The National Bank of Canada (OTC:NTIOF) reported robust earnings per share of $2.44 for Q4 2023 and $9.60 for the full year, marking a 7% growth in pre-tax pre-provision earnings compared to the previous year. Despite a contracting Canadian economy, the bank's diversified business mix, disciplined approach to credit, capital, and cost management, and strong performance across segments position it well for 2024.
Key takeaways from the call include:
- The bank reached its target dividend payout ratio range of 40% to 50% and achieved a return on equity of 16.8%.
- The Personal and Commercial Banking segment and Wealth Management had strong results, with pre-tax pre-provision earnings up 16% and 8% respectively in 2023.
- The Financial Markets business delivered net income of over $1 billion and is expected to continue growing in 2024.
- Credigy and ABA Bank performed well in 2023, with Credigy's revenues increasing 13% in Q4 and ABA Bank expecting double-digit asset growth in 2024.
- The bank expects positive operating leverage and mid-single-digit pre-tax pre-provision earnings growth in 2024, despite a 1% sequential decline in non-trading net interest income in Q4 2023.
- The bank's credit portfolio performance was strong in 2023, benefiting from defensive positioning and disciplined risk management.
Despite a challenging economic outlook, the bank's diversified business mix and disciplined approach to credit, capital, and cost management have positioned it well. The bank achieved record revenues of over $10 billion in 2023 and maintained an efficiency ratio below 53%.
The bank's liquidity position remains robust, with a liquidity coverage ratio of 155% and a net stable funding ratio of 118% at year-end, well above regulatory requirements. The CET1 ratio stood at 13.5% and is expected to remain strong, providing flexibility for capital deployment and sustainable dividend increases.
In terms of credit performance, impaired PCLs reached 11 basis points for the full year, well below pre-pandemic levels. For 2024, the bank expects a return to pre-pandemic levels of credit provisions, with impaired PCLs ranging between 15 to 25 basis points.
The bank does not foresee any significant changes in strategy or deployment due to tax changes. They expect to see new business opportunities in the global capital markets in 2024 and aim for positive net income growth in Financial Markets.
The bank has been proactive in managing expenses and headcount and expects to continue doing so in 2024. They do not anticipate any restructuring charges. The impairment losses on intangibles will result in savings and a reduction in non-interest expenses of approximately 0.5% next year.
Overall, the National Bank of Canada delivered a solid performance in Q4 and is well-positioned to achieve its financial objectives in 2024.
InvestingPro Insights
The National Bank of Canada (NTIOF) has demonstrated resilience and financial strength through its latest earnings report, which aligns with some key metrics observed in the InvestingPro Data. With a robust Market Cap of $23.63B and a P/E Ratio of 10.01, reflecting stability in its valuation, the bank's financial health appears sound. The Revenue Growth over the last twelve months as of Q4 2023 stands at 2.8%, showcasing its ability to increase earnings in a challenging economic environment. Additionally, the Dividend Yield as of late 2023 is an attractive 4.21%, which is particularly noteworthy considering the bank has raised its dividend for 14 consecutive years, as highlighted by one of the InvestingPro Tips.
InvestingPro Tips also reveal that the National Bank of Canada has maintained dividend payments for 45 consecutive years, which speaks to its long-term commitment to shareholder returns and financial consistency. This is particularly relevant for investors seeking stable income streams through dividends. Moreover, analysts predict the company will be profitable this year, which is consistent with the bank's reported earnings per share growth and its strategic outlook for 2024.
For readers who wish to delve deeper into the financial prospects of the National Bank of Canada, InvestingPro offers additional insights and metrics. Currently, there are 9 additional InvestingPro Tips available for the National Bank of Canada, providing a more comprehensive analysis for informed investment decisions.
Investors looking to leverage these insights can take advantage of the special Cyber Monday sale on InvestingPro subscriptions, which offers a discount of up to 60%. Additionally, using the coupon code sfy23 will grant an extra 10% off a 2-year InvestingPro+ subscription. These tips and metrics, combined with the bank's strong financial results, suggest that the National Bank of Canada is well-equipped to navigate the upcoming fiscal year.
Full transcript - National Bank Of Cda (NTIOF) Q4 2023:
Operator: Good morning, ladies and gentlemen, and welcome to National Bank of Canada's Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Madam, Marianne Ratte, Vice President and Head Investor Relations. Please go ahead, Madam Ratte.
Marianne Ratte: Merci, and good morning, everyone. We will begin the call with remarks from Laurent Ferreira, President and CEO; Marie Chantal Gingras, CFO; and Bill Bonnell, Chief risk officer. Also present for the Q&A session are Lucie Blanchet, Head of Personal Banking and Client Experience; Michael Denham, Head of Commercial and Private Banking; Nancy Paquet, Head of Wealth Management as of November 1st; Etienne Dubuc, Head of Financial Markets, also responsible for Credigy; and Stephane Achard, Head of International, responsible for ABA Bank. Before we begin, I would like to refer you to Slide 2 of our presentation for information on forward-looking statements and non-GAAP financial measures. The bank uses non-GAAP measures such as adjusted results to assess its performance. Management will be referring to adjusted results unless otherwise noted. I will now turn the call over to Laurent.
Laurent Ferreira: Merci, Marianne, and thank you everyone for joining us. This morning, National Bank reported earnings per share of $2.44 for the last quarter of 2023 and of $9.60 for the full year. On the back of strong execution, organic growth, and tight expense management, we delivered on our pre-tax pre-provision earnings objective for 2023 with 7% growth over last year. Through sustainable dividend increases, we reached our target dividend payout ratio range of 40% to 50%. Our ratio now stands at 41%. This is excluding this morning's 4% quarterly dividend increase, effective Q1, 2024. We also generated a return on equity of 16.8% while growing our capital position and ended the year with a CET1 ratio of 13.5%. Looking at the Canadian economy, which contracted 1.1% in Q3, the effects of tighter monetary policy are kicking in. This is putting pressure on our customers, with consumers and businesses having to adjust to higher borrowing costs. Domestic demand has slowed and the labor market is softening. Housing costs are rising due to higher rates, limited supply, and population growth. As a result, we are operating in an environment where the outlook for economic growth remains challenging. In this context, our diversified business mix and our disciplined approach to credit, capital, and cost management positions us well and will continue to guide our path forward. We have a solid credit profile and are building prudent reserves in-line with business growth and credit normalization. Our capital deployment strategy remains unchanged, as does our target of generating ROE of 15% to 20%. Our objective is to maintain strong capital ratios, invest in business growth, deliver sustainable dividend increases, and provide flexibility. Turning now to the performance of our business segments. Personal and Commercial Banking delivered strong results in Q4 and for the full year, with pre-tax pre-provision earnings up 16% in 2023 over last year. These results were supported by deposit-driven margin expansion from rising rates, as well as solid volume growth on both sides of the balance sheet. 2023 also marked another successful year on the client acquisition and satisfaction fronts. Our commercial loan book experienced strong growth, with lending volumes up 3% sequentially. Personal loans were up 1% quarter-over-quarter as mortgage growth continued to moderate. As always, we remain disciplined on new originations, balancing volume growth, margins, and credit quality. 2023 was a record year for Wealth Management, with total revenues exceeding $2.5 billion. Pre-tax pre-provision earnings were up 8% over last year benefiting from our strong client franchise. Our Wealth Management business delivers superior returns year after year and is a key pillar of our growth strategy. Looking to 2024, fee-based revenues for -- from our client franchise will remain reliant on market performance. Our focus is to continue growing our client base, as was the case in 2023. For our core banking operations in P&C and Wealth, we expect the increase in net interest income from higher rates to moderate. Our Financial Markets business delivered net income in excess of $1 billion once again in 2023, demonstrating resilience in all market conditions. Corporate and investment banking delivered 16% revenue growth in Q4, capping off a record year with revenues of $1.2 billion. This highlights investments we have made in talent over the last several years. Global markets also delivered a strong quarter. We expanded our activities in securities finance through the year. Structured products also benefited from a pickup in volumes and normalizing equity volatility in Q4 compared to the prior quarter. We continue to grow and diversify our Financial Markets business and build upon our expertise in select areas while maintaining disciplined risk management. Looking at next year, the segment will be subject to the proposed Canadian dividend tax measure. Despite this change, we expect to deliver year-over-year net income growth for financial markets in 2024. Credigy also delivered a solid overall performance in 2023. Revenues in Q4 increased 13% sequentially, reflecting the performance of our portfolios and prepayment revenue. In an uncertain macro environment, the franchise selectively deployed capital throughout the year with success, growing average assets by 13% consistent with our 2023 objective. Credigy continues to demonstrate its ability to execute in various economic environments. It has invested over $2.5 billion in 2023 and has reached for the first time the $10 billion mark in average assets in the fourth quarter. Looking at next year, we are seeing positive momentum in deal flow and foresee double-digit asset growth for 2024. ABA Bank delivered a solid performance in 2023 with continued momentum in client acquisition. It was again recognized as the Best Bank In Cambodia by Euromoney and Global Finance. In Q4, ABA generated double-digit growth in loans and deposits, although revenues reflected continued margin pressure from the deposit mix. From a macro standpoint, the Cambodian economy continues to adjust to softer external demand and a slower recovery in tourism. In this context, we will remain focused on delivering balanced growth. Longer-term, the outlook continues to be very attractive. Cambodia remains a high-growth economy with favorable demographics presenting substantial growth opportunity for ABA. As we enter 2024, we are committed to our prudent and disciplined approach to capital, credit, and cost management across our businesses. Our defensive positioning and the earnings power of our diversified business mix provides us with resilience and flexibility in a less constructive environment. This will enable us to continue to generate sustainable long-term value for our shareholders. Marie Chantal, over to you.
Marie Chantal Gingras: Thank you, Laurent, and good morning, everyone. My comments will begin on Slide 8. In fiscal 2023, the bank achieved record revenues of more than $10 billion underscoring our diversified and resilient business model. Through strong execution, we generated solid growth and maintained an efficiency ratio below 53%. Turning to our quarterly results on Slide 9. The bank delivered a strong finish to the year despite a macro environment that remained challenging. In Q4, revenues increased by 14% year-over-year and when combined with continued cost disciplines, PTPP grew by almost 19%. Reported expenses in Q4 increased by 19% year-over-year and included the following specified items: impairment losses of $86 million, litigation expenses of $35 million, and provision for contracts of $15 million. Excluding specified items, expenses rose by 9% year-over-year. Compensation was up. This was primarily driven by variable compensation, which was in line with strong performance as well as salaries, which mainly reflected the annual salary increase. We continue to prudently manage headcount. To this end, FTE count in Canada has declined by 1.6% since Q1. Technology costs were higher. This was mainly due to a shift in investment portfolio mix, business growth, and amortization of prior year projects. Investments in technology allow us to improve the client experience and our efficiency by accelerating automation and simplifying our operations. Costs were also higher year-over-year for occupancy, marketing, and travel. As anticipated and mentioned on our last call, operating leverage was positive in Q4 at 4.3%. While positive operating leverage remains our objective, a slower revenue growth environment may make it difficult to achieve, especially in the first half of 2024. Similarly, we expect PTPP growth to be in the mid-single-digit range and skewed towards the second half of the year. In the current macro environment, we continue to be strategic in prioritizing and managing expenses. We remain focused on controlling costs as well as on balancing business growth and investments. As such, while expense growth may vary from quarter to quarter, we expect the trend to continue slowing down in 2024. Now turning to Slide 10. Non-trading net interest income in Q4 declined by $16 million, or 1% sequentially. In P&C banking, NII increased by $20 million, benefiting from growth in both loans and deposits. For Financial Markets, non-trading NII was down $11 million, reflecting a payment recovery in Corporate Banking last quarter. NII was up $14 million at Credigy, benefiting from prepayment revenue and positive portfolio performance. At ABA, NII was up $5 million on balance sheet growth, partly offset by lower deposit margin. Lastly, in the Other segment, NII excluding trading, declined by $39 million. This reflected in part, strong performance from treasury in the prior quarter as well as lower NII from asset and liability management activities. As anticipated, the all bank non-trading NIM declined by 4 basis points sequentially. Strong performance in our business segments, including 2 basis points expansion from P&C banking, was offset by lower NII in the Other segment. Looking ahead, we expect the Other segment total revenues for 2024 to be relatively stable from 2023. We're pleased with our NIM expansion since the beginning of the rising rate cycle. Going forward, there may be some quarterly fluctuations of a few basis points up or down, but overall we expect the all bank non-trading NIM to be relatively stable, assuming no change in the Bank of Canada's target rate. Slide 11, highlights our balance sheet. Loans were up 9% year-over-year and 3% quarter-over-quarter. Growth was broad-based. Commercial loans grew 4% quarter-over-quarter, in part driven by opportunities in the residential insured segment. Sequentially, personal loans grew by 1%. Deposits, excluding wholesale funding, grew by 6% year-over-year and were relatively stable quarter-over-quarter. Sequentially, personal deposits rose by 1.5% with continued growth in term deposits across our retail businesses. Non-retail deposits declined by 1% sequentially. As you can see on Slide 12, we're starting 2024 from a robust liquidity position. Our liquidity coverage ratio was 155% and our net stable funding ratio was 118% at year-end, as we prudently and consistently operate at levels that are well above regulatory minimum requirements. As ruled by OSFI recently, cash ETFs will be reclassified as all sale deposits with a liquidity requirement of 100%. This will be effective January 31, 2024. At year-end, we held $13.6 billion of cash ETFs classified as non-retail deposits within Financial Markets. Taking a step back, it's worth noting that this product serves the needs of our retail investors and also complement our open architecture model. As such, we will continue to support the product. While there will be an impact on our liquidity metrics, we're starting off with peer-leading ratios and have been preparing for this potential outcome. Based on current assumption, we expect LCR at the end of Q1 to be around 140%. We are well positioned to absorb the new regulatory liquidity treatment for cash ETFs and will continue to be heading into the new year. As such, we do not expect changes to our term funding plan in 2024. Our core banking activities are well funded through diversified and resilient sources, while we remain disciplined around funding costs. As always, our objective is to grow the franchise, and we remain disciplined in managing our balance sheet, balancing growth, margin, and credit quality. And now turning to capital on Slide 13. Our CET1 ratio stands at 13.5%, unchanged from the previous quarter. Fourth quarter earnings net of dividend contributed 40 basis points to our ratio, underscoring our strong internal capital generation capacity. RWA growth represented 35 basis points of capital, primarily driven by solid growth in our commercial and corporate banking books, as well as rating migration from retail and non-retail portfolios. On November 1st, 2023, the Basel III reforms related to the fundamental review of the trading book and a revised credit valuation adjustment framework were adopted. This combined impact of these measures on the CET1 ratio as of November 1st falls within our previously announced range of 35 basis points to 40 basis points. On a related note, we do not expect to hit the capital-output floors in 2024. Our capital position is strong and will remain strong upon the reform implementation in Q1, 2024. It provides us with flexibility to deploy capital across our businesses. It also allows us to return capital to shareholders through sustainable dividend increases. In conclusion, the bank delivered a solid performance in Q4 and in 2023. Strong execution is supported by a consistent and prudent approach across the bank. As we enter 2024 with lingering macro uncertainty, our diversified business mix, our continued cost discipline, and our strong capital and liquidity levels position us well to achieve our financial objectives. I will now turn the call over to Bill.
William Bonnell: Merci, Marie Chantal, and good morning, everyone. I'll start on Slide 15, looking back at our credit performance over the full year. Throughout 2023, the negative effects of higher interest rates, elevated inflation, and geopolitical events impacted the Canadian economy and slowed growth. Unemployment rates rose but remained close to historically low levels, and demographic trends provided support to housing demand. Against this macro context, the performance of our credit portfolios was strong, benefiting from our defensive positioning and disciplined risk management. As expected, impaired PCLs rose from their 2022 trough to reach 11 basis points. This was at the low end of our target range and remained well below pre-pandemic levels. We took 8 basis points of performing provisions as we prudently built additional allowances. Including POCI impacts, our total PCLs for the full year were 18 basis points. Looking now at the fourth quarter. Total provisions of $115 million or 21 basis points were 1 basis point higher than last quarter. For the sixth consecutive quarter, we prudently built our performing allowances taking 9 basis points of performing PCLs. The primary drivers of performing provisions this quarter were portfolio growth, migration, and model calibration. Provisions on impaired loans of $88 million, or 16 basis points, were also 1 basis point higher quarter-over-quarter and reflected the same trends we discussed on previous calls. In our domestic retail portfolios, normalization continued towards pre-pandemic levels, led by credit cards. In our non-retail portfolios, impaired provisions were taken on a few files, primarily in the wholesale trade and healthcare sectors. In the USSF&I segment, performance continued to meet our expectations. At Credigy, normal seasoning of acquired portfolios generated an increase in Stage 3 provisions. At ABA, Stage 3 provisions declined slightly quarter-over-quarter, but remained elevated as we expected. Given the macro context in the Cambodian economy that Laurent mentioned, with softer external demand and a slower recovery in tourism, we expect ABA's impaired provisions to remain elevated for several quarters. I should note here that ABA's loans remain well collateralized with low LTVs, and that net charge-off rates remain low and below our prudent level of impaired provisioning. Now, looking ahead at next year. In 2024, we expect the impacts of higher borrowing costs to continue to work their way through the economy, leading to lower GDP growth and higher levels of unemployment. In our domestic portfolios, this should bring a return to pre-pandemic levels of credit provisions with unsecured portfolios in retail banking and consumer discretionary sectors in wholesale banking normalizing more quickly. At Credigy, we expect provisions to be primarily driven by portfolio growth and mix. At ABA, we expect provisions to remain elevated and net charge-off rates to remain low. At the total bank level, our outlook for impaired PCLs in fiscal 2024 is a range between 15 basis points to 25 basis points. If current trends continue, we should end up around the middle part of that range. Turning now to Slide 16. With the additional build in the fourth quarter, our total allowances grew to almost $1.4 billion, representing 8.7 times coverage of our last 12 months' net charge-offs. Our performing allowances grew 6% quarter-over-quarter to reach almost $1.1 billion. The performing ACL now exceeds the peak pandemic level and represents 4.4 times 2023's impaired PCLs. In the appendix on Slide 32, we provide additional metrics about our allowances, and we remain very comfortable with the prudent level we've built. Turning to Slide 17. Our gross impaired loan ratio rose 4 basis points sequentially and 6 basis points from the end of last year, driven largely by the USSF&I segment. Currency fluctuations accounted for almost a third of the sequential increase. In our domestic segments, gross impaired loans were relatively stable at 31 basis points, rising only 1 basis point from last year. Net formations increased to $172 million last quarter. In retail portfolios, the normalization trend continued, and our non-retail portfolio saw a few formations primarily in agriculture and wholesale trade. Formations at Credigy were stable quarter-over-quarter and reflected the normal seasoning of acquired portfolios. At ABA, formations remained elevated at $65 million, up $14 million in Canadian dollars. On a constant currency basis, ABA's formations decreased by $6 million quarter-over-quarter. On Slide 18, we present highlights from our Canadian RESL portfolio. The geographic and product mix remained stable, with Quebec accounting for 55%, and insured mortgages accounting for 29% of total RESL. Average LTVs for HELOC and uninsured mortgages remained in the low- to mid-50s and high-risk uninsured borrowers represented less than 50 basis points of total RESL. Additional details on our Canadian mortgage portfolio are presented on Slide 19. About half of our mortgage portfolio has already been repriced to the higher interest rates we've seen over the past 12 months, and clients have continued to demonstrate their resilience. In both variable-rate and fixed-rate uninsured mortgages, early-stage delinquency rates are normalizing but remain below pre-pandemic levels, and 90-day delinquency rates remain less than half of pre-pandemic levels. As we discussed last quarter, early-stage delinquencies on insured variable rate mortgages have increased at the fastest rate in the RESL portfolio, and we're seeing regional differences continue to emerge. We've provided the maturity profile of our fixed-rate mortgages over the next three years. We take comfort in the high percentage of insured, the overweight in Quebec, and the low LTVs. In the appendices, you'll find further information on our loan portfolio and market risks. In conclusion, we are pleased with the credit performance again this year and remain very comfortable with our defensive positioning, our resilient mix, and our prudent level of allowances. And with that, I'll turn it back to the operator for the Q&A.
Operator: Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman: Hi. Good afternoon. Marie Chantal, you mentioned that the capital floor will not be binding in 2024, but based on the new disclosure, it looks like it might be an issue in 2025. I was wondering if you could comment on the outlook for 2025 when it comes to the capital floor.
Marie Chantal Gingras: Hi, there. Thank you for the question. So our base case to date is not to have an impact before 2026. But as you know, there are many moving parts. But to date, Meny, we're comfortable with the 2026 impact for the floor and definitely, nothing in 2024.
Meny Grauman: Thanks for that. And then second question, I think it's for Laurent. Thank you for providing a little bit of guidance in terms of what to expect for financial markets with the tax changes. But I'm wondering if you could give us a little bit more detail in terms of sizing the impact in terms of dollars and what you expect that impact to be from the dividend tax change.
Laurent Ferreira: Absolutely. But I'll pass the question to Etienne, Meny.
Etienne Dubuc: Yeah. Thanks for the question, Meny. So, like Laurent said, our expectation is to achieve year-over-year net income growth in Financial Markets in 2024. I think when you take a step back, what we've built over the years is a strong and diversified global markets franchise, and our equity businesses in particular are client-focused domestic leaders, and they're all performing very well. So I don't foresee any significant modification in strategy or deployment because of this tax change. When you look at the amount of Canadian dividends that's fluctuated over the years based on market activity and client demand for equity products on Canadian shares, and the tax benefit we were receiving was incidental to those client businesses. We also think a change like that will have other impacts on the markets that we think we are well positioned to exploit because of the nimble way that we deploy capital because we don't have silos between products and asset classes. So we believe we'll see a lot of new business opportunities in the global capital markets in 2024. And like I said, our expectation is to achieve positive net income growth in Financial Markets.
Meny Grauman: Maybe just a follow-up on that. I mean, in the market, one way that people are looking at this issue is looking at the T number for you was 165 in Q4. Is that number going to change materially when these tax rules get implemented?
Etienne Dubuc: Yeah. That number will go down, although it will be less than that -- less than half of that number will be impacted.
Meny Grauman: Great. Thanks so much.
Operator: Thank you. The following question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.
Nigel D'Souza: Thank you. Good morning. I wanted to follow up on the additional disclosure you had on your mortgage portfolio on Slide 19. On the variable mortgage book, any color you could provide on the LTVs for that portfolio and what you're seeing in terms of the subset of customers that are, I guess, under the most financial stress in terms of absorbing the payment increases? And then similar for the fixed uninsured that are separate renewal. I think you note that about 18% have an LTV above 70%. So any color there on what vintage that would be? Is that all -- is that predominantly mortgages originated after 2020?
William Bonnell: Hi, Nigel. It's Bill. I'll take that and start off. I think I captured most of your questions. On the first part about variable rate mortgages, you'll see in the top part of the chart we provide some additional details. And I think the takeaway from that is, as you know, our variable rate mortgage product, the monthly payment has changed every time the rates have changed. And so, the borrowers have seen and absorbed the impact of those rates change. And we call out here on this slide, the average payment increase was around 65% for the variable-rate mortgages. And that methodology, it's a pretty simple methodology we looked at from the very beginning of Q2, from the time that rates started to increase. And if it had been a customer that actually was originated in 2018 or 2019, we're not comparing that to the higher origination rate. We're actually looking from the trough to current rate. So a little bit of conservatism in that. But what we're seeing with the impact is the clients have been able to absorb the effect of that. You've seen and we've talked about the early-stage delinquencies in variable rate mortgages. Uninsured variable-rate mortgages have risen faster in the RESL book than fixed-rate. However, they remain below pre-pandemic levels. And late-stage delinquencies in those insured variable rates are well below pre-pandemic levels. In the insured variable rate mortgage space, where clients had less of a down payment, the impact has been larger. And that is where we've seen the delinquency levels reach the pre-pandemic early-stage and link pandemic levels and with some regional differences. Now, step back to answer, I think, the second part of your question, for those customers, we have outreach and we've got ability to -- clients have optionality from the equity that they have in their homes. And maybe Lucy, if you want to comment about how we work with those clients.
Lucie Blanchet: Yes. Thank you, Bill. So we've been, I would say, very proactive from the beginning and we continue to be with our customers that are renewing well ahead of their maturity date. So what we get from reactions so far from the customers are very positive. And it ranges -- mostly it ranges from we are okay, we've managed, we've adjusted, and also to implementing a new systematic saving plan for them in the anticipation of what's coming forward in a year or two years from now. And for the customers facing hardship, we've offered the adapted solutions that is the best suited depending on each and every customer financial situation. And those are the one that we use normally in the normal course of business.
William Bonnell: And then maybe to close, Nigel, your question on the fixed-rate mortgages. So on the chart, you'll see at the bottom, we've shown the maturity profile of the fixed-rate mortgages. And you can see the percentage that are insured is very high. The percentage in Quebec is very high. And as you know, in Quebec, house prices have been lower, consumer leverage is lower, and there's more dual-income families, households. And so we're quite comfortable and confident with the performance of the fixed-rate mortgages when they come to renewal as well.
Nigel D'Souza: Great. And just a minor follow-up here, I think you touched on it. For the customers that do have equity in their home, are you seeing more action taken to sell properties and realize that equity in order to avoid stress on renewal? Any trends you could highlight on how -- other than prepayments, how are individuals handling the upcoming renewal increase?
Etienne Dubuc: Maybe I'll start off and then let Lucy, but I think it's important to just repeat even the early-stage delinquencies. The late-stage delinquencies, so impairments are well, well below that demonstrates the resilience in the consumers. Remember, incomes have also gone up. Liquidity is higher than pre-pandemic. So the impairments and late-stage delinquencies are significantly below pre-pandemic levels. And early-stage delinquencies, even for the variable rate uninsured, are below pre-pandemic and they're well below pre-pandemic for the fixed-rate mortgages as well. But Lucie?
Lucie Blanchet: Yeah. And specifically on what you pointed out, we've been looking at those trends from the beginning of the rate increases and we have not seen any material increase in refinancing requests from our customers.
Nigel D'Souza: Okay. I'll leave it there. That's it for me. Thank you.
Operator: Thank you. The following question is from Doug Young from Desjardin Capital Markets. Please go ahead.
Doug Young: Hi. Good morning. Just maybe on the CET1 ratio, I noticed the RWA impact was a little bigger than we would have anticipated. I think there was about 14 basis point negative impact from credit migration. So Bill, I don't know if you can talk about, what's driving that, what are you seeing? Is that linked in to any particular area within your portfolio?
Marie Chantal Gingras: Hi. Yeah. Thanks for the question. It's Marie Chantal. When you look at the credit migration, I'd say that the mass proportion of it comes from annual reviews from our non-retail book mostly, so maybe three quarters of it and the rest from the retail book.
Doug Young: Okay. Is this -- and this is typically an annual review that you do or is this like -- I'm trying to get a sense of what type of drag, I can kind of guess what I think the organic growth will be impact on the CET1 ratio and then trying to build in something for a negative migration. Is this an outsized quarter? Is this something that you foresee? I know Bill talked about the expected impaired PCL for fiscal '24. Just trying to get a sense of how we should think of a negative impact on a CET1 ratio from migration.
William Bonnell: Sure, Doug, I can comment. I think it's going to be difficult to have an exact number, but just in context on the retail portfolio, as consumer behavior changes, so the message is delinquencies are and they're expected to continue to rise towards pre-pandemic levels that by nature will drive migration on the retail portfolios in the capital. For the non-retail portfolios, just a macro outlook is driven by GDP growth in the economy as the interest rates increases work their way through the economy. So hard to predict a number. But as you can imagine in this context, with a slowdown in GDP, the watch list has increased and we expect that there'll be continued negative migration going into 2024. But very difficult to put a number on and it depends on where interest rates and GDP growth is.
Doug Young: No, it's fair. Fair enough.
William Bonnell: And in the context, one other comment I guess I'd make. In the -- when we think about a slowdown and changes as consumers adjust to changes in interest rates, we would expect the first sectors to be hit would be around the consumer discretionary. And when you look at which sectors those are, they're pretty close to -- if you remember, during the beginning of the pandemic, the pandemic impacted sectors consumer discretionary. And we were relatively underweight in those sectors. So I can give you some additional help, guidance.
Doug Young: Okay. And then if I look at Canadian banking pre-tax pre-provision earnings, I've got it being flat year-over-year. And to be fair, I don't do the annual adjustment that you guys do when you go back and you take some of the expenses out of the divisions and throw them in corporate. So I'm just looking at it without that adjustment. And so I'm just trying to get a sense of is there anything like in terms of unusual this quarter from expenses because it looked like the NIM trajectory was good, loan growth was fine. Just trying to understand, what some of the driver of that might have been.
Marie Chantal Gingras: So just to be clear, you're looking at the P&C segment, right?
Doug Young: Sorry, yes, the banking, sorry.
Marie Chantal Gingras: Yeah. Okay.
Doug Young: I have a lot of things going around in my head right now. So yeah, that's correct.
Marie Chantal Gingras: Yeah. No problem.
Lucie Blanchet: On expenses?
Marie Chantal Gingras: Yeah. So in expenses, so growth was coming broadly more from salary increase, as I mentioned, and increase in technology due to our investments in projects. I think that was my comment, is also very applicable to P&C, but I don't know if Lucie, you want to give maybe just a bit more color on the segment.
Lucie Blanchet: Yeah. Thank you, Marie Chantal. So in terms of expenses, IT and amortization is really the, let's say, the most important increase. We've been very diligent in managing our headcount, but obviously, higher compensation and employee benefit is also the second aspect of it. And obviously, volume-driven expenses that just follow the revenue growth. So basically this is what happened. Does that answer your question?
Doug Young: Yeah. No, maybe I could follow up. I mean just -- I'll follow up offline. I guess maybe just lastly, on expenses in general, and national has been more of the bank that there has never been a big difference between reported and cash. This quarter was very different. There's a number of different adjustments and you've laid them out in your sip. I guess where my question is going is this an abnormal quarter? Are things changing? And more specifically, I don't see a restructuring charge in here. And it sounds like the environment that you're expecting from a revenue perspective is going to get a little bit more tough. Is there considerations to maybe making more drastic changes to reign and expense growth?
Marie Chantal Gingras: So I can take that and give a little bit more color on the expense. So in terms of -- we've been very clear last quarter, first of all, in terms of charge, that it's not something that we were considering. And as we're entering 2024, we still have the right -- the same mindset. So we've been very proactive in managing expenses early in 2023, and this will continue in 2024. Lucie mentioned we've been managing headcount and you saw on our slides a decrease of 1.6% since the beginning of the year. So that strategy will not change. We will remain very focused, and we're not expecting any charge next year. That said, we did add some specified items that you've alluded to in this quarter that are very specific in terms of impairment on intangibles that are mostly affecting our P&C segment. So I think that those are very non-recurrent items that you won't be expecting in the next couple of quarters.
Doug Young: And is there savings? Like, is there savings that you're anticipating out of that? Have you quantified that?
Marie Chantal Gingras: Yeah. There will be savings coming out of those impairment losses. So you can expect total bank non-interest expenses to reduce by approximately 0.5% next year coming out of those specified items. And they're mostly attributable to the P&C segment.
Doug Young: Thank you.
Operator: Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca: Afternoon. Just a couple of quick questions. Last quarter, you highlighted that fundamentally the trading book would reduce the CET1 by 35 to 40. Is that still guidance we can rely on?
Marie Chantal Gingras: It is still the guidance that we've mentioned in our remarks. Yeah.
Mario Mendonca: Okay. The other thing -- like I understand your point about the change in Canadian tax -- the taxation of Canadian dividends. I understand that what you're offering us here. Could you help me understand how that gets reflected in the income statement? Is it just in the form of higher taxes or will we see revenue impacted? Can you help me understand that?
Marie Chantal Gingras: Yes. So if you look at the proposed dividend tax measure on a solely basis, it will definitely have an impact on our effective tax rate. So, yes, you can expect an increase on the effective tax rate for next year. But then again, as Etienne mentioned, going forward for the financial market business, we still do expect net income increase in 2024.
Mario Mendonca: But on a total bank basis, what are we looking at, 100 basis points or so? Or is there anything you can offer to help us think that through?
Marie Chantal Gingras: I don't -- it's not a number that you -- we can give because we're -- the tax rate will increase, but the business mix in financial market will compensate some of that.
Etienne Dubuc: And Mario, it's Etienne. When you consider how dynamically we allocate capital across opportunities, it's difficult to compare from year to year and do everything being equal because we'll be allocating maybe differently.
Mario Mendonca: Okay. So the tax rate moves up a little bit, but how about just the trading number? Is the trading number going to be impacted by this at all?
Etienne Dubuc: Well, all else being equal, it would be impacted marginally down on the equity side, yes.
Mario Mendonca: Thanks very much. Appreciate your help.
Operator: Thank you. Our following question is from Mike Rizvanovic from KBW Research. Please go ahead.
Mike Rizvanovic: Hi. Good afternoon. I wanted to ask about ABA Bank. And so, specifically when I look back at previous downturns, just going back to the GFC, not to suggest that that's ahead of us now, but there were a couple of years where ABA Bank, based on the regulatory data that I've seen, actually lost money. I think it was 2009, 2010. Correct me if I'm wrong. Back then it was a much smaller loan portfolio relative to the Cambodia economy. It's a lot bigger now. And when I look at the recent trends, what's really catching my eye is that your non-performing loans, as a percentage of your loans in ABA Bank has basically quadrupled over about seven or eight quarters. It had been running below 1%, and now it's at 3.5%. And so it makes me wonder how you could grow your loans here by 23% year-over-year and still have a positive view on, expanding that balance sheet when it does seem like you're getting a little bit more stress points here. And by no means am I an expert in Cambodia, so correct me if I'm seeing things incorrectly here, but it does seem like there's some potential risk here on whether it's the tourism dynamic coming off a bit, and I think a construction boom that's been pretty healthy starting to come off here. So I'd love to get some more color on that, why you don't see risk here and why you're able to continue with this rapid pace of growth.
William Bonnell: Thanks, Mike. It's Bill. I'll start off, and maybe Stephane will have some addition. So I think just on your first point, back in 2008, 2009, completely different bank ownership, business model. So I wouldn't take -- I wouldn't look for any insights from that old, old data. Very different. And then on the current -- the growth in the gross impaired loans, there were two parts of the history on that over the last few years. And if you remember, as we were coming out of the pandemic in Canada, the pandemic moratoriums ended much earlier than the moratoriums ended in Cambodia. And we called that out in 2022 that we expected, as the moratoriums ended, we would have a peak in formations towards the end of '22. And that did play out, and the performance was pretty close to what we had expected through that. And going into 2020, in the second and third quarter, what we spoke about was the context, the drivers were different of gross impaired loans in that the macroeconomic situation had changed with the recovery in tourism not being as strong, softer external demand that impacting the Cambodian economy. So that was driving and that's what we've been speaking about of the growth in impaired loans through 2023. We did call out last quarter, and this quarter as well, we expect the impaired loans and formations to remain elevated, however, at a macro context, difficult to predict over the next 12 months to 24 months, as you'll see, as expressed in the bond markets and there is some optimism that there will be a very soft landing. And when we speak about external demand for the Cambodian economy, you're thinking U.S. exports, exports to Europe. So depending on your optimism on the macro picture, that would impact the speed of the recovery in Cambodia. The second point that I'll make is that different than Canada, the impaired loans stay on the books longer. So the process of going through the process to end resolution is not as quick as it is in Canada. So that's why we expect formations to remain elevated. The gross impaired loans don't exit as quickly. So the gross impaired loans will continue -- we expect them to continue to grow. You'll see that in the numbers that we report, there is quite a significant foreign exchange impact as well. So on constant dollars, the growth was not as high. I think foreign exchange, as I mentioned, was almost the quarter-over-quarter impact. And then the last thing I'll point you to which I think is helpful is on Slide 32, where we give more details of our allowances. You'll see on the bottom left, we've provided additional disclosure. This was already in the SFI, but we just condensed it for you so you can see it more clearly. But we have wanted to be quite prudent in our provisioning and allowances in ABA because we haven't been through many cycles, and we -- so the uncertainty level is higher and therefore management overlays are higher. And what you can see from that bottom left table on Slide 32 is from the beginning of IFRS 9, we have very prudently built performing provisions. So you'll see from 2019, 2018 as well, had a significant build in performing allowances. You can also see on Slide 32 at the bottom that net charge-off rates have remained low. And that's really driven by the fact that the book is very secured, 98% secured with low LTVs. We've talked about mid-40s LTVs. So even though the loans remain in that impaired category for a long time, in the end when they came out the charge-off, the actual losses have been very, very low. And in my prepared remarks, I commented, we expect that charge-off rate to remain low. And you can also see the prudency in our impaired PCLs that are significantly above the charge-off rate. So that was long-winded, but I hope it answered part of your question. I'll hand it over to Stephane.
Stephane Achard: I'll be very quick, Mike, just to say as well, if you go back to our book over the years, it started very much in a retail trade environment as such was the nature of the Cambodian economy. It has evolved substantially. Light manufacturing has grown agriculture. So if you look at our top seven industries in the portfolio, they account for about 87% of the book. I mean, it's very diversified, and actually on a year-over-over basis, the industries that have grown the most are industries that keep on doing well manufacturing, wholesale trade, agriculture, and so forth. And last quarter, where East Asia has had issues, and much less so in Cambodia, has been construction and real estate. And we actually, reduced exposure in construction last quarter.
Mike Rizvanovic: Okay. That is extremely helpful from both of you. Thank you very much for that. Just one very quick follow-up. So should investors care about the level of leverage in the Cambodia economy? So if you just take the banking sector assets as a percentage of GDP, is that something that should be of concern just given how it's trended?
Stephane Achard: I don't think so. Honestly, we've seen the liquidity of individual consumers reduced over the last year, reflecting, a bit of some leverage in the industry. But certainly, the ability that we've shown in raising deposits and loans on both sides showed there's still, interesting opportunities. And you've only got 13% of Cambodians that actually have credit facilities. So we've got the ability to pick and choose our clients well within that, that market. I wouldn't talk for the other banks, but in our case, it's not something we're seeing now. And the low LTV at 40% shows it.
Mike Rizvanovic: Okay. Thank you for the color. Appreciate it.
Operator: Thank you. The following question is from Lemar Persaud from Cormark Securities. Please go ahead.
Lemar Persaud: Thanks. This is probably for Marie Chantal, still above the minimum LCR ratio despite the change in treatment for cash products. And you mentioned it doesn't change your term funding approach. Now, does that current term funding approach already include building back the LCR to the, I guess kind of 145% to 150% range we saw throughout 2023? Or should we assume you're comfortable in the 140% range?
Marie Chantal Gingras: No. We're -- second portion of your question, we're comfortable at the 140% range. We always target to have peer-leading LCR comfortably above regulatory requirements, and we're heading into the new year with 140% is a range which we were comfortable with.
Lemar Persaud: Okay. And then like what is a scenario where you guys would feel like there's a need to move back into the kind of 145% to 150% range? Like, what's that scenario look like where you want to move back into that?
Marie Chantal Gingras: Well, it's actually not a scenario we're considering at the moment. As I said, we're very comfortable with the 140%. I don't see something that would pressure us to be at a higher level than that.
Lemar Persaud: So it wouldn't be like if there was a more hard landing situation that you would feel like you would need at that time to build it back up into the 145% to 150% range. That's just not a reasonable assumption. You feel like the 140% is good enough and -- regardless of what happens. Is that fair?
Marie Chantal Gingras: Well, it's good enough at the moment with what we know. So if something changes materially, we'll -- certainly, we'll be flexible and agile, but at the moment we're very comfortable with 140%.
Lemar Persaud: Okay. Okay. That's it for me. Just a really quick one. Thank you.
Marie Chantal Gingras: Thank you, Lemar.
Operator: Thank you. A following question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Darko Mihelic: Hi. Thank you. And I appreciate we're running up against time here. So I'll try and be very quick. My questions are all aimed at Etienne. You've got a lot coming at you next year from LCR to FRTB to dividend, and even at some point, there was an alluded -- earlier we alluded to relatively heavy capital of corporate lending going forward. And so while I appreciate that net income, you're hoping you get it to grow next year. The question I have is more a strategic one, actually, and I think of it as like when I look at your supplemental, essentially we had 20% growth in average assets, in Q4. When I look at that versus last year, you've had a lot of growth in corporate loans. And the question Etienne is when you're managing for an acceptable return in this business with all of these things changing, why is it that there aren't going to be some strategic changes to your business model in 2024 and 2025? Or are there you're just not sharing them right now?
Etienne Dubuc: Thanks for the question, Darko. These are some great observations, and you're right that there are some movements over time in average assets in balance sheet. I think what you see there is a function of our capital allocation model where we're very nimble in allocating to the best opportunities. And that often means moving relief not only from different asset classes but also from types of trades. So for example, what you often see in that movement, if you go from a securities for securities trade to a cash for securities trade, that would show up as an increase in securities and balance sheet, even though the risk profiles are pretty much the same. So we like to move dynamically across these types of trades to capture the best spreads. This is really aligned with our strategy of leveraging our expertise in liquid, short-term secured funding trade. Like, overall, if we take a step back and think about the outlook, we're really cautiously optimistic on this year's outlook. And like Laurent said, and I said previously, targeting positive net income growth for 2024, I think there's a lot to like in the current setup with the softening of the hawkish tone from global central banks, you could see a big tailwind there for markets and client activity. In particular, retail structure products could really benefit from decreases in rates and an equity rally. And on the rate side, we expect activity to continue to be elevated in the coming months. I mean, the volatility in rates has brought a lot of hedging to the forefront of our clients' priorities. So that pipeline continues to look good. On the government's debt side, we expect domestic supply to continue rising as borrowers increase their programs. And on the investment banking side, we continue to like our M&A pipeline and it's well diversified across sectors and there's a lot of dry powder on the sideline right now. And we see many well-capitalized firms potentially seeking growth through acquisition. So -- and you mentioned credit portfolio, credit remains sound. Over the last few quarter we've seen a material increase drawings and they will likely remain high, and that's driven with many factors, including unfavorable capital markets conditions. But we really see a ramp-up in corporate debt activity in 2024. There's a big maturity wall spike that's coming and another potential tailwind would be a reopening of the equity markets. It could get really busy really fast in ECM. There is lots of cash on the sidelines. So yeah, I think we feel good about the outlook and are confident that our strategy of being agile and allocating capital dynamically towards the best opportunities is still the right one.
Darko Mihelic: Okay. Great. Thank you very much for that.
Operator: Thank you. [Operator Instructions] Following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Sohrab Movahedi: Okay. Thank you. I just wanted to clarify, I think something Marie Chantal, you said it in your prepared remarks, I just wanted to make sure I heard it properly. When we look at the Corporate or the Corporate/Other segment, I think you provided some commentary as to what you would likely expect the performance of that segment to be next year. And I wasn't sure if you said it would be more or less the same sort of net income drag that it was this year or if it would be less or more. Can you just please clarify?
Marie Chantal Gingras: Yeah. So what I said -- Sohrab, thank you, it was going to be relatively stable from 2023, so flat.
Sohrab Movahedi: And I guess you're saying that both on a -- whether it's on a reported or on a bit of an adjusted basis, there's a small difference given some of this stuff. But basically, you're saying 2023 was around $270 million, let's say, split the difference drag and it should be around that sort of a level next year.
Marie Chantal Gingras: Yes. And the guidance, Sohrab, just to make sure, was on the revenue line.
Sohrab Movahedi: What about the net income? What about the after-tax line?
Marie Chantal Gingras: The -- in terms of after-tax, maybe the one aspect that I could maybe be more precise is the impact of variable compensation that could be different year-over-year because of the -- it's in the Other segment. So it's hard to tell at this point in time, but it could vary up or down. But mostly what we're guiding on is the revenue portion of the Other segment that's going to be stable year-over-year.
Sohrab Movahedi: Okay. And maybe just, Bill, I can take this offline, but if it's got a quick answer. I think earlier, you and, I think, Lucie, that you tag teamed a fairly comprehensive explanation of consumer behavior when it comes to refi activity and renewals and so on and so forth. I just wanted to get a sense, is that consistent across the country, or would you say there are regional differences in that consumer behavior?
William Bonnell: Thanks and happy to take as -- have an offline call with you, Sohrab, because my answers haven't been very short today. So I'll start off. When I called out the regional differences, I called out in a couple of places. It's the rate of normalization that we've seen in retail, in RESL and the unsecured. And that the -- as we expected, given the resilience of the Quebec economy, the lower levels of leverage, the normalization back to pre-pandemic delinquencies has been slower in Quebec than outside. And so that's what I was referring to. In terms of -- maybe I'll hand it -- we'll tag team again, Lucie and I, in terms of consumer behavior on refi.
Lucie Blanchet: But just overall in terms of consumer behavior, I think what we're seeing is really an important resilience of the consumer. Because when we look at the behavior, facing inflation, really paying a higher debt loan, you can see that because the -- let's say, for example, the non-amortizing HELOC, the balances are decreasing. Lines of credit, the balances are decreasing, the lines are also decreasing. And on credit card, when we look at the portfolio growth, the revolving balances are not going at the same pace, they are lagging. And we still see elevated payments across the board. And also the utilization rate is below pre-pandemic. And we see also if I can give you more color, because we look a lot at the spend, obviously on credit card and 2023 was record years in terms of spend, but Q-over-Q in Q4, we see an important deceleration in purchase volume, which is the biggest I've seen in many years. So we see a consumer that is adjusting, definitely. And again, I think it just shows of the resiliency of the consumer right now.
Sohrab Movahedi: And Lucie, just for crystal clarity, you're saying that consumer, whether it's sitting in Western Canada, Quebec or Ontario, you're not seeing a distinct behavior in that consumer behavior. It would be relatively uniform across the country.
Lucie Blanchet: Yes. But -- let's see, our credit card portfolio, about 85% of it is in Quebec. So I wouldn't really skewed my answer to the Quebec population, as I really want to make sure that we have enough volume to be statistically good into those trends, if you see what I mean.
Sohrab Movahedi: Yeah. I understand. Thank you very much for -- and thanks for squeezing me, and I know you've gone over time.
Operator: Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Ferreira.
Laurent Ferreira: Thank you, operator. And I'd like to take the opportunity to thank all the analysts covering us, shareholders, clients, employees for your continued support, and like to wish you everyone a happy holidays.
Operator: Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.
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