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PRIMA Stress Testing for Financial Institutions November 8, 2012 Presented by: Angus Watt Advisory Group Stress Testing After the US Election.

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Presentation on theme: "PRIMA Stress Testing for Financial Institutions November 8, 2012 Presented by: Angus Watt Advisory Group Stress Testing After the US Election."— Presentation transcript:

1 PRIMA Stress Testing for Financial Institutions November 8, 2012 Presented by: Angus Watt Advisory Group Stress Testing After the US Election

2 National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada. The National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). ** The securities or sectors mentioned herein are not suitable for all types of investors. Please consult your investment advisor to verify whether the securities or sectors suit your investors profile as well as to obtain complete information, including the main risk factors, regarding those securities or sectors. *** The information contained herein has been prepared by Angus Watt, an Investment Advisor with National Bank Financial; the opinions expressed do not necessarily reflect those of National Bank Financial. **** While opinions expressed are based on analysis and interpretation of historical data believed to be accurate the underlying data is not necessarily guaranteed as to accuracy. Stress Testing After the US Election Disclaimer

3 Dr. Allard Top 3 Principles when Investing in Real Estate. True in business as well. We are addicted to oil We are addicted to growth Rex Tillerson, Chairman & CEO, Exxon Stress Testing After the US Election Messages over the Years

4 Market Size Global debt markets $72 trillionGlobal equity markets$47 trillionGlobal commodity markets $ 2 trillionUS Housing market $10-$12 trillionUS Economy/GDP$14.5 trillionUS Government Debt (Nov/12)$16.2 trillion Stress Testing After the US Election

5 Since 2008... YearTotal National Debt December, 200810.7 trillion December, 2009$12.3 trillion December, 2010$14.0 trillion December, 2011$15.2 trillion December, 2012 Estimate$16.4 trillion 2015 Estimate$19.0 trillion United States of America National Debt Since 2008...

6 Stress Testing After the US Election When Will Debt Ratios Peak? NBFG Economy & Strategy (data via International Monetary Fund, July 2012)

7 Monetary Stimulus Federal Reserve + Keeping interest rates at historically low levels + Increasing the amount of money available through QE by increasing money supply + Effective lowers the value of $US, increasing potential for inflation European Central Bank + Maintaining liquidity and low interest rates + Buying bonds with maturity > 3 years + Sterilizing: purchasing bonds of one security while selling another for a net neutral position Stress Testing After the US Election Will there be effective Fiscal Policy?

8 Inflation Deflation Stagflation Economic Probabilities Stress Testing After the US Election

9 C&I Loans – USA Commercial Banks NBFG Economy & Strategy 1,640 1,600 1,560 1,520 1,480 1,440 1,400 1,360 1,320 1,280 1,240 1,200 1,160 200720082009201020112012

10 Stress Testing After the US Election Profit Margins: Non-Financial Corporations NBFG Economy & Strategy

11 Stress Testing After the US Election Financial Stress in the USA NBFG Economy & Strategy 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.5 1994199619982000200220042006200820102012

12 Stress Testing After the US Election Leading Indicator: USA NBFG Economy & Strategy (data via ECRI)

13 Stress Testing After the US Election USA: Jobs NBFG Economy & Strategy

14 Stress Testing After the US Election USA: Consumers have deleveraged NBFG Economy & Strategy (data via Federal Reserve) Financial Obligation Ratio % %

15 Stress Testing After the US Election USA: Inventory of Unsold Homes on Resale Market NBFG Economy & Strategy

16 Stress Testing After the US Election USA: Home Resales NBFG Economy & Strategy

17 Stress Testing After the US Election USA: Home Prices on Resale Market NBFG Economy & Strategy % (y/y)

18 Source: Bureau of Census, US Commerce Department Stress Testing After the US Election US Housing Starts (Annual Rate)

19 ©2012 National Association of REALTORS® Stress Testing After the US Election US Housing Affordability

20 4.6% between 2009 and 2015 0% between 2000 and 2008 US Demographics remain positive ( Population 21-40 yrs) Source: NBF Economy & Strategy (data via Census Bureau) Stress Testing After the US Election US Housing

21 + Home prices are gradually increasing again...... but not as much as the headline numbers indicate + Delinquencies are dropping, and current loans are performing better + Credit is still very hard to get: many buyers are investors + New construction has been too low for years + Housing finance reform is difficult and will take a long time PIMCO – Near Term Stress Testing After the US Election

22 Current to 30 Transition Rate by Vintage PIMCO, CoreLogic: Sept 20/12

23 + 2-3 million foreclosures still need to take place; most are behind us + Recent originations are going delinquent at very low rates + Investors are buying more units and renting them out Key Themes: PIMCO Stress Testing After the US Election

24 Most Newly Forming Households: Rentals PIMCO, JCHS tabulations of US Census Bureau, Housing Vacancy Surveys Annual Change in Households (thousands) Annual Change in Households (thousands) Homeownership Rate %

25 Stress Testing After the US Election Canada: House Prices rose 5.4% in June on a YoY Basis House price composite index Teranet-National Bank and S&P House Price Composite Index, Canada and USA seasonally adjusted

26 *Based on 2012 Statistics Canada data, Median total income (all census families). **National Bank of Canada 5 Year Fixed Mortgage Rate of 3.99% ***Based on a 25% qualifying ratio for monthly housing expense to gross monthly income with a 20% down payment over 25 years. *Based on 2012 Statistics Canada data, Median total income (all census families). **National Bank of Canada 5 Year Fixed Mortgage Rate of 3.99% ***Based on a 25% qualifying ratio for monthly housing expense to gross monthly income with a 20% down payment over 25 years. Sources: Statistics Can 2012 CREA, July 2012 National Bank Financial Group 2012 Stress Testing After the US Election Canadian Housing Affordability

27 Stress Testing After the US Election USA: Auto Sales on the Rise NBFG Economy & Strategy (data via Bureau of Economic Analysis)

28 Stress Testing After the US Election USA: Vehicle Stock has Never Been as Old NBFG Economy & Strategy (data via Polk) Average Age (Years)

29 Stress Testing After the US Election USA: Outlook calls for Relatively Stable Consumption NBFC Economy & Strategy (data via US Energy Information Administration {EIA}) Total Energy Consumption: Actual and current EIA Forecast

30 Stress Testing After the US Election USA: It was Supposed to be Much Stronger than that! NBFG Economy & Strategy A comparison between the EIAs 2008 forecast and current forecast

31 Stress Testing After the US Election USA: Where is the Production Coming From? NBFG Economy & Strategy (data via EIA) Primary Energy Production

32 Stress Testing After the US Election USA: Key Imports are Falling NBFG Economy & Strategy (data via EIA) Imports of Natural Gas (monthly data) Imports of Natural Gas (monthly data)

33 Stress Testing After the US Election USA: Outlook for Energy Imports NBFG Economy & Strategy (data via EIA) A Comparison between EIAs 2008 forecast and current forecast

34 Stress Testing After the US Election World: A New World Order in 2012 NBFG Economy & Strategy (data via IMF) Share of World GDP

35 Stress Testing After the US Election World: Outlook for Energy Consumption NBFG Economy & Strategy (data via EIA) 770 Total Energy Demand

36 Summary Stress Testing After the US Election Corporate Balance SheetsGreen US Housing RecoveryYellow US Auto IndustryYellow US DollarYellow US EmploymentYellow Audit US Currency Volatility Interest Rates Global Problems (Greece, France, Japan/China, Israel) Stress Testing

37 Stress Testing After the US Election 780 412-6644 james_angus.watt@nbf.ca anguswatt.com


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