?

Yes. Absolutely.

I think that’s been consistent from the beginning. The HELOC is typically a higher end profile, higher FICOs, higher net worth and that’s by design as well.

The criteria for the HELOC are a little tighter. So the – certainly, the LTV has consistently been below the uninsured and those are the LTVs based on the authorized.

If we were to look at it over the outstandings with the utilization rate, it would probably be below 30%.

Okay. I am going to assume that those are probably older vintages with shorter amortization, so maybe benefit from greater home price appreciation as well, is that fair?

Yes. That’s part of it.

But also just of the need that the HELOC serves for some clients is not necessarily immediate need. Sometimes they – the high end, high income earners will want the flexibility to their planning for renovation or their – have things in mind and they don’t want to use it now.

Conversely also, it on the – then on the amortizing piece, they can pay a down substantially when they have a higher income than expected coming in and that’s been an important factor, I think, through the pandemic. All of our rotating credit, including the HELOC on these, we have seen higher prepayments on that as the savings balances of the clients is higher so.

Okay. That makes sense.

And if I could switch to net interest income, when I look at your sensitivity disclosure from 100-basis-point increase in interest rates, it looks like you have about $130 million benefits in net income and that implies a low-to-mid single-digit increase in net income and when I modeled it out, I get a higher expected increase. So, is that lower benefit driven by hedging activity?

Have you initiated hedges that limit the asset yield accretion that you could get in a rising rate environment?

Maybe I will start off. I don’t have the table in front of me, Nigel, but I believe that there was an increase – small increase in sensitivity quarter-over-quarter.

And part of that is from growth in good retail core operating accounts. So the growth in deposits certainly has an impact on that.

Yes, there’s – as we have talked about in the past, there is always activity in treasury to try to risk manage and stabilize and protect NII through the cycle. But – does that answer your question, Nigel or should we take some…

Okay. No.

It does partially. I mean, when I look at your maturity profile, you have a lot of loans maturing in the next 12 months and the weighted average in maturities are lower.

So, I would have just expected a greater benefit, but I mean, I will assume that’s really on hedging. It doesn’t sound like there’s anything else that’s driving it.

Yeah. Nothing else to call it.

Okay. That’s it for me.

Thanks.

Hi. Good afternoon.

A couple of quick questions. First on capital, wondering how you view buyback as an option to deploy capital from here, could we see the Bank continue to buy back shares?

Just wondering in the context of the elevated level uncertainty and perhaps being more prudent on the capital front? Thank you.

Thank you for your question. It’s Laurent.

The buybacks are always part of our yearly capital management. But they are really a complement.

Our number one focus is always organic growth. And we -- investing in our businesses, we see still a lot of ROE accretive opportunity for the Bank.

So that’s where we are – the mindset of the team is and the mindset of the Bank. So providing also our shareholders with a sustainable dividend growth is also part of our strategy.

So buybacks are really a complement. And in terms of our capital level, with the current market uncertainty and the macro economic uncertainty, we like the level of capital that we have at this point in time.

Okay. Thanks for that.

And just lastly, a quick on ABA, another quarter of very strong growth there, I am wondering if you could give a bit more color on what drove the loan, the deposit growth this quarter and just stands out. And I am wondering how sustainable that level of growth is going forward?

Thank you.

Yes. Thank you for the questions.

This is Ghislain here. So, essentially a couple of things, the border – first of all, the borders are completely reopened.

So there’s an economic recovery right now. So the inflation is also under control.

You have to keep in mind also that this is a dollarized economy. So this is why I think it helps to control inflation and maintain purchasing power.

The population is still very young. So and the fundamentals of the banking sector are still there.

Bank penetration rates are still very low. So we think that – so all this contributed to the good results in Q2 and they will continue to contribute for the rest of the 2022 and 2023.

Great. That’s good color.

Thank you.

Well, thank you very much and we will speak to you next quarter.