Q1 2020 Earnings Call
Good day, Basel and welcome to the Laurentian Bank Financial Group first quarter results Twentytwenty Conference call. Today's conference is being recorded at this time I would like to turn the conference over to me. She was in Cohen Director Investor Relations. Please go ahead.
Good morning, Thank you for joining.
Today's review first quarter at 2020 results will be presented by soft watch all day, President and CEO I suppose one other executive Vice President and CFO.
Documents pertaining to the quarter, including live action based financial good news release Investor presentation, I financial supplement can be found on our website in the Investor Center.
Following our formal called <unk> senior management team will be available to answer questions. And then also additional data will offer some closing remarks before we'd again, let me remind you that during this conference call forward looking statements made he made and it's possible, but actual results may differ materially from those projected in such statements.
A complete cautionary note regarding forward looking statements. Please refer to our press release or just like to have the presentation.
Now my pleasure to turn the call those small fluctuations.
Thank you Susan and good morning, everyone.
This quarter, we continued executing strategies across all businesses, what the ultimate goal or building, a better and different banking experience for our customers.
There's a lot of work already behind us and a renewed energy across the organization. We are beginning to see real progress in our foundational work rather than our customer base and talk pretty advancement towards improving customer experience.
In terms of a financial performance merchant Bank Financial Group reported adjusted earnings of 36.9 diluted earnings per share of 79 cents.
A return on equity up 5.8.
Several elements impacted our performance this quarter, including lower net interest income in part due to the low interest rate environment competitive pricing and customer growth initiatives.
<unk> expenses in part due to the investment in our digital platform at higher salaries and benefits to recruit and retain township and higher provisions for credit losses, mainly due to.
Commercial loans.
We're disappointed with this quarter's financial results and are addressing both revenue and expense side of the equation.
After a period of asset attrition wherever you're building growth engines, and making good progress towards stabilizing our loan portfolio.
That's a return to net positive personal loan growth by the end of the year loan and deposit growth combined with efforts to improve efficiency and implement new technologies. The top we are on and we're confident that this would lead to better performance.
Subsequent me, we remain committed to meeting our midterm targets.
More details on our financial performance will be presented by spots what I got.
But first I will report on key areas of the business.
For personal customers, we launched LBC digital our newest direct to customer China, expanding our personal customer reach from coast to coast. We welcome thousands of new customers and accumulated over a billion dollars in deposits.
Digital deposit is not our end goal, but rather a first step in acquiring new customers.
That's the offering is limited to checking high interest savings accounts as well as Joe seats, but our goal is to broaden and deepen their relationship with customers and use this platform to build out a more complete suite higher value convenience driven products over time.
The next product being a credit card.
And the advisor and broker channel renewed business development efforts combined with expanded all day mortgage programs are gaining traction with brokers, we expect to see positive trends throughout the spring and summer phone buying season.
And financial clinics. The momentum is changing we are originating new business with growth in gross sales of mutual funds in mortgages demonstrating that customers do appreciate the value of 100% advice model.
Every day, our professionals are having productive conversations with customers accompanying them through their lifecycle as they buy at home safe first for personal goals and blasted their retirement.
So business customers the portfolio lost a business customers grew by 7% year over year and by 2% sequentially. We continue to see profitable growth and we are on track to deliver low double digit growth again in 2020.
In real estate financing youre, continuing to build opportunities and drive growth. The pipeline is strong although we experienced a high level of loan repayments in the first quarter.
Commercial we'll also see benefit this year from the core banking initiative, we are developing a new online banking platform, which will provide better self service on cash management solutions for small business customers.
Putting in finance and inventory finance the growth that we are achieving on both sides of the border.
Seating our expectations. The two acquisitions that we made helped us become better leaders and this nish market, where we can truly meet the unique and diverse needs of customers.
For institutional customers capital markets had a good quarter the stronger results compared to both last quarter and last year strengthen fixed income as well as improved activity in equities were key contributors with a fresh perspective, we expect new growth opportunities.
With respect to transformation overall I began my remarks by mentioning you got a lot of work was already behind US. This is true we have been making strategic investments in the business to meet the demands of customers for digital solutions, adding technology to continuously improve governance risk insecurity and in our people so that they embrace I called.
Sure if performance the bulk of the investment related to this transformation is behind us.
What we have put in place are the technology people and processes necessary to manage growth and this ever evolving environment.
Once we have built is a stronger financial institution than ever before stronger capital a healthy level of liquidity and an industry low loan loss ratio positions us well for the future.
But we're not done just yet our teams are working on finishing the core banking replacement for financial clinics and once complete this will not only allow the organization to decommission legacy I, two systems and improve efficiency, but offer a greatly improved customer experience at the end of 2020, we expect us all new customers will be onboard.
<unk> digitally.
We'll have started to migrate existing customers accounts to the new platforms. So that by mid 21, all our personal banking customers will enjoy the same experience and managing their accounts and day to day transactions.
As we had previously stated we fully expect to deliver improved financial performance and the second half of this year after resumed growth in our loan portfolio.
Gross and efficiency. This is the focus of our teams.
This was a challenging quarter in terms of financial results, but we must remember that one quarter doesn't make a year growth is returning and performance will follow.
And now I will turn the call over just <unk> to provide a more detailed review of our first quarter results possible.
Thank you for US well good morning, everyone I would like to begin by turning to slide 10, which highlights the banks financial performance as fast one just mentioned our results in the first quarter 2020 were lower year over year and sequentially.
Reported earnings for the first quarter were affected by adjusting items as outlined on slide 11 totaling $4.7 million after tax or 11 cents per share.
And our largely related to severance charges and amortization of acquisition related intangible assets.
The drivers of our performance beginning on slide 12 total revenue in the first quarter of 2020 amounted to $238.7 million decreased up 1% compared to last quarter and last year.
Net interest income fell by 2% compared to a year ago, and 3% sequentially well other income was unchanged and increased by 2% over the same periods.
The year over year decrease in net interest income was mainly due to lower loan and deposit volumes, partially offset by an improved business mix as well as a wider prime be spread and normalized level of liquidity.
Sequential decrease in net interest income was mainly due to the impact of the adoption of I as far as 16 on November 1st 2019.
The launch of.
Did you had told I interest saving accounts and the lower crime be a spread.
As shown on slide 13, NIM in the first quarter of 2020 was 1.81% up one basis point compared to year over year, mainly due to the change in the loan portfolio mix.
The proportion of commercial loans in the portfolio stood at 39%.
Versus 36% a year ago as we are successfully executing our strategic plan to evolve the bank mix towards higher margin commercial loans.
Compared to the fourth quarter 2019, nandan decreased by three basis points the impact of I as far as 16 launch of the digital high interest saving accounts and Delaware prime be spreads each accounted for a decline of about one basis point.
Other income as presented on slide 14 totaled $69.9 million relatively unchanged from a year ago.
Arches year over year variances thing so it didn't market related revenues that increased by 1.5 million and were mostly driven by strong results in fixed income activities and the recovery and revenues from adviser advisory and equity operations and and service charges that decreased by $1.2 million.
My neighbor. It every south of the ongoing changes to that retail banking environment and consumer consumer banking behavior.
Sequentially that aren't just far and sweats market related revenues that increased by $5.4 million for the same reasons I just say that.
As mentioned last quarter the fourth.
Excuse me the fourth quarter of 2019 included a $3.8 million losses loss related to their revaluation of trading securities.
Slide 15 highlights adjusted noninterest expenses of $182.8 million, which rose $3.5 million are like 2% year over year.
Salaries and employee benefits increased by $3.2 million, partly as a result of share base, then performance based compensation, including a portion related to brokerage operations as well as other sales driven compensation.
Taking into account I as far as 16 rental costs and pro slightly.
Sequentially adjusted noninterest expenses increased by $10.8 million. The increase is explained by share base grants higher performance based compensation related to improve results in capital markets higher employee benefits, including payroll taxes and regular salary increases.
Adjusted other noninterest expense decreased by close to half a million dollars year over year and sequentially largely due to lower as far as advertising costs and lower professional fees.
The $15 million of cost savings initiatives were substantially completed over the last 12 months.
However, despite the implementation of these measures you adjusted efficiency ratio of say, 76.6% in the first quarter 2020 remains high as we pursue investments in our foundation processes and technology.
Nonetheless were striving to improve both revenues and expenses and continue to grow loans to business customers and resumed growth and more into mortgage portfolio in order to achieve tangible efficiency gains throughout the remainder of 2020.
Slide 16 highlights our well diversified sources of funds.
The first quarter of 2020 deposits stood said stood at $25.2 billion.
Personal deposits totaled $20.1 billion, including $1 billion of digital deposits and its stable level of deposits at our financial clinics.
Given the successful launch of our newest digital direct to customer channel, we reduced G. I see some third party and the wholesale funding.
Furthermore, our liquidity position continues to be strong and above regulatory requirements and our liquidity portfolio is largely a highly rated government securities.
Slide 17 presents the sea to one ratio under the standardized approach up 9% at January 31st 2020, and highlights our strong capital position.
Our diversified loan portfolio as shown on slide 19, and stands at 333.5 million billion dollars hosted at year end level. There residential mortgage loan portfolios also closer to year end level and launched a business customers increased by 2%.
Personal loans declined 5% from year end, reflecting the reduction in investment loan portfolio.
Slide 20 highlights our residential mortgage portfolio.
We're maintaining our strategy to see profitable niches and to that and recently enhanced the breadth of our out a offering.
At January 30, Onest 2020 are out a portfolio totaled $1 billion and represented 6% of that total mortgage book and 3% of the total loan portfolio.
Overall this portfolio is high quality as evidenced by very low loss ratios and low ltvs as well as a high high credit scores.
Slide 21 highlights our commercial loan portfolio, which has been Canadian with a U.S. presence.
At 30 at $13.2 billion as at January 30, Onest 2020, this portfolio grew 2% sequentially.
Strong growth and inventory financing and equipment financing was partly offset by repayments of commercial real estate loans.
The portfolio is well diversified and is positioned for sustainable profitable growth.
Turning to slide 22.
In the first quarter of 2020, the provision for credit losses was $14.9 million.
Fair to $10.5 million, a year ago and $12.6 million into prior period.
The year over year increase was mainly due to a few loans in the commercial loan portfolio, However, economic conditions as well as the good overall the underlying credit quality of our loan portfolios continue to results and then industry low loss ratio of 18 basis points.
Impaired loans are shown on slide 23.
Gross impaired loans totaled $186.7 million up $11.6 million sequentially, mainly due to an increase in the commercial loan portfolio.
The allowances for loan losses against impaired loans increased by $5 million from year end, mainly from commercial loans.
Allowances for loan losses against other loans amounted to $57.9 million down $1.6 million as their results have been proven and risk ratings of personal loans and a decrease in Arizona.
Volumes.
The net impaired loan ratio stood at 42 basis points up two basis points from year end.
The bank remains comfortably president provision and the loan portfolio remains well collateralized.
I would now like to provide an update on how we expect the remainder of 2020 to unfold.
And then should improve slightly from does that hold into first quarter 2020, as our loan portfolio continues to evolve towards higher margin loans to business customers.
The efficiency ratio is expected to gradually improved throughout the year.
Along that there's only loss ratio is expected to be into mid teens and the tax rate should be move towards the mid to high teens.
In light of the weak first quarter results adjusted EPS for 2020 is now expected to range from 5% below two being in line with the 2019 adjusted EPS.
As we speak there's growing uncertainty in the macroeconomic environment as well as increasing volatility in capstone markets globally. This evolving situation has the potential to impact our outlook and performance.
Okay. So despite the challenging quarter, we remain committed to execute our strategic plan and work towards that medium term objectives that we have said. Thank you for your attention and I will now turn the call back to Susan.
I would like to turn the call.
For the question and answers.
And Jeff.
Thank you she would like to ask your question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned to off to larger signal to reach our equipment again press star one to ask a question and we will pause for just a moment to live or when an opportunity to.
One moment please.
Your first question comes from the line about Meny Grauman of Cormark Securities. Please go ahead.
Hi, Good morning first question.
Just wanted to follow up on the guidance in terms of.
The net interest margin you're talking about an improvement I'm just wondering what you're assuming right now in terms of bank of cans or rate moves.
Uh huh.
Well I, assuming we're at the moment and were taking a view of the forward the rates that they exist at the moment.
So that's a two cuts.
Now where were doing sensitivity analysis, and ER and stress testing.
Regularly but at this point, we don't we were waiting to see.
Yes, we haven't done pin a reduction at this point.
Okay.
And then if I could just that's kind of in terms of the.
Credit I'm, just wondering about the increase in commercial provisions on the impaired side and.
If you could give them or do you in terms of what drove that increases it.
Is it a is there any pattern there is it's a few specific accounts.
Liam.
Thank you and good morning, Noddy Ah Thanks for your question.
There were a few loans in the commercial lumpy portfolio that didn't become impaired it amounts to about 5 million of provisions.
Beyond the macroeconomic climate pressures, we don't see anything systemic in our portfolios at this point, we believe that these loans are adequately provisioned and they are not tied back to any previous loans.
And then in terms of good recovery in stage, one and two in the personal loans just wanted to get.
More insight into what was moving that does that just migration or a change in economic assumptions.
So in terms of the personal loans, we did see favorable migration overall in that portfolio and and and yeah. This in my view. This is just normal variation ebbs and flows we've talked about that in past quarters.
Okay and then just a final question for me is just in.
In terms of the.
The high interest savings accounts and sort of the promotional rates there.
Do you expect that.
Promotion.
We continue to weigh on on the margin in Q2 and beyond and how confident are you that the clients that are taking those promotions aren't just rate shopping like how how sticky do believe those claims huh.
Well first of all having a diversified sources of funds is a real strength for the bank.
And that includes deposits, obviously with respect to personal customer deposits were pleased but now we have three channels instead of two financial clinics, where we had a few quarters of stable deposits now advisors and brokers and now we have LBC digital our digital direct to customer channel.
We're really pleased that we have gathered a billion dollars in deposits through this channel, which gives us access to or many new customers all across Canada, and this will provide cross sell opportunities Alaska, Craig Tockman to.
Give some more color on that.
Sure.
We've just announced to customers that there will be a reduction in rates, 2.8% from 3.3% effective March 1st.
We believe this remains a competitive offer.
Over the next quarter, considering the reduction in the interest rate, we would not expect trio variations in the volumes.
We will continue to dynamically monitor race and volumes according to the needs of the bank and market conditions.
If I may add man, if that's where the impact on profitability is not expected to be material than 20, and long term longer term to be profitable.
Understood. Thank you.
Thank you. Thank you take or next question from Sumit Mulacek Scotiabank. Please go ahead.
Thanks, maybe start with a qualitative one first on your.
Shifting to the advice based model I know that a it's obviously so early days since you use migrated to.
This new structure just wanted to ask you and then some of this might be conceptual maybe there's some.
Numbers around product offerings, you can share with us.
Obviously, you talked about some of the revenue challenges that are still visible, but as far as the interaction with customers or what you're seeing in terms of.
Product sales cross sell those type of measures is there any a any tangible wins you can Ah you could talk just about it as to how that are being received in your worthless.
Hi, Thanks for the question, Yeah, well as I said in my remarks, we're seeing a gross sales in both mutual funds and mortgages, which is very encouraging and and also a stable or in deposits I'll ask us defense I've, yet to give more colors on the interactions that we're having with customers.
Thanks for your question we.
We're really not be above yeah. The reaction from our customers. Just a reminder, that all these changes were aligned with the evolving customer needs of our customer so spent having more times dedicated to.
Longer discussion with our customer advising them on their future is all positive for the customer and the reaction. So far is is really positive good thing as well is during the first love our transformation plan as you mentioned one of our time was indicated through simplifying our offering for brand customer putting your model what else are preparing for potential work.
All of this is now behind US we are now in the growth mode as the POS wedge of mentioned, we're getting back to basics. Our financial claims are now for customer meeting their dedicated advisor to improve their financial health.
And getting a little bit more specific into into the quarter. Here you know if you go back to.
Your commentary for US what does your then after the.
New contract with a with your workforce was resolved it certainly seem to open the door to the efficiency improvement as an expense outlook.
Getting better for the back to be fair expenses early up.
2% year over year on adjusted basis, and and clearly the revenue piece plays or do efficiency, but I get the feeling from some of your commentary that the aggregate level of expenses. This quarter. I mean, you use the term disappointing for how you view Q1 is expense as a part of that and more specifically what are some of the areas.
That might be this line going going forward and 2020.
Oh, I just can't tell us what to give some specific on those numbers and then I'll double back on the end right.
Okay on the expense expenses side.
Most of the increase in this area in CLO sequentially most of it comes from salary and benefits.
Yes.
By the tone of the vegetarian of $10 million or so and basically 66 million. Our 60% of this is summit is right. That's a seasonally higher elements, including ire vesting of share based compensation and other seasonally higher employee benefit that guy or pay a payroll tax.
Yes, so half of those we don't feel that they will recur, we clearly don't expect to recur in following quarters.
The other part of the increase is $2 million of it is related to higher compensation, reflecting improved better performance in the capital market business compared to previous quarter and business services growth. So assuming those elements state. So those expenses will come with the success of the units himself.
And the remaining $2 million is ready to favorable adjustment to pension costs in the previous quarter.
So that we don't expect going forward. So when we take all these expenses from the main salaries and other expenses, we expect to gradually improve our efficiency ratio the into year by three to four basis points.
Three and 304 hundred basis points coming from the salary benefit that just mentioned and other expenses that we see coming down like professional fees, but the rest of the year.
So that's the expenses point to the extent Nick Spence portion.
That's right for so I just wanted to circle back yet.
Yeah. So so.
Obviously, we're not happy with the border for obvious reasons.
But you know putting this into context, we are recovering right from a.
A period of of decreasing assets due to labor relations environments.
I'm encouraged by what I see on the momentum on the growth side business services has never stop than we see good growth there.
From a mortgage perspective, I'm really encouraged by what I see we're increasing momentum there businesses coming in more than it was last year for sure we're putting in place new programs with major brokers across Canada, I, we're increasing our business development activities.
And ER and basically we're originating more mortgages, there's still work to be done there I'm expecting more from this and we also have to address.
The personal loans and credit card businesses, but all in all we need to be in growth mode.
From an accident expense perspective, we had a border with where we had.
Some nonrecurring expenses, so obviously doesn't help but that's not what explains a we need to work on the efficiency ratio and we expect the efficiency ratio to go down to.
Two more to.
Due to decrease from now to the ended the year.
A combination of both the revenue and expense side of the equation.
Last question for me is on the commercial loan portfolio.
You made it very clear since Ah since you took the real first of all that so that's really where the focus of the bag is going to go and then the numbers. We see this quarter in terms of balances of 2% sequentially seven year over year, certainly solid your husband as we've gone through this a this earnings season your husband, some differentiation that commentary from the various bags.
But how they're approaching the.
Commercial market in Canada.
You know something to be thinking they put up the guys, whereas others continue to go.
If I look at your numbers this quarter and they'll say again too on the quarter seven of the or is that a reasonable expectation for what you think the bank.
Ken can deliver when it comes to commercial and are there any.
Situations from a credit quality perspective, maybe your pricing perspective that give you any pause and.
Pursuing growth at this level.
I'll ask us to fund to give some commentary on growth in the sector.
Thanks for your question I got the we still.
I feel very good about our specialization strategy. So I think that if 100% of your salesforce is specialized by industry, they're really close to the highs and lows of the industry. There are aligning with our credit team as well. So we feel good about the current structure that we have in place.
And we feel good to continue to grow by double digits and the current here.
Thanks for that.
Welcome.
Thank you.
Now take or next question from Mario Mendonca of TD. Please go ahead.
Good morning, everyone and.
Forgive me if somebody's questions have been just another calls and still Familiarizing myself with some of the nuances Everbank can we talk first about.
The sensitivity the bank has the sensitivities of 25 basis point rate cut in Canada, but that might mean to your NIM over it.
Over say 12 months.
Hi, Francois sure all things being equal Myra Moran Mario at 25 before the increase in interest rates would results and approximately 4.6 million dollar redemption.
Net interest income annually, all things being equal with no change in any of the other variable.
But at the start please go ahead to fit.
To that I would say, we still expect even if that would occur.
And when it does occur we would we still believe that there are a NIM is expected to be positively impacted by the volume growth and the explanation that Stephane just gave as we deploy our capital.
And then a and it's all that mix of our portfolio to higher yielding commercial loans that would be partially upset by any.
Increase in interest rate that could occur, but we still see this are evolving mix to be positive thing on.
Revenues and NIM going forward.
Yeah.
You also referred to were lowering the rate paid on certain deposits from.
Say 3.3 to 2.8 I think you made the point that you don't expect us to have any effect on profitability in 2020.
A lot because there's eight months left in the here. If you could you just on March Onest.
Is the logic here that the rate.
This is essentially just offsetting the decline in your realized yields on other securities and other assets.
The logic behind suggesting that it won't have an effect on profitability.
It's more from a funding perspective that we the overall funding perspective has we lowered this rate when you look at our various options that we have to fund our business and our plan lowering their rate by 50 basis point at this point, we see this has not materially impacting our profitable.
They going forward.
More data perfect.
And then finally.
I think on page 14 in your presentation, you were referring to the decline in service charges. You said that it was a change in retail banking behavior.
The 12% decline seems like an awfully large amount, reflecting customer behavior, because I never like a customer behavior, changing and such and.
In such a big way could you talk about what what you're actually so what you're really seeing them.
Well that's there so that's why you're clearly as we moved our.
Our the financial clinics do.
Fewer transactions, obviously, many services you had that commentary before are just totally disappear. So now, it's and financial advice to their customers and new products and try to explain that says a mutual funds and other products are getting some growth.
Since we moved it to the new model and that's what we mean by the behavior we have.
Before we made that switch basically less than 4% of our transaction were done at the counter by clients. So already that was started and not to come in as services being taken at the counter but we had the costs before so now we moved the financial clinics to service and advice. So we eliminate many.
I have that cost us to provide services that were not sought after by customers and so thats why we see on the revenue line clearly on their revenue nine you see a decrease but the decrease in expenses is isn't may is part of our total expenses other expenses salaries and everything.
That you don't identified to date, good financial clinics per se, but their revenues are.
That's helpful. Thank you very much room.
You're welcome.
And if you find that your question has been answered you may remember yourself from the Q by pressing star too.
I'll take the next question from its just kind of Canaccord. Please go ahead.
Hi, Good morning, just wondering if the other expenses I I, just kind of people who they built into them a line item that economic out with if I look at rental property taxes. This quarter was 6 million tracking 11 for awhile.
Can you explain why it kind of swaps that much and die.
It's one late but good guide here.
Sorry, Scott, how you're talking about their rent.
Yeah, the rental property taxes line and other.
No.
Their rent with the advent I as far as 16 started that started in November 1st their rent expenses. It basically theres no more and we need to capitalize most of that Iran. So you have a major decrease of rent by I think it's a 5.8 million or for maybe a 5.8 met yet but.
I have an increase in amortization of format yen. So you have a change in between the end to end. The lines. So you have a decrease of rent expenses by 5.8, you have an increase of about monetization because now you have to capitalize delay the leases and then you have the interest portion that interest cost portion of 1.2 million that's part of.
And then.
So when you take those trailer shipments compared to the previous their rent expenses were basically a bit.
Less expensive, where we have some savings compared to previous periods.
So that explains that they're in their rent there the rent now freezing rent expense.
That's helpful and a and friends why you talked about a whopping remarks about personal.
Getting back to positive territory by yearend did you did you referred to just personal in isolation that was down 15% or does that include credit cards in mortgages as well.
You know the goal of getting to positive loan growth by the end of the year as an overall comments I'm I'm really encouraged by what I see on the mortgage side.
I'm seeing a new loans coming in on a much higher pace than what I've been seen so.
He is very encouraging.
We still have work to do to do the same on the personal lending side.
And the visa credit card portfolio is rather stable and we need to switch more efforts in terms of growth and cross selling.
To our existing customers so that would be the the China, that's before us, but I'm encouraged by what I see so far.
Well, it's a combination of those that those three.
Correct. Okay. Thank you very much.
Welcome.
Well now take our next question that from Flanagan of National Bank Financial. Please go ahead.
Hey, Good morning, guys couple quick questions here, so just going back to the Oh.
Hi, good offering.
I'm just wondering if you guys you're seeing existing clients transferring balances from your other other products.
For or just entirely.
Yes.
Obviously, the LDC digital offering was launched.
Only outside of tobacco.
So given that our financial clinics are in Quebec, we saw I'm very very little.
Crossover from one point out to the next.
Okay great.
And then just running about your early thoughts on AOS means that you proposals for kept regulations for the small and medium sized banks and is there anything you're seeing there anything you think might impact.
Uh huh.
Well, that's coming in may seem to comment on that.
Thank you for your question will in terms of Oxys White paper on the former proportionality, we do believe that actually taking a step on the right direction.
By addressing unfortunately for small and medium sized banks and attempt to reduce complexity in the capital space, while allowing institutions to compete effectively taking reasonable risks. It is a bit early to assess the impact as the consultation with our Aussie colleagues is evolving.
But we have we view last piece moves in this direction is positive.
Okay, Great and then my last question is just died touching back on the commercial loan book in the provisions there.
This quarter, you built right any detail in the regions or specific sectors that it's on sort of some of the trouble there.
Yeah.
[laughter], they're there and in terms of the specific specific areas I don't really want to get into that to the specifics, but they were within our syndicated loan portfolio. They were in the energy and telecom sectors.
Okay, great. Thanks, that's all I had been too.
Okay well go ahead with our next question from a Roberts.
Capital. Please go ahead.
Hi, Good morning, France, why you talked I, just want to come back to the performance based compensation for a moment you addressed it in your in your prepared remarks, and I think answering that question as well, but I'm still a bit confused when when I see that large of a jump both quarter over quarter and year over year.
Like fees and securities brokerage commissions looks flat in fact down sequentially fee income is down sequentially, you're now guiding for the full year EPS to be flat to down.
And so I'm not sure from aware this magnitude of an increasing seasonality, it's up even more year on year than it is sequentially. So can you maybe just try one more time to help me get to where you know what's driving this number up so much this quarter.
Sure when we you you take the a.
Basically it's mostly in the.
The performance based compensation.
About 60% of the including performance based compensation. If you look at it and Photoshop supplementary information, we have about four or $5 million about 60% of it relates to share based compensation that will not recur in the rest of the year.
Basically that says when the time of the year when.
Are you in Netspend options are granted and sometimes.
People at cheap the divesting period, and we need to put desk to expenses on the piano. So that's always.
Basically from Q1, two Q1 you have this obviously you we may and we have a bit more this year than we had previously.
So thats. One then the second one is 40% events as Ray said today higher compensation.
Capital markets. If you recall last quarter, we had a $3.8 million loss on some.
And just trying to fine tune instrument that hit clearly the performance based compensation of those people that she and this year you have and this quarter compared to the other one you have an increase up basically flat 5 million and the results so that and did it.
Basically those people are anywhere between 30% to 40%.
Compensated on those revenues. So that's what so that's why I'd say this one it's based on the results going forward and there you have to growth in business and people and that sector based on their profitability and their Oh, you have access to company.
Station and that obviously, they're doing well unless we saw fund or the increase in loans in that sector. So that's why despite the lower revenues overall indebted portfolio.
That these two sectors have done better than they did in previous quarter.
Ask about it it does just that just to clarify that first component is it isn't about it's not about great bigger grants, it's more just about more vesting and getting equivalent I guess some employees that are eligible to retire until you have to take that charge into Q1 is that more what it had rather than people getting paid more exact.
Exactly Robert Okay. Thank you.
You're welcome.
And we will now take our next question from Rob.
Please go ahead.
Thank you just wanted to get a couple of clarifications here.
On the service or see charge with the customer behaviors is that line going to go close to zero over the coming quarterly call it seven or eight quarters.
As to find you want to comment.
[noise].
Yeah, obviously, moving to 100% advice and having a lot less transaction gradually and few I've data as well into the fact that we're going digital. This line will continue to go down for sure.
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Is it going to be going to zero like much quicker than let's say and million or show a quarter or or do you think that's about the right kind of wait for it to me going down.
If I might add here.
Only the transactions that are in the financial clinics done by human beings.
Where.
Our <unk> dark the charges were where this reduction has secured.
Other fees that are related to things that are done online or things that are on the other products or transaction fees don't disappear.
So the move to a 200% advice meant that we're not doing these these transactions by human beings anymore. We don't have the revenue we don't have the comps.
Yes, I was speaking speed specific just the service charge language I think was discussed earlier.
Yes, yes.
It should not go down as quickly.
Because what is left is.
<unk> is a transactions that are not done by human beings.
Nobody will define said I continue continued to decrease slightly.
Thank you and you've talked about the commercial loan growth that and the pipeline and alike are these by these as syndicated credits.
We as a any other banks, obviously were using syndications S.
Both in commercial and real estate.
Our overall syndicate the desk for business services only accounts for 10% of our loans.
Like Buddy that counts for a but did accounted for I think it accounted for all of that impairment right.
This quarter is that wouldn't be and said that each were syndicated along in energy and telecom.
Sorry, the increase was driven by two syndicated loans right. So I was really good loans. Good quality I guess is what I'm trying to figure out here.
I from an overall quality perspective, our we're happy with the quality of our syndicated loan portfolio. You do have that's inflows as you know in this space syrup on specific situations, but we're very comfortable given our underwriting standards with the overall syndicated loan portfolio.
Okay, and so maybe I'll just finish off with you I mean, I think on a number on.
On a number of Oh locations on this call you've said you weren't happy about the quarter can you feel a little bit more specific about which aspect of the quarter. You are unhappy about was it the expenses with it. The revenue was what was it that you are unhappy.
[noise] all of its a little bit of everything right. We're recovering from a from an asset.
Reduction.
So a decrease in a in the top line.
I'd like to see a flattened out.
Our loan portfolio, we're working on that obviously, having a few having to take a few provisions on that specific loans in this quarter did not help and and having some expenses related to.
Gross in a in or different digital and others. This combination I gave us.
Also we have.
Obviously, not happy with any of it.
Happy with the strategic.
Investments that we're making.
Happy with the fact that we're going and getting customers across Canada now happy with the fact that we welcomed thousands of customers in.
Just not happy with the end result, this quarter, a what I am looking forward to rank is the bar the efforts that were making going in getting that gross like I said last year was difficult to do this year, it's all boots on the grounds and I'm seeing results in India.
And as soon as we see growth, we will see performance life's northwest said from a a loan loss perspective, we have a couple of Oh pickups this quarter, but that doesn't mean that we're expecting not to go forward every quarter and from an expense perspective, or we are working on getting our efficiency ratio.
Down like Francois I mentioned earlier.
Three to 400 basis points is what we're looking for from now until the end of the year.
I'll be a lot happier when that occurs.
Thank you very much.
Thank you.
And once again, ladies and gentlemen, if you have any additional questions. At this time. Please press star one now.
For additional questions.
Hold on just one moment for I guess.
And we have no further questions at this time and like the handed back to fund.
I need closing or remark I sleep.
Oh no. Please go ahead Mr. Anderson for closing.
It is what do we have a challenging quarter like this one but it is most important to remind ourselves why we undertook this transformation.
Why we are working on.
Or working through such an ambitious undertaking transfer missing can be bumpy, but it is worthwhile overall costs are under pressure through transformation, but this is not a permanent run rate and when we get a quarter like this it looks even worse bucks the heavy lifting is coming to an end.
We also need to remind ourselves that a substantial portion of the transformation is already behind us and even if it's not yet tangible we're making progress towards growth efficiency and future performance. We're on a plan well and emissions, we're going to get it done.
We're working on growth and efficiency the years not over we're building something great I will now turn the call back to Susan.
Thank you for joining us today should you have any further questions. Ocwen has information is included at the end of the Investor presentation.
Second quarter 2020 conference call will be held on May 29 need to flow.
Good day.
This concludes today's call me. Thank you for your participation you may now disconnect.
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