Q4 2019 Earnings Call
Good day, Basel and welcome to the Laurentian Bank financial group fourth quarter results.
Conference call today's conference is being recorded and at this time I would like to turn the conference over to Mr. isn't Cohen Director Investor Relations. Please go ahead ma'am.
Good morning, and thanks for joining today's review of after fourth quarter fiscal 2019 itself will be presented luggage.
President and CEO , So slimming executive Vice President and CEO .
All documents pertaining to this quarter, including the press release Investor presentation and stuff woman she financial information.
2019 annual report can be found on our website under Investor Center.
Following our formal comments the senior management team will be available to answer questions. After which is why they still there well again all for some closing remarks.
Before we begin let me remind you the journey the constant ball forward looking statements Navy me.
Actual results may differ materially from those projected in such statements.
Cautionary note regarding forward looking statements. Please refer to successfully slide to the presentation.
Now my pleasure to turn the call, though fluctuation.
[laughter] our strategic plan.
The most significant of ended the year west establishment of a new labor relations environment.
Underpinning this new environmental wasn't redefined bargaining unit and the ratification of a new collective agreement.
This is a strategic foundational change.
Significantly improves our ability to serve customers and allows us to implement process efficiencies.
Now the bargaining unit covers customer facing positions almost exclusively and known it positions kind of yet.
Well the agreement emphasize individual performance instead of tenure and job security.
The strategic achievements came at a cost the cost of having to allocate a lot of resources towards building a business continuity plan.
During a higher level of liquidity.
So growth in mortgages on personal loans and having to spend more on everything related to labor relations.
All of this impacted our 2019 financial performance.
However, these consequences, albeit temporary are considered worthwhile to achieve an enduring positive shift towards a culture of performance throughout the organization.
Well 2019, once a year when profitability was below what we are aiming for growth and most of business customers were strong at 9% and was driven by inventory and equipment financing as well as by real estate financing.
We continue to optimize our loan portfolio mix, which contributed to an improvement in net interest margins credit quality remains solid and capital with strong.
However, some of these strengths were offset by lower capital markets revenues, which also impacted our financial performance.
This was primarily due to reduced capital market activity levels, given all the time market conditions at a week investment banking environments in Canada, consistent with what we're seeing across the industry.
In 2015, it was with eyes wide open that we embarked on a transformative journey that would take this organization into the next decade and beyond.
We are more than halfway there.
Our first accomplishments retooling and retaining our team members rethinking that refocusing our organization.
Committed to making our foundations stronger than ever before.
Moreover, we are preparing for a simpler and higher value convenience driven products and preparing for tomorrow's customer today.
In 2019, we also became the largest back in Canada to have changed our main banking system.
Inverted our come back based network.
200% advice financial clinics.
Yes, I fully digital offering for Canadians.
Let me elaborate on these foundational achievements.
In 2019, we implemented the foundation of our new core banking system time, and I was to 24, which allowed us to enter the digital era.
With this system in place, we migrated albeit to be bank products and most of our launch the business customers to this new platform.
The initiative is 75% complete and were preparing for the migration of all remaining accounts. This is a true when as you were now able to build our future personal banking product suite.
At more than 80 financial panics personal and business customers are encouraged to 60 advice the financial professionals and built long term relationships.
We're having a real conversations with customers about their roles and how we can help and achieving that.
And the last quarter of 2019, we lost a fully digital offerings are Canadians to meet their everyday personal banking needs.
First for advisors and brokers and then direct to customers through obviously digital.
Anyone can now open with straight through on the spot processing checking high interest savings and GRC accounts using their mobile devices.
Digital as important on multiple fronts. It gets turned customers access to a renewed and modern mobile first banking experience. It allows for immediate and effective communication and extends the reach of our group to attract and serve new customers from coast to coast and finally, it lays the foundation for more products services and growth.
With the spotlight on transformation, we sometimes overlooked some of our core strengths that set us apart.
We are diversified bank with multiple business units and distribution channels that target specialized finishes, we operate across Canada and have a presence in the U.S. through inventory and equipment financing.
Our capital was strong at year end, the 61 ratio stood at 9% a full 1.4% higher than the 2015 level.
Our funding has diversified and strong.
Our over 98% of our loans are secured by real estate and investments.
And our provision for credit losses are about one third of the industry level.
Finally, we are the only Canadian bank midsize back to have to investment grade ratings.
Across all channels in the personal segment financial Pfenex advisors, a brokers and digital director customers. This year's focus will be on the customer experience.
Growth, specifically in personal lending and investment products.
To ask the customer experience digital teams are working towards adding functionality transactions and products to the platform and promoting our optic any ideas from coast to coast.
For financial clinics, James will focus on migrating all current and personal customers to the new core banking platform. So that at the end of 2020, they will have access to modern digital interfaces.
Once this is completed we will be able to gradually decommission our legacy systems, putting an end to the operating costs associated with maintaining that.
One of our growth engines has banning continues to be our business services unit.
And the last four years assets have grown by over 60% from eight belvieu into 13 Belvia.
This is a direct reflection of our solid expertise and a strong relationships, we have built and real estate financing equipment and inventory financing I think commercial banking.
Furthermore, the investments we have made and equipment in inventory financing are paying off and we won't make additional investments and the infrastructure to expand our U.S. operations.
We will also upgrade customer facing technology to improve the business customer experience.
We're committed to harnessing more opportunities in the institutional segment and we have set plants in motion to June to do just that beginning with the appointment of new leadership and capital markets.
We believe that this will contribute to driving performance in 2020 and in the years to follow.
As we evolve into a digital environment, we will continue to work on improving and automating our processes and have to controls and adapting practices.
Also maintain that discipline and rigor and continuous improvement around cyber security data security and privacy, because our utmost responsibility is to protect our customers personal information.
I'm pleased to report that the heavy lifting is coming to an act as we look for 2020 will be the year. When we complete major initiatives and focused on growth. So that we are well positioned to achieve our medium term objectives. As we do every year at this time, we are introducing our objectives for 2022, which can be found on slide seven.
Our medium term financial objectives are delayed by year as a difficult union negotiation has impacted our timeline.
That's what I will soon provides additional detail.
I'd like to add the 2020 will set the stage for 2021, our 175th anniversary and the beginning of a new aircraft for the group.
The board has reaffirmed its competence and has approved an increase in the quarterly common share dividend of one set bringing up to 67 cents per share.
In conclusion banking has changed and so have weight.
We are building, a better and different banking experience and we're starting to see the positive tangible results from our efforts.
It has been a long road, but we're making every decision caf for all our stakeholders.
And now I'd like to turn the floor over to Francois to provide a more in depth review of our fourth quarter and 2019 financial results.
Thank you crosswalk good morning, everyone I would like to begin by turning to slide 11, which highlights the banks financial performance.
Adjusted EPS in the fourth quarter, and 2019, whereas the other five and $4.26 compared to other 22 and $5.51 a year earlier and adjusted our OE over the same periods were 7.8 and 7.9%.
Compared to 9.9 and 10.5%.
The 2019 results were impacted by cost related to labor relations, specifically, a higher liquidity cost of $7 million on an annual basis.
Hi, or other expenses, including those related to legal and security of $3 million on an annual basis as well as the impact of curtailing growth in residential mortgages and personal loans.
Another important factor contributing to the year over year decline in profitability for both the core into full year was lower other income and specifically lower capital market related revenues.
As outlined on Slide 12 reported earnings for the fourth quarter included adjusting items stollings totaling $6.6 million after tax or 15 cents per share for 2019, adjusting items totaled $20.5 million after tax or 49 cents per share.
The restructuring charge mainly related to the uptick.
Hey related to the optimization of our financial clinic operations and their related streamlining of search and back office and corporate functions.
Turning to slide 13.
Total revenue for the fourth quarter of 2019 was $241.6 million, 6% lowered than a year earlier.
Net interest income was relatively unchanged and other income declined by $14.3 million in the fourth quarter of 2019 compared to a year earlier.
On a sequential basis total revenue declined by 1% as net interest income was slightly lower.
Eni in the third quarter of 2019 benefited from season, the mortgage prepayments, while the fourth quarter was impacted by a lower average volume.
Total revenue for the years declined by 7% or by $74.9 million net interest income decreased by 3%, mainly due to the lower level of loans, partially offset by Delaware liquidity the costs and the change in business mix.
Other income decreased by 16% of $555.4 million.
As lower capital market related income accounted for about half of that decline.
Net interest margin shown on slide 14.
Was it one point, 84% in the fourth quarter of 2019.
This was seven basis points higher than a year earlier due to the greater proportion of IR margin loans to business customer.
And a reduction in liquidity following the ratification of their collective agreement.
Compared to the third quarter 2019, net interest margin declined by one basis point due to seasonally higher mortgage prepayments.
Other income as presented on slide 15, total $68.4 million into fourth quarter of 2019 and decreased by $14.3 million so year over year.
This is largely due to the decline in capital market related revenues of $11.1 million and is mostly explained by the 3.8 million loss, resulting from a revaluation of trading securities, which equals five cents per share on the net basis.
And $4.9 million of gains of available for sale Securities in 2018 18, sorry.
Which no such gains were realized in 2019 in part as a result at the adoption of I as far as nine as well as a $2 million lower lending fees as that mix is changing towards lower fee, but higher margin business, which is reflected in net interest income.
Sequentially. Other income was relatively unchanged with the trading inventory last upset by improvements in brokerage operations.
Other income for 2019 was lower by 54 $55.4 million and as mentioned earlier half of the decline was related to lower captive market revenues.
This reduction included the impact of lower activity levels, resulting from mark market volatility $7.6 million.
Gains on available for sale Securities in 2018 of which no such gains were realized in 2019 in part as a result of the adoption of I as far as nine and a $3.8 million us, resulting from a revaluation of trading securities.
Other income was also impacted by lower lending fees and service charges I would like to mentioned that since year end trading activities as improves and the investment banking pipeline is strong.
Slide 16 presents the adjusted noninterest expenses.
That is in the fourth quarter were relatively unchanged from a year earlier.
Salaries and benefits and employee benefits decreased by $3 million, mainly due to lower performance based compensation.
Favorable adjustment to pension and other benefit costs and lower headcount.
And was partially offset by an increase in other noninterest expenses of $2.3 million, mainly related to the launch of our new digital offering.
Compared to third quarter of 2019, adjusted noninterest expenses decreased by more than $600000 essentially for the same reasons.
Adjusted noninterest expense net interest expenses.
Well controlled in 2019.
Adjusted efficiency ratio stood at 71.2% in the fourth quarter of 2019, and 72.3% for the whole year, which reflected lower revenues.
Slide 17 presents our well diversified sources of funding.
Deposits totaled $25.7 billion at the end of 2019.
$1 billion lower than at the end of the third quarter of 2019 and $2.4 billion the word than at the end of 2018.
The decrease in deposits was the result of a reduction in liquidity align with the lower level of loans and the ratification of the collective agreement midyear.
We also increase our funding through securitization, which on a net basis was up by 1.1 by $1.1 billion over the year and by $935 million.
During the quarter in the fourth quarter, we securitize residential mortgages and finance lease receivables and earlier in the year, well, so securitized investment loans.
Going forward, we expect that deposits gathered through our digital offering will further diversify diversify our funding sources.
Turning to Sightsee 18.
CK one ratio of 9% is present in under the standardized approach and highlights our strong capital position.
Our diversified loan portfolio is shown on slide 20.
He wants to business customers increased by.
38% of the portfolio from 35% a year earlier.
Portion of residential mortgages declined by 1% to 48%, reflecting our focus on higher yielding commercial loans.
The proportion of personal loans declined by 2% to 14% as a result of the reduction in the investment loan portfolio as consumers the leverage in 2020, we expect double digit growth and launched a business customers.
Gradual resumption of growth and residential mortgages and personal loans.
Slide 21 provides a deep dive into our residential mortgage portfolio.
We are maintaining our strategy to seek profitable niches such as Diane about a business.
October 30, Onest 2019, our old a portfolio totaled $1.1 billion and represented 7% of the total mortgage book and 3% of total loan portfolio.
This portfolio remains well diversified with mortgage loans into GTV, representing about 20% of the portfolio and the JV accounting for 4% and.
And is high quality as evidenced by very low loss ratios.
Slide 22 highlights our commercial loan portfolio, which has been Canadian without us presence.
As well diversified ends is positioned for sustainable profitable growth.
Turning turning to slide 23.
In the fourth quarter of 2819, the provision for credit losses was $12.6 million compared to $17.6 million at your earlier.
Which included a loss of $10 million ready to single syndicated commercial loans.
2019, the provision for credit losses amounted to $44.4 million essentially unchanged compared to 18 2018 as higher commercial loan losses were offset by lower personnel losses.
So where 2019 person or losses are mainly explained by releases of stage, one and two provisions for personal loans and to a lesser extent residential mortgages as a result to volume reductions in those portfolios.
Similarly, there was an increase in stage, one and two provisions for commercial loans due to portfolio growth.
Overall, our commercial credit.
Portfolio remained strong at.
18 basis point loss ratio.
For the bank as a whole the loss ratios for the fourth quarter and for the year full year were 15 basis points and 13 basis points, respectively. On an annual bases. We continue to expect the loss ratio to trend slightly higher as a long portfolio mix involves however, we expect increases.
To me more than offset by higher revenues.
Slide 24 highlights the net and gross impaired long ratios decrease sequentially and year over year as the underlying credit quality of the portfolios remains good.
The bank remains comfortably provision considering that the long portfolio portfolio is well collateralized.
This quarter as presented on site 25.
We are providing our initial view of the impact of adopting I as far as 16.
For leases, which is being implemented effective November one 2019, the decrease in net shareholders' equity at I as far as fixing transition is not expected to exceed $8.5 million.
The adoption of I as far as 16 is expected to decrease C. One ratio by up to 10 basis points.
With respect to our income statement.
The impact of ours sick Fysixteen and 2020 is now projected to be material.
Depreciation and amortization will increase by about $20 million, but would be offset by lower rental costs as well net interest margin is expected to be nicotine negative negatively impacted by about two basis points.
Finally, I would like to return to our updated medium term objectives that Francois I mentioned earlier and can be found on slide seven.
Our 2022 financial objectives are unchanged from our 2021 objectives, our timeline to achieve them has been extended by year given the labor situation that prevailed during the first half of 2019.
Our 2022 are already objective is to narrow that gap with a major Canadian banks to 250 50 basis points and the gap should gradually close when we add up ERP approach to credit risk and 2022.
We continue to target an efficiency ratio of 63% and positive operating leverage lastly, we will work towards Anup and adjusted EPS growth rate of 5% to 10% annually over the medium term.
With respect to growth objectives.
Business services has been and we'll continue to be a growth engine for the bank.
For that reason as we move our targets from 21 to 22, we are increasing our objectives for loans to business customers to $17.5 billion from $16 billion as we continue to expect double digit growth.
Furthermore, given the foundation that we have built in our financial clinics, and our did just and and our digital allow Frank.
We have the opportunity to attract new customers. In addition to our existing customers and to cross sell products to them for that reason, we believe that are better measure of our successes so target growth and launched a person personal him customers, which includes residential mortgage loans and personal loans.
We expect this portfolio to grow to $22.5 billion by the end of 2022.
Lastly in line with our expected were asset growth and optimization of our funding sources, we are targeting deposits from science to increase to $26 billion by the end of 2022.
In 2020, we expect EPS growth to resume and be skewed towards the end the second after the year to reach the lower end of our medium term EPS objective.
Revenues should improve particularly those related to capital market and net interest margin should increase by a few basis points as our loan portfolio continues to evolve towards higher margin zones to business customers.
For the year, our efficiency ratio is expected to be slightly lower than the level in 2019.
Although the first quarter of 2020, we should should be relatively in line with the fourth quarter level as it is expected to be impacted by seasonally higher stock base compensation and higher payroll charges, while the ratio should be lower in the second half of the year as we realize the remaining cost savings from lower.
We're at head count and dis synergies of back office and corporate functions.
Provision for credit losses should be slightly higher.
Then in 2019 as our portfolio mix involves.
And should be more than offset by higher revenues.
We also expect that our tax rate when moves towards the high teens and tuna in 2020 as a result of changes introduced into into the 2018 Canadian Federal budget that will impact future income earned on foreign reinsurance operations by about $5 million annually.
We remain committed to ever as ever to execute with our strategic plan and achieve the objectives that we have said. Thank you for your attention and I will now turn the call back to Susan.
At this point I would like to turn the call. While we're at the conference. Operator next question and answer this question Angela.
Thank you if you'd like to ask your question. Please signal by pressing star one on your telephone keypad.
Using a speaker phone. Please make sure immune function is turned to October signal to reach our equipment.
Again press Star one to ask a question and doing well pause for just a moment to libel and an opportunity to signal for questions.
And your first question comes from Marco Gear Leo.
Please go ahead.
Good morning.
Good morning.
My first question is for front side dish or day.
In your prepared remarks, you you mentioned, making investments to expand your U.S. platform.
So im just wondering.
What.
What do you envision the capital implications might be for that and.
Just just speak if you could extend on the just overall strategy.
For sure. Thank you for the question.
Probably a little simpler than.
Of an answer then you're expecting basically were.
We have to move our people in and Georgia too.
Your location.
Because they have outgrown their current space and we're changing out some of the technology.
To help them with other organic growth.
Plants from an expansion perspective.
We're still on track with.
Loans to business customers.
For our as part of a general business services unit growth.
But maintaining our businesses in the last two equipment and inventory finance.
All right and if we were too just focus on domestic commercial commercial growth could you could you tell us what the growth of the the business has been a this past year.
For business services are for growth as a whole.
Just your commercial growth Act.
Ex North point.
I'll ask.
Defense doesn't need to comment on that.
Yes. Thanks for question the loan business customer, where it was up 9% adjusting for the portfolio sale that we've done we've done in Q1.
Portfolio sales was 405 million.
Going forward, we expect.
That.
Business services will remain a solid growth engine, because you need to expect double digit growth in 2020.
Mainly driven by Inventure refinance equipment finance and the.
Real estate loan construction financing.
Okay and my last question is just on.
Yeah. The implementation you mentioned.
I believe from solar I mentioned that you would get a lift in 2022. So did the implementation timeline there get extended by year as well alongside your.
Your your financial targets.
No we mentioned a couple of quarters ago that.
But we were.
Extending that timeline.
But from that revised timeline, we have not extended has any further it's still being implemented in 2022 with benefits 20 to 20 324.
Okay alright, thank you.
Thank you.
And if you find that your question has been answered you may remember yourself from the Q by pressing Star Q. We will now take our next question from many grauman of Cormark Securities. Please go ahead.
Hi, good morning.
Just wanted a little bit more detail on the the laws and the revaluation of trading securities if you'd give anymore.
Along with.
What that situation was and whether there's still a risk of more kind of evaluation to come in Q1.
I'll ask at Frost, what I'd like to answer that.
Yes. Many this this is that they really a onetime nonrecurring loss related to a specific position into trading portfolio revaluated in the quarter.
We don't expect.
This to reoccur.
We're now discussing the specifics.
Can you save <unk>.
Do you are fixed income.
No.
Okay. So.
And then just wanted to understand better.
Maybe a more detailed.
Detailed basis quarter by quarter, how you expect the evolution of specifically the deposit growth to evolve in 2020, so basically.
At what point do you expect deposits from clients to actually starts a growing sequentially.
Well in.
We haven't diversified sources of funds, which is a real strength for the back right. So that includes deposits.
In 2019 deposits were lower but that was really a reduction in liquidity following their following the ratification of the new collective agreement and a reduction in assets and an increase in securitization activities to optimize our funding mix, where please note that now we have three channels to gather deposits from cry.
Financial clinics, where there has been relatively.
Stability overtime.
Stability from clients. Despite the fact that we've been merging more than a third of our network.
Of course advisors and brokers are a second source and recently, we've added a digital source with our Pancanadian launch of RBC digital.
So we we use.
Really believed that our deposit.
Taking abilities is actually quite strong.
Okay, and maybe what I'm trying to get in part is just.
I understand how customers have reacted to the transition on the branch size I'm wondering if there's any metrics you can share with us in terms of.
No number of clients.
We lost over this period or if you can kind of isolate the deposits.
Simply going through through the branch.
Yes, spores anything to get to get a sense of how you're tracking.
Like reception to the changes.
I will ask as different ideas to answer that.
Thanks for the question the the three key metrics that we were following it will.
Still be following obviously and you mentioned this one is the customer satisfaction through NPS.
Second one that will follow will be the efficiency ratio of our network in the third one would be the overgrow overall growth of our balance sheet.
Including in the overall growth of our balance sheet, plus we're just mentioned that door, we're pleased with where our deposit level.
As the.
As evolved through the through the years.
So so goal and so going forward, we feel that the customers with our with US right, though are happy with our transformation.
Just raises by the the results as we have.
Can you give us some sense of how many customers you've lost over this transition.
The branches.
We have.
In any given year, we win lose some some customers.
Mr. Leading make you link between the transformation of the loss of some customer more importantly, we we believe that we're following the customer trends as their new behaviors as we're confident that will attract new customer going forward.
Thank you.
And your next question will come from the line of US somewhat Mulacek plus the bank. Please go ahead.
Thanks, good good morning.
A couple questions Mr. on credit quality, so first off or your your gross impaired loans.
Balance in the quarter.
Did the declined decently I think in slow down 12% as you noted in his prepared remarks I know this information is flowing through the annual so.
Just hoping you give me a little bit of little there because that's a good performance was it.
Was it some recoveries that you a you enjoyed wars or was that write offs was a combination just oh I have another follow up on credit, but just one or two to get some information on the.
20 million plus decline of the Geo belts.
I'll ask Oems the comments sure we've seen a couple of moving elements overall.
In terms of gross impaired, though I would I would.
Note that.
Yes.
In residential mortgage so we got gels.
Leasing sequentially.
We have.
6 million.
In terms of it.
Changes one way was driven by I first nine elements. So that's still seeing some some noise arising from from that.
We also have one or two situations that were in 2018 that were resolved.
That one offs.
Overall, we're happy with our underwriting standards in the portfolio, we expect our strong PCL singye else to remain.
And then they have to stay with you.
You know we had this conversation a a couple of times this year.
Obviously, the market is still getting familiar with the.
Well the transition to the new accounting for provisioning.
And maybe especially with the with you folks given that we just go four quarters of history. This is the first quarter that you moved too.
To provisions in the in the non impaired or the stage what in stage two buckets.
I know this can be somewhat detail, but just curious as you did this year and review.
After three quarters of releases.
What what prompted.
The increase and I apologize if you discuss this and I missed it earlier, it's a there was a little bit like getting on.
Yes.
Start by pointing you to slide 23 in the in the presentation, where fronts, while I've laid out sort of our evolution overall in terms of Pcls.
I would note that notwithstanding that we do have the methodology shift is.
39, IRS nine 2018 results as you noted where we're under the old standards, where were relatively stable year on year overall in terms of our provisions there are some moving parts as our commercial loan portfolio in seasons, we were going to be stable.
Looking at that readily shaking out as well.
Perform isn't growing dramatically and also some shifts in in the residential mortgage as.
That said that portfolio shrunk a little bit in terms of in terms of size. So we've got moving parts due to higher volumes in commercial and seizing.
There's some timing differences, but overall the pcls are relatively stable.
I would note, though as we've indicated in the path from a run rate perspective, we do expect.
Yes to tick up commensurate with an increase in revenues.
And I wouldn't know the comments it first of all around made around our loss ratios.
Am I correct Instating when you provide PCL.
Targets or forecast and what you're expecting for the coming here, you're you do so the anticipation that the non impaired portfolio will will not have any contribution.
You're basing your your outlook on the impaired Brooklyn.
We're basing our outlook on the overall portfolio.
Lastly, when you think about Bcl methodology, you have unexpected base case, you have an extreme case and you have a benign case.
Our overall forecast is based on the expected case.
As you know as you know with the eye of first time methodology as you change your expectations from an economic condition standpoint.
You re baseline your expectations from PCL Accordingly.
Okay last the last one for me is going to be for France, where does your then.
You are you spoke of a year ago, you're rolling your targets forward a year.
And I think the big one the from the time are you a you took the role was focused around the.
Narrowing the or are we differential with a with the industry. We've got a few if you guys love to report, but I think going to on a full year basis.
Are we for the for the sector is going to be around 15% and then on your adjusted measure.
You've come in that 8% so to get the gap.
Narrowed your drug because there's a there's a lot of work to be done just.
Lets stating the obvious we think the 2020 as these moving parts that you've talked about started to aligned what's a reasonable objective in terms of or we expansion in your mind off of the 8% level you're out right now is narrowing the gap with the industry going to be something that that's going to take until closer to the the timeframe or do you expect.
To see meaningful progress in terms of or are we expansion for your bank.
In particular forgetting about the industry in 2020.
Thanks for the question that was.
Well first starting I think that the ultimate goal is still the same.
Obviously.
With a new labor relations environment, we can now focus on growth and efficiency, which has driven or are we down as you know so our target is to reach a 250 are we gap by 2022.
From where we are now the wrote a better performance starts with officials in growth and that's really fueled by the things that we've we've already done.
Flexibility of a new labor relations environment, It was not easy, but Don completion of a core banking initiatives, 75% their growth in higher yielding assets a good on the business services side, our focus on 2020 on the personal side opportunities to attract new customers and generate additional cross selling synergies from digital.
Right.
Just launched and recently transferred 100% advice activities.
All of this stuff drives the future.
And of course, lastly, I RV.
Which which benefits would start partially in 2022.
You know the confidence I have to achieve this plan.
You know comes to me because I feel that 2020 ends the period of heavy lifting and investments and gets us back to growth.
Mesa might sound like a large cap to Phil.
But I am more confident than ever that this is the roads that needed to be taken to get there.
With wins in our faces some times in the last few years as you know, but this is a this is what needs to get dot.
For 2020, I would say that we'll focus on execution growth and profitability as we worked towards those medium term targets.
But we do expect that financially 2020 will be better.
In 2019 skew towards the second half of the year.
Well I appreciate you taking us through the journey, but I think you said it.
From a.
750 basis point gap, a this year or two to 250 in three years does that sound like a lot of work so.
I think alone away.
I appreciate the fact that.
It's good to have some some signposts underway to 2022 and that's what we're hoping for but I think I hear you think you'll be better next year and.
Well look forward to up.
I do and as far as was said maybe earlier.
I think that's all towards 2020, I will be a plus one I will be giving you some shorter based.
Disclose some sort of based wins in terms of what's happening on digital.
You know what's happening on customers. So that you can see some of the progress that we're making on growth.
I appreciate that thank you for your time.
Well thank you.
Yes.
Question of from Richard Roth of TD Securities. Please go ahead.
Hi, guys question on your.
Good morning.
The loans customers target I.
I guess previously you had it specifically you are dealing with mortgages rather than.
No loans, but if I back into what the implies mortgage growth rate is given the changing disclosure it seems to imply that youve taken down your mortgage growth expectations.
Because you're not expecting diffuse click of a rebound and growth radian mortgages is that correct interpretation.
Partially partially.
We're focusing on financial house, and offering to write product to the customers important.
I always want to build relationships with our customers not offered just one product.
Now that we've built the foundation for our financial clinics on digital offering we can attract new customers and offer full suite of products to them, obviously personal loans that are not mortgages have different profitability levels as well.
It should include credit cards personal loans ours, Pdfs say investment lending so offering the full suite of products is really the reflection of why we changed our targets to include personal loans, but your rights on the on the mortgage side.
We did in the last few quarters indicate that.
At previous objectives might be too high and given.
We want to focus on profitable growth not just growth for the sake of growth.
We are though thinking that mortgage book a growth in 2020.
Will resume.
And hit our targets.
That's we've outlined today.
Okay, and then on the commercial front it seems like when you rolled out a year.
Taking and almost 910% growth rate on top of mind 20 ones original target.
But the last couple of quarters, we've seen pretty tepid growth on the commercial.
What are you seeing right now that's caused commercial loan growth in relatively slow.
And what are you expecting to see in the future. That's having you bake in Oh at high single digit low double digit growth going forward.
Oh, that's different dug into comment on growth, yes, the [noise].
Our treat a growth engine and commercial will be will continue to be in Ventura refinance equipment finance and the real estate of that said before.
One of them, mainly investor refinements growth is the skewed to the Q1 in Q2, so its normal that you've seen a bit less growth in the last two quarters.
But look we're confident and we have all the data to to be done to them that a 22 when it will be up double digit growth in these two businesses globally and business services.
Okay. Thank you.
Welcome to next question. Your next question will come from the line of kind of Canaccord Genuity. Please go ahead.
Good morning, just on the capital market Friday concordance between the loss with a new leadership team is there any change in strategy.
Going forward.
We're thrilled to have Kelcy gunderson, leading this business now he brings a vast amount of capital markets experienced strong network to our organization.
Kelcy would you mind sharing a few das sure as well.
Well I mean, I should point out that my tenure here is currently only makes good weeks. So has made a longtime books and so far I've been impressed.
By both the structure of capital markets business, you need as well as the people that are here.
But really also run the opportunity you think there's room to grow this business here.
Doing things like delaying or couple of markets group, you know, maybe a little better with the enterprise.
The Golden our strengths, which isn't doing should more or largely with more small and mid cap issues are fixed income business here in or could that be students as well.
But I wouldn't expect to see a dramatic change in strategy into this business mix in the near term overtime will continue to prudently and measure we evolve this platform along with rest of the bank.
Hey, Thanks, and I'm just wondering all day book I, just haven't seen how is the growth than they are not portfolio.
That kind of whats the outlook damage or is your peers are going along faster than market within that segment.
Well, where we are introducing new products, including the I'll say mortgage product.
For business for south clients amongst others I wish we expect to contribute to increasing volumes I. We believe that growth is achievable given that we are operating below our historical ability to grow mortgages.
As a as to your question comparing to to others, well from a profitability and growth perspective, the main elements impacting our our profitability and growth in 2019 were really the efforts that are associated with the labor relations situations.
So long as the business customers growth has been strong.
We're changing the business mix, there and we're pleased with that progress, but for mortgages and personal lending labor relations was that distraction and slows down gross now that that's behind US, we're working to stabilize our portfolios and resume growth.
If I might add as well we were a diversified back with multiple business units and distribution channels I would targets you know in specialized initiatives. The this bank is is a backward this capital is strong.
And 61.
As you know is that 9% I think that are investing that capital in growth and the rest of the investments that we need to make in 2020.
I will will be our focus for next year.
And just lastly, just a clarification question in your prepared remarks, you talked about NIM getting impacted by two beeps next year without them I have for 16.
Yes. It is.
Overall, we feel thanks.
Since the overall waste.
Yeah, sorry go ahead.
So overall, despite that to bips negative impact, we expect them to grow compared to the level we have today.
The business mix going forward.
And with them and then back this out then they in fiscal Q1 point.
Yeah, starting Q1.
Okay. Thank you very much.
You're welcome.
Your next question will come from the line about Darko Mihelic of RBC capital markets. Please go ahead.
Hi, Thank you good morning, and those are question.
Thanks, Hi, just a few questions here first starting with the other income and.
And I'm looking at your supplemental.
I wanted to understand a little bit better.
The reclassification or the sort of the change in the way you're presenting these items and in particular I am interested in the income loss from financial instruments.
Presumably that trading loss was in there, but what I'm what I'm interested in is a few things on that line.
The first is just getting back to your commentary on that trading loss. You. You mentioned that you did not expected to re occur.
Is that because it position is gone and secondly is that it was this a proprietary position.
And then third what is it that I should look at that would drive this line item going forward.
That's what gave first first it's clearly a nonrecurring and the items that were affecting that are basically very low and now in the books. So that's why we feel very comfortable that it's not going to recur going forward.
Regarding the capital market, the we part of their part of the reduction as.
The reduction you had year over year, mostly half of it is because of the volatility in to the softness we've had during the year.
Fifth is the loss, we mentioned that the other one is the I have already.
Gains that we had been recorded in 2018 dead. We didnt have in 2019 because of this change our classification of the is the portfolio from and I am sorry. This boy I first nine point of view. So what you should see going forward from this level Don If you go from Q2 Q2.
Three Q4.
We'd have been better than Q3 on that line. If it was not for that 3.8. So we we feel that the pipeline and the activities. We see will take that line from where we are the Q3 level to move forward up and going.
ER positive going forward in 2020 Darko.
So why should consider that some sort of a trading line is that a fair way to characterize it is what is driving the trading as a pure.
That's where I'm going with this is proprietary trading a significant component of that line item.
It's all trading that deckers into dealer.
Just proprietary.
Okay.
Thank you and then a question for you on the expense side Firstly.
And when we look at your expenses and I know we often.
Try to avoid looking at restructuring.
But what we do note is an awful lot of restructuring charges every quarter.
Laurentian Bank for quite some time now is this going to stop anytime soon or do you anticipate that we will continue to have restructuring charges every quarter going forward.
Well the restructuring charges.
That we expect in 2000, we should expect some in 2020, because we still are continually optimization of the financial clinics and other initiatives to improve efficiency.
Going forward, we expect there.
The however in 2021, we expect those charges to be lower as were part of this transformation plan as we transform mentioned the heavy lifting will come to an end. So obviously as we could go forward, we should expect that number and those charges to be lower in time.
Eventually disappear.
But not for the for that one thats the immediate future.
Okay, and then lastly on the on the expense side.
I'm trying to gauge me one of the things that I'd like to look at is a performance based compensation or variable comp.
And I tend to try and want to model that sort of as a percentage of revenues is now at me when I look at it at kind of looks like it's averaged in here around this level as well as a percentage of revenue.
Well you know should I think of that its first is that okay way to think of it.
And is that how you guys like to think of of your performance based comp going forward.
And if so what is the appropriate level it came in around 5.5%.
This quarter and is generally be between that and you know around 6% or six not present is that an okay way to think of that that line number should this change going forward because of the way you're changing your bank.
I think there's there are different compensation programs in India, India organization. The Darko, so making an average clearly yeah, you've got to higher compensation level from a dealer perspective, the banks perspective, I think if you go to Iowa.
We could take it offline very few that would suggest go to shoot past quarters as a better indication of win of the a.
The level of performance base.
Percentages.
Good.
Because of the reader reduced profitability, we have in this quarter compared to previous ones I would use.
In your calculation previous quarters.
If that makes sense.
If that's clear.
Okay, No that's the Harold I might come back to you on than I do have one last question, which is on.
Credit quality and ER and really what this is I'm, referring to your annual report when you guys provide.
A view of your stage one stage to allowance for credit losses is if everything was in stage one.
And to all banks do this and what I noticed in your case does the AC I would come up to around 49.
Million.
And I like to think of that as a sort of a 12 month expected credit loss.
In a roundabout way that's kind of what we should expect for 2020 in terms of losses do you think that that's an okay way to think of it and in which case.
I mean I just like you hear your thoughts on it and.
And maybe I'll just leave it there, but I might have a follow up.
Yeah, I think I, rather look at.
It's one way to look at it.
Thank you for your questions I'd, rather look in terms of our run rate on Pcls and our expectation around PCL.
And so you know it's as far as Rob indicated run rate overall at 13 basis points commercial 18, we expect an uptick in terms of basis points and sort of run rate now a in around 12 million a quarter I'd rather based on that.
Okay, Alright, that's good thank you.
You're welcome.
Your next question comes from.
No sign of National Bank financial Please go ahead.
Morning.
So we're running running short lived here so.
Yeah the.
Slide 17, or page 17 of the supplement that shows and personal loans the migration of a.
The drawn in stage two thirds run with a negative numbers foods to the positive numbers that really migration from a you know for lifetime expected loss.
Because there were category.
[noise] the Mds yeah. Thank you for your question Gabriel.
Yes, I first time has brought some some volatility to our numbers.
Normal course variations, but also within a personal loans, we've seen some timing differences on on recovery actions that have shifted some of the elements between that between quarters, but so I would I would I would tend to look at the a year on year our results for.
For for personal loans and once we get some of the noise out they should stabilize.
No. It wasn't a particular categories somebody would be would treat your and your mood.
It wasn't a particular shed no no it was not a particular shift.
Were sticking to the credit a a I'm just wondering how the you know if you can give some.
Intra quarter, I guess move on the U.S. impaired loan balances it could be uranium figure and were.
Over 16 million the U.S. impaired loan from nine to some of the total we don't know how about shifted from Q3 I know the <unk> went up from 8.8 million for in Q4 last year, but was there any migration there or impairments I should say.
During the quarter.
Well, then I'll ask that answer that are sure.
That's really driven by a methodology.
Shift more than anything else.
We have we have are evolving our methodology with regard to our a U.S.
You see else and that's a methodology shift.
Okay.
A lot I mean, obviously, sorry 111 Sonic one is obviously a in addition, you've got the growth in the portfolio, which is affecting those numbers.
Okay.
Or are we got back to that one as well Oh hospice and with the kind of a different way, but what kind of rate environment. The you need to get the you know the rate differential for Titan substantially versus the peer group worker, who are working to.
What's embedded in your a your model your internal all over.
Ah toss what asset so so far what we have in our model. This one rate decrease in 2020, and we don't foresee we don't go beyond that for now.
Okay.
Thanks, a lot of a good day.
Thank you guys are heavier.
Your next question will come from that I never done young I've just outlined capital markets. Please go ahead.
Good morning, I'll keep this really quick first you mentioned decommissioning of legacy systems at the end of fiscal 20. So fiscal 21 is when you get the benefit of that can you quantify what the savings will be.
Our last ever rose to answer that.
We expect the extra cost.
Operating parallel Corbett then.
He is eliminated gradually through 2021, which is factored into our objective.
Yeah.
If I could the asked us to find also to talk about those benefits from a client perspective, yes as soon as our employees have been made aware that we're that the retail network is moving toward that system. Everybody is really excited about the unfortunately to present this new online banking.
Experience to all our customer by yearend.
And so he is there anyway to quantify like is it 3 million 5 million annual.
Cost to operate the two systems like is there any quantification you can provide.
Okay.
Thank you and everyone. Thank you Doug no. We don't provide quantification, we just it's part of the elements to make it to reach our 63% to an efficiency ratio in 2022.
Obviously, if I might add.
I'll, just if I might add to the questions that were asked earlier about bridging the gap Theres a lot of moving parts here rights and.
The confidence level as a senior is when you add them all up right a simplified products core banking ending heavy lifting ending so the gap is to large obviously, but as we're finishing up these things and focusing on growth out of the adding them all up.
Is what gives us the confidence that we can reach these targets by 2022.
Lastly, the restructuring charge back to darkens question, Yeah, I know, they're going to continue through physical 20, I know in fiscal 18. It was 5 million in fiscal 19. It was 6.2.
Are these read is this a reasonable goal posts for what we should think about in terms of restructuring charges for fiscal plenty or or should it be starting to dwindle below the 5 million in fiscal 18.
<unk>.
In 2020, there should be the range.
Hi, Hi single digit fives, betide below 10, but between five and 10 Doug.
That's why we anticipate.
Five and 10 million.
Yeah Okay.
Okay. Thank you.
You're welcome.
And there are no further questions at this time I would now like to hand, the call back over to Mr. funding.
Right.
Thank you.
2019, I wasn't here, where profitability that not meet our expectations, we established a new labor relations environment converted to 100% advice finance Rennix and are focusing on this advice I, we have launched a fully digital offering to Canadians.
These are no small fees these our investments and when combined with improving portfolio mix towards loans, the business customers and our expanding geographic footprint and our renewed culture of performance. We are really building something great.
We're confident that value creation is well underway as we continue to focus on execution growth and profitability.
I'll turn it back to Susan.
Thank you for joining us today.
At any further questions contact information is included.
I think station.
Well it.
Yes first quarter.
All right.
Oh happy holidays.
This concludes today's call. We thank you for your participation you may now disconnect your lines and have a wonderful day everyone.
Oh.
[noise].
[noise] Oh.
[noise].