National Bank of Canada is better positioned than many of its larger rivals to navigate a downturn that’s poised to hit banks’ balance sheets and customers, according to chief executive Laurent Ferreira.

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Many of the firm’s clients with fixed-rate mortgages — accounting for about two-thirds of its home-loan book — will soon face a harsh “new reality,” Ferreira said Sept. 21.

About 85 per cent will need to renew those loans — which haven’t yet been affected by higher interest rates — in 2024 through 2026, said Ferreira, who became CEO two years ago.

Canada’s sixth-biggest bank is trying to prepare them for the shock, he said, noting that clients with variable-rate loans that increase along with interest rates have already seen average monthly payments increase by $600 a month in Quebec and $1,200 in Ontario.

And they shouldn’t count on rates dropping any time soon, Ferreira said.

During a speech earlier in the day in the bank’s hometown of Montreal, he predicted inflation will remain sticky and that interest rates will stay high over the next year.

While revenue growth won’t come easily amid the economic turbulence, Ferreira said he thinks National Bank — which is similar to a United States super regional bank with its focus on the province of Quebec — will outperform bigger Canadian peers on several fronts.

Its “well-balanced” business is not concentrated in any particular sector, he said, and it has limited exposure to unsecured consumer debt — thanks to a smaller credit-card business. And while National Bank plans to curtail hiring to rein in expenses, Ferreira said it’s not considering painful job cuts like some of its competitors.

National Bank also has a large capital reserve — its CET1 ratio is 13.5 per cent, well over the 11.5 per cent mandated by regulators — and Ferreira sees room to grow in wealth management and commercial loans outside of Quebec. To that end, it recently picked up Silicon Valley Bank’s Canadian assets, including $1 billion in loans and 100 new clients.

But he won’t spend that money indiscriminately. Smaller rival Laurentian Bank, which concluded a strategic review last week without finding a buyer, wasn’t a good fit, Ferreira said.

“We have a leadership position in Quebec and it wasn’t on strategy for us,” he said.

Trudeau government

Last week, Prime Minister Justin Trudeau said the federal government would cut its portion of the sales tax on rental construction to help address the housing shortage and rising costs.

“It should be done for all residential construction,” Ferreira said during the speech in Montreal. “Builders are the ones feeling the uncertainty.”

He lamented that regulations and permits can spread construction starts over four years in Canada.

Stefane Marion, the bank’s chief economist, called inflation a “social cancer” and also took aim at the Trudeau government’s desire to increase immigration after Canada’s population grew by one million in 2022. Population growth can only be inflationary, Marion said, “because of the inability to absorb the flow.”

To spur growth, Ferreira added that capital investment should be directed toward exploiting and transforming natural resources, rather than deploying billions of dollars in subsidies to attract foreign companies, as governments do with EV batteries.

“In the long term, I don’t think it’s a good idea to tax Canadian companies more and give subsidies to Stellantis and Volkswagen,” he said.

Bloomberg.com