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

Disclaimer Stress Testing After the US Election 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 investor’s 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

Messages over the Years 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

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

United States of America National Debt Since 2008. . . Since 2008. . . Year Total National Debt December, 2008 10.7 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 Stress Testing After the US Election

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

Will there be effective Fiscal Policy? Monetary Stimulus Federal Reserve European Central Bank 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 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 Will there be effective Fiscal Policy? Stress Testing After the US Election

Economic Probabilities Inflation Deflation Stagflation Stress Testing After the US Election

C&I Loans – USA Commercial Banks 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 2007 2008 2009 2010 2011 2012 NBFG Economy & Strategy Stress Testing After the US Election

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

Financial Stress in the USA 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 -1.0 -1.5 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 NBFG Economy & Strategy Stress Testing After the US Election

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

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

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

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

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

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

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

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

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

PIMCO – Near Term 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 Stress Testing After the US Election

Current to 30 Transition Rate by Vintage PIMCO, CoreLogic: Sept 20/12 Stress Testing After the US Election

Key Themes: PIMCO 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 Stress Testing After the US Election

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

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

Canadian Housing Affordability * 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

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

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

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

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

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

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

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

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

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

Summary Audit Stress Testing Corporate Balance Sheets Green US Housing Recovery Yellow US Auto Industry Yellow US Dollar Yellow US Employment Yellow Audit US Currency Volatility Interest Rates Global Problems (Greece, France, Japan/China, Israel) Stress Testing Stress Testing After the US Election

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