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

PRIMA

Stress Testing forFinancial

InstitutionsNovember 8, 2012

Presented by:

Angus Watt Advisory Group

Stress Testing After the Stress Testing After the US ElectionUS 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


DisclaimerDisclaimer



Messages over the YearsMessages over the Years

Market SizeMarket Size





Since 2008. . .

Year Total National Debt

December, 2008 10.7 trillion

December, 2009 $12.3 trillion



December, 2012 Estimate $16.4 trillion

2015 Estimate $19.0 trillion

United States of AmericaUnited States of America

National Debt Since 2008. . .



When Will Debt Ratios When Will Debt Ratios Peak?Peak?

NBFG Economy & Strategy (data via International Monetary Fund , July 2012)

Monetary StimulusMonetary StimulusFederal 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



Will there be effective Fiscal Policy?

Inflation

Deflation

Stagflation

Economic ProbabilitiesEconomic Probabilities





C&I Loans – USA C&I Loans – USA Commercial BanksCommercial 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

1,1602007 2008 2009 2010 2011

2012



Profit Margins: Non-Financial Profit Margins: Non-Financial CorporationsCorporations


16

15

14

13

12

11

10

9

8

7

61970 1975 1980 1985 1990 1995 2000 2005 2010



Financial Stress in the USAFinancial 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

-1.51994 1996 1998 2000 2002 2004 2006 2008 2010 2012



Leading Indicator: USALeading Indicator: USA

NBFG Economy & Strategy (data via ECRI)

2005 2006 2007 2008 2009 2010 2011 2012 2013

ECRI

148

144

140

136

132

128

124

120

116

112

108

104



USA: JobsUSA: Jobs




USA: Consumers have USA: Consumers have deleverageddeleveraged

NBFG Economy & Strategy (data via Federal Reserve)

19.2

18.8

18.4

18.0

17.6

17.2

16.8

16.4

16.0

15.6

15.280 82 84 86 88 90 92 94 96 9 8 0 0 0 2 04 06 08 10 12

Financial Obligation

Ratio

Financial Obligation

Ratio

%%



USA: Inventory of Unsold USA: Inventory of Unsold Homes on Resale MarketHomes on Resale Market


4.0

3.8

3.6

3.4

3.2

3.0

2.8

2.6

2.4

2.2

2.0

1.82 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2



USA: Home ResalesUSA: Home Resales




USA: Home Prices on USA: Home Prices on Resale MarketResale Market


2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

16

12

8

4

0

-4

-8

-12

-16

-20

20% (y/y)% (y/y)

Source: Bureau of Census, US Commerce Department



US Housing Starts US Housing Starts (Annual Rate)(Annual Rate)

0

500

1,000

1,500

2,000

2,500

3,000(Thousands)

©2012 National Association of REALTORS®

Stress Testing After the US ElectionStress Testing After the US Election

US Housing AffordabilityUS Housing Affordability

Year

Median Priced Existing Single Family Home

Mortgage Rate

Monthly P & I

Payment

Payment as % of Income

Median Family Income

Qualifying Income**

Affordability Index

Composite2009 172,100 5.14 751 14.8 61,082 36,048 169.42010 173,100 4.89 734 14.4 60,609 35,232 174.02011 166,200 4.67 687 13.6 61,455 32,976 174.6

2011 Aug 171,200 4.69 710 13.9 61,510 34,080 180.52011 Sep 165,400 4.51 671 13.2 61,526 32,208 191.02011 Oct 161,100 4.32 639 12.6 61,591 30,672 200.82011 Nov 164,000 4.33 652 12.9 61,545 31,296 196.72011 Dec 162,600 4.27 641 12.6 61,604 30,768 200.22012 Jan 154,600 4.37 617 12.1 61,558 29,616 207.92012 Feb 156,100 4.21 611 12.0 61,603 29,328 210.02012 Mar 165,100 3.96 628 12.4 61,637 30,144 204.52012 Apr 174,100 4.04 668 13.1 61,648 32,064 192.32012 May 180,200 3.92 682 13.4 61,666 32,736 188.42012 June 189,600 3.81 708 13.9 61,688 33,984 181.52012 July 188,600 3.78 701 13.6 61,708 33,648 183.42012 Aug 188,700 3.70 695 13.5 61,717 33,360 185.0

4.6% between 2009 and 2015

4.6% between 2009 and 2015

0% between 2000 and 2008

0% between 2000 and 2008

US Demographics remain positive (Population 21-40 yrs)

Source: NBF Economy & Strategy (data via Census Bureau)



US HousingUS Housing

+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 TermPIMCO – Near Term




Current to 30 Transition Rate Current to 30 Transition Rate by Vintageby Vintage

PIMCO, CoreLogic: Sept 20/12

+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: PIMCOKey Themes: PIMCO




Most Newly Forming Most Newly Forming Households: RentalsHouseholds: Rentals

PIMCO, JCHS tabulations of US Census Bureau, Housing Vacancy Surveys

Annual Change in Households(thousands)

Annual Change in Households(thousands)

Homeownership Rate %

Homeownership Rate %



Canada: House Prices rose Canada: House Prices rose 5.4% in June on a YoY Basis5.4% 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

House Price Composite Index, Canada and USA

seasonally adjusted

* 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 2012CREA, July 2012

National Bank Financial Group 2012



Canadian Housing Canadian Housing AffordabilityAffordability

Sep-12

Median Family

Income*

Median Priced Family

Home

Monthly P & I

Payment**

Payment as % of Income

Qualifying Income***

Affordability Index

Toronto $68,810 $503,662 $2,117 36.92% $101,616 67.72

Vancouver $67,090 $722,681 $3,038 54.34% $145,824 46.01

Calgary $89,490 $402,756 $1,693 22.70% $81,264 110.12

Edmonton $87,930 $323,803 $1,361 18.57% $65,328 134.60



USA: Auto Sales on the USA: Auto Sales on the RiseRise

NBFG Economy & Strategy (data via Bureau of Economic Analysis)

1980 1985 1990 1995 2000 2005 2010

22

21

20

19

18

17

16

15

14

1312

11

10

9

8



USA: Vehicle Stock has Never USA: Vehicle Stock has Never Been as OldBeen as Old

NBFG Economy & Strategy (data via Polk)

1941 1952 1960 1968 1976 1984 1991 1995 1999 2003 2007 2011

12

That is not the American dream !11

10

9

8

7

6

5

Average Age

(Years)

Average Age

(Years)



USA: Outlook calls for USA: Outlook calls for Relatively Stable ConsumptionRelatively Stable Consumption

NBFC Economy & Strategy (data via US Energy Information Administration {EIA})

Total Energy Consumption: Actual and

current EIA Forecast

Total Energy Consumption: Actual and

current EIA Forecast



USA: It was Supposed to be USA: It was Supposed to be Much Stronger than that!Much Stronger than that!


A comparison between the EIA’s 2008

forecast and current forecast

A comparison between the EIA’s 2008

forecast and current forecast



USA: Where is the Production USA: Where is the Production Coming From?Coming From?

NBFG Economy & Strategy (data via EIA)

Primary Energy Production

Primary Energy Production



USA: Key Imports are USA: Key Imports are FallingFalling


Imports of Natural Gas

(monthly data)

Imports of Natural Gas

(monthly data)



USA: Outlook for Energy USA: Outlook for Energy ImportsImports


A Comparison between EIA’s 2008 forecast and current

forecast

A Comparison between EIA’s 2008 forecast and current

forecast



World: A New World Order World: A New World Order in 2012in 2012

NBFG Economy & Strategy (data via IMF)

Share of World GDP

Share of World GDP



World: Outlook for Energy World: Outlook for Energy ConsumptionConsumption


770770

Total Energy Demand

Total Energy Demand

SummarySummary





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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