Q2 2020 Earnings Call
Good day.
Welcome.
<unk> banking financial group's Q Twentytwenty financial results Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. isn't Cohen Director Investor Relations. Please go ahead.
Good morning, Thank you for joining us on our earnings call bubble, you're all calling in two different or belt locations. Today's review of the second quarter of 2020 results will be presented by itself what each of their president and CEO and plus one other executive Vice President and CFO.
Documents pertaining to the quarter, including Laurentian Bank financial group's report to shareholders Investor presentation.
Supplements can be found on our website in the Investor Center.
Following our formal comments the senior management team will be available to answer questions and then pops luggage older level off for some closing remarks before we begin let me remind you that during this conference call forward looking statements maybe need.
Possible, but actual results may differ materially from those projected in such statements for the complete cautionary note regarding forward looking statements. Please refer to our press release working slide show presentation.
It is now my pleasure to turn the call over to pots wants to jump there.
Thank you Susan and good morning, everyone.
These are challenging tours and cobot Nike, that's not a profound impact on our economy customers communities.
Despite the many hardships that resulted from this crisis.
It's also demonstrated our ability to proactively manage three dos.
So the situation in order to provide service to our customers.
I, particularly trial.
Team members, who are able to quickly take charge at the work.
Prior to ensure that our customers there seems to support I'm sorry, they need.
No more than ever.
First bars, which environment persists or actions will be aligned with the following parties.
To keep our team members and customer safe.
Right.
I support for customers need.
To position ourselves to withstand any uncertainties tells you have to come.
To take advantage of growth opportunities I last but not least complete our strategic plan.
Food approximately 80% of our team members working from home.
Most of our financial clinics business centers operations and call centers fully operational.
They did it banking continues to be accessible.
She members have been able to help customers over the internet phone I didn't person.
Our 61 ratio stands at 8.8% well in excess of the minimum regulatory requirements and our revised operating level that now stands at 8.18, 0.5%.
We have a high level of liquidity at the provision for credit loss ratio continues to be lower than the banking industry.
Yeah strong capital and liquidity position.
And disciplined management.
But this is a time for Britain's.
Although we still believe that chart earnings are not reflected future earnings power of the organization, we have reduced a quarterly dividend to 40 cents per share, which improved operational flexibility I totally agree you anticipated benefits of our strategic plan.
In terms of financial performance for the second quarter, We're actually my financial group reported adjusted net earnings of 11.9 million that eating.
Earnings per share of 20 cents, an adjusted return on equity of 1.5%.
Colby Nike has had a negative impact on operating income and the second quarter.
The underlying improvements in the quarter were overshadowed by the increase in provision for credit losses.
And the second quarter lost a business customers grew by 3% or 11% on an annualized basis.
In line with our guidance for double digit growth.
Net interest income was 4% higher than a year ago, mainly due to a greater proportion of higher yielding loans to this is customers.
This is demonstrating that our plan to approve the business mix is working.
I'm encouraged by the business development is a result with respect to the mortgage and personal loan portfolios, where we have seen increased demand over the last few months an early signs of stabilization.
Capital markets has had very strong results generating good growth in revenues largely from its fixed income business.
On the expense side, we've reduced our workforce by about 200 people of which about how important it probably Matt.
And the second quarter, we've reviewed our expenses.
I think they need to do so going forward actually work towards improving efficiency.
Not want to strategic initiatives.
And the current environment wherever June to try and people learn investments within angles that remains the same.
Okay. What we started starting a strong foundation work on a profitable growth.
Enhancing performance.
More than ever digital technology as part of our there late life.
Addvantage technologies and eliminating all non essential paper based transactions are required in a modern for national institution.
Thanks to the core banking system replacement has already begun.
This final phase includes the migration of all remaining products offered and financial cracks and business services.
My Mic 21, all the personal customers will be onboarded digitally altered your core banking platform and we will begin the migration of existing personal banking customers.
Which is targeted to be completed by the end of calendar 2021.
This will enable all of our customers to enjoy a much improved experience and managing their accounts and do they transactions.
The migration of remaining business customers, if not scheduled to start November 2021, a six month away from what was previously announced.
I used to should therefore be completed by early 22.
Which we won't be able to aggressively decommissioned our legacy systems I think gradually eliminate the associated operating costs.
For financial clinics, the 100% advice smaller is getting momentum.
We are expanding its visor team, which now stands at 400, having onboarded about 25, new advisors since the beginning of the here.
Customer behaviors continued to shift from any person visits to virtual.
We are further optimizing our footprint and expect to have 63 locations by year end down from 83.
Following the launch of RBC digital or coast to coast direct to customer channel were broadening and deepening our relationship with these customers and developing a complete high value product suite.
I'd be ended the quarter deposits from this channel slightly about 700 million inline with expectations.
With this digital offering we are well positioned to take advantage of the expected acceleration and consumer adoption of digital banking.
Although we firmly believe the benefit of moving to the I RV approach and the current contacts and given what we are that we are prioritizing growth and efficiency initiatives. We are reviewing the timetable for eight I'd be and was there to be completed by the end of 22.
For now we expect a delay of at least a year.
When we started the year I had high degree of confidence the 2020 would be a year in which we would return to growth and that the heavy lifting would come to an at risk.
Recent events have certainly changed timetable, but not all resolved.
While these times are challenging have also brought out the best in class.
It is in these times that you define what your organization stand for.
How we treat our customers today well be remembered for years to come.
I would like to thank our customers for the business our team members for their dedication and our investors for their continued support.
We are building, a better and different financial institution, and our commitment to helping customers improve their financial health will not waiver in good times and back.
I now turn the call overture consider that to provide more detailed review of our second quarter results.
That's why.
Thank you it's not so good morning, everyone I.
I would like to begin by turning to strike 10, as Francois just mentioned the financial impact of tools in 19 in the second quarter 2020 reduced profitability compared to last year in last quarter.
Essentially as a result, so higher provision for credit losses.
As outlined on slide 11, adjusting items for the second quarter totaled seven cents per share.
Slide 12 highlights total revenue for the second quarter 2020.
$240.1 million, which was relatively unchanged from last quarter and last year.
Net interest income increased by $6.2 million compared to last year and by $2 million compared to last for.
These increases were mainly due to an improvement in business mix, there proportion of a higher yielding loans to business customers as well as an improvement in funding cost through the greater use of secured funding.
This was partially offset by a decrease in loan volumes to personal customers and the unfavorable impacts of the decrease in a time be spread.
As shown on slide 13, NIM in the second quarter, 2020 was 1.8% up 11 basis points compared to your earlier and up seven basis points sequentially, mainly due to the change in the loan portfolio mix and the improvement in funding costs.
And was partially offset by the decrease in prime be spread.
The proportion of commercial loans in the portfolio stood at 40% versus 37% a year ago as were successfully executing our strategic plan to evolve the bank mix towards higher margin commercial loans.
Other income as presented on slide 14 totaled $69.4 million.
The $5.9 million the exciting from last year was largely explained by a 1.9 million decrease in service charges as the retail banking environment and related customer the eight years ago.
The $1.7 million decrease in card service revenues as transaction volumes decline driven driven by a reduction in consumer spending since the beginning of the pandemic.
And a 1.6 million dollar decline in insurance income.
Customer claims increased.
Sequentially other income slightly decline as the same factors were partially offset by a 1.6 million dollar increase in fees and securities brokerage commissions, maybe due to strong results on fixed income operation.
Slide 15 highlights adjusted non interest expense of $179.6 million, which rose by $3.4 million year over year.
Salaries and employee benefits increased by $3.5 million, mainly due to a higher wages and special compensation paid to team members were required to work in financial clinics or in our corporate offices are independent make up about half a million dollar.
Dollars.
Well performance based compensation increase mainly due to brokerage operations and other sales driven compensation business services.
Premises and technology costs were relatively unchanged year over year and included cost of half a million dollars associated with precautionary measures such as increased training and reinforce security to enable our 80% of our team members to work remotely.
Adjusted noninterest expenses improved by $3.1 million sequentially, mainly due mainly due to lower share based compensation and overall expense control. Despite the cold in 19 really took us just mention of about $1 million.
The adjusted efficiency ratio of 74.8% into second quarter of 2020 remains high.
We're maintaining our focus on improving efficiency as fast as I mentioned, continuing to optimize and that's worth of financial tenants and reducing our workforce to better align with our operational needs are expected to contribute contribute to this objective.
These measures will generate an impairment charge related to these contracts and severance costs of approximately $6 million in the third quarter of 2020.
Slide 16 highlights our well diversified sources of funds in the second quarter 2020 deposits stood at 25.8.
Point $3 billion essentially unchanged from the prior period.
Core direct personal deposits source through financial opinions increase for the second consecutive quarter and demand deposits through intermediaries also increased while certain deposits sourced through advisors and brokers decline.
Digital direct to customer deposits are reduced inline with expectations.
Securitization activities increased by 400 into dollars during the quarter as we continue to optimize our sources of funding.
In the context of evolving global pandemic, we continue to prudently manage our level of liquid assets in March and financial markets became extremely volatile, causing severe disruption to business and economies activity.
To support our customers and provide the banquet necessary buffers, we increased our liquidity level like all banks, we participated in various banks are kinda programs to further diversified our fund our funding sources at a lower costs and maintain.
Hi, or liquid assets.
Slide 17 presents this easy one ratio under the standardized approach of 8.8% at April 30, or so 2020 and highlights our healthy capital position.
The impact of the Aussie transitional arrangements for provision for credit losses.
Represents a positive adjustment to the C. One ratio of about 10 basis points at the same day.
Our diversified loan portfolio is shown on slide 19, and stands at $33.7 billion or 1% higher than at the end of their first quarter.
We launched the business customers continue to be our growth engine and increased by 3% sequentially.
And by inventory and equipment financing activities.
Slide 20 highlights our residential mortgage portfolio.
On April Thirtyth 2020, 50% of our mortgages were insured.
Okay portfolio totaled $1.1 billion and represented 7% of our total mortgage book and 3% of the total loan portfolio.
Slide 21 highlights our well diversified commercial loan portfolio, which has spent a need yet with the U.S. presence.
At $13.5 billion at the end of April this portfolio group grew 3% sequentially, maybe a due to growth and events are in equipment financing.
In response to account Coven 19, we continue to work with our customers, we may need flexibility in managing their own and our offering up to six months of payment deferral for residential mortgages and some personal loans.
For commercial loans customer request and that hurdle programs are reviewed and approved on a case by case basis.
These payment or these options allow customers to temporarily stop making their regular payments, while interest continues or crude accrue on the outstanding balance.
As shown on slide 22 at the end of the second quarter, we had authorized deferred payments of 19% of art mortgage portfolio for up to three months insured conventional and all day mortgages. They account for relatively similar proportions.
The value of deferred payments for mortgages was $50 million for the deferral occurred.
With respect to.
Personal loans at the end of the second quarter, we had authorized deferred payments of about 0.1 person that portfolio with a deferred payments you less than $1 million for the deferral period.
As well deferred payments were authorized for 11% of loans to business customers at the end of the second quarter and the value of deferred payments was $58 million for that period.
Damon deferrals I'm not consider to automatically trigger a significant increase in credit risk or results in such loans being moved to stage two or three when calculating expected credits offices our CEO.
Yeah hasn't been a material change in their level of authorized deferred payments during the month of me.
I would like now I would now like to discuss our disciplined approach to modeling expected credit losses.
As a result of the deterioration and you kind of economic conditions caused by the spread of their kogan 19, pending and their related increase in economic uncertainty three forward looking economic scenarios based upside and downside were updated and use for estimating and species you see how that April thirtyth.
2020.
The key assumptions are highlighted on slide 23.
Hi, weights were assigned to the base and downside scenarios in the small residual weight was assigned to the upside scenario.
Are you see on models, where adapted to consider the recently announced monetary and fiscal measures to promote liquidity needs financial stress on individuals and businesses.
Judgment was also apply to account for this unprecedented situation.
Turning to slide 24 in the second quarter of 2020, the provision for credit losses was $54.9 million compared to $9.2 million, a year ago and $14.9 million into part of the carrier.
The increase was mainly a result of higher collected allowances.
Specifically credit losses on personal loans in the second quarter.
Quarter of 2020 were $17.4 million compared to $4 million into pretty disappeared.
The increase menu related to stage, one and two credit losses of $9.6 million compared to recoveries in the previous period. It was it essentially the result of this significant increase in credit risk due to cold in 19.
For the to losses on residential mortgage loans remained relatively unchanged at $1.4 million into second quarter compared to last quarter and reflects strong underwriting criteria.
Credit losses on commercial loan still though.
$36.1 million compared to $9.5 million in the previous quarter.
Stage, one and two provisions rose to $21 million, so not $927000 last quarter as a result of the negative impact of cold in 19, and collective allowances and individual allowances on a limited number of loans.
Stage, three provisions were $15 million up from $8.5 million last quarter, reflecting impairment charges from nonperforming loans.
As shown on slide 25, the provision for credit losses as a percentage of average loans was 67 basis points to the second quarter of 2020 compared to 18 basis points in the previous third.
This ratio continues to favorably.
Compared favorably to the industry, reflecting our discipline underwriting standards and the strength of the collateral.
The magnitude of code of their coven 19 impact on their Canadian and US economy remains highly uncertain.
Therefore, it is difficult to predict whether the increase in expected credit losses will materialize into a significant level of write offs of or reversals and if the bank will recognize additional increases in expected losses in subsequent periods.
Impaired loans are shown on slide 26.
Gross impaired loans totaled $235.2 million up $48.5 million sequentially, mainly due to an increase in the commercial loan portfolio.
Around says for loan losses against impaired loans increased by $13.8 million from the previous quarter, mainly driven by adverse shifts in forward looking economic scenarios related to cold in 19.
Short term, we like most businesses have little visibility and of course of that they may or the performance of the economy.
But as defined they make wanes and we gained greater clarity, we will update our mid term objectives.
To conclude our response has been quick and our actions have been prudence.
We are well positioned to navigate through these challenging times and we will be prepared for the future.
In the entering the operational flexibility that we're building along with the healthy capital and liquidity levels allows us to support our clients improve our business mix and grow profitably.
Thank you for your attention and I'll now turn the call back to Susan.
Thank you at this point I would like to turn the call over to the conference call operator for the question and answer session and Joe.
Thank you.
Ask a question please signal by pressing star why no on your telephone keypad. If you are using a speakerphone. Please make sure I mean function is turned off to larry's signal to reach our equipment again press star one to ask a question and we will tie for just a moment to allow everyone an opportunity to signal for questions.
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And we will take our first question from Sumit Malhotra.
Bank. Please go ahead.
Thanks, guys good morning.
First question just thinking about the trend line in capital you mentioned that you have lowered your.
Expected for your target range for the Cetone ratio and frankly, I think that's understandable and in this environment.
With respect to the reduction of the dividend do you expect that.
That will keep you.
In this target range I know you're above that right now and maybe more to the point what type of risk weighted asset inflation are you expecting.
As we go through this cycle, obviously, you're you're increasing our during this quarter, which is pretty limited 1%.
Thank you Scott.
How strong capital and liquidity positions and distributors managements, but as a as you said this is a factor of prudence.
Well, we still believes that the current earnings are not reflective of the future earnings power of the organization.
I am certain times with back over 19 pandemic upon us.
This decision.
Improves operational flexibility ensuring that we can move forward confidently aim for growth efficiencies absorb credit losses should they arise and complete the long awaited strategic objectives.
We prefer to go forward with an abundance of caution so a reduction of the quarterly dividend better aligned with our dividend policy you get a prequalified world as back until they read the anticipated benefits other strategic work we're doing.
We are keeping the payout ratio at between 40 and 50% going forward.
Hit ratio.
Oh.
Just in terms of our heavyweight growth, but it really as you as you noted we had a modest growth driven by growth in even business services.
Really the growth depends on how the economy evolves, if we see things coming back we will grow commensurate with the market, we idled targeted plants as frustrated by those to grow our business, but how the arguments evolve really depends on how the situation changes.
And then sort of them to be clear right, then I get the I get the business piece of how that affects are WH. My question is more what is the bank assuming.
With respect to our WH inflation arising from from credit migration as we go through.
Through the next several quarters and presumably the underlying credit quality.
Metrics begin to deteriorate and then you move.
Through your models.
Is that sort of that.
I can give some general I mean, I'm not expecting a lot driven by the mortgage portfolio given.
Relatively low loan to value that we have.
With.
The equities markets improving some of the pressures that would have been on our WH from our investment loans are are coming off but obviously, that's one area outside pressure.
And with regard to migration given the strength of our portfolios right now I don't expect a lot of impact beyond that.
To add to our to be range, but we'll see helping to ball.
And then some of this is obviously the benefit you're still getting for being on the under the standardized approach that is that fair to say.
Some of the benefit is yes, but I would remind you that.
From a in terms of our estimate are on an ERP equivalent basis, we'd be approximately 200 basis points higher. So you have not been freshwatch as a target range of 8.18 0.5 on standardized basis. That's an equivalent a are being target range of 10.1 to 10.5 based on our view of day RFP.
Thanks I'll requeue.
Thank you Simon will.
And we will take our next question from Sohrab Movahedi of BMO capital markets. Please go ahead.
Yes. Thank you.
I think you've obviously talked to the economic uncertainty, it's that big degree of complexity on the strategic transformation program.
I just.
I Wonder if you could just talk coast, who.
Ill.
You decided on the order of magnitude reduction.
Yes.
The dividend I mean I guess.
Just trying to understand how to think who went through it.
Why.
We just about 40% thought 80% for 20%. We just is that is that something could talk to you a little bit.
Absolutely obviously, when we went into the year after a year and a half of a flavor grows et cetera.
I started the year by thinking that we would earn our way out of it.
And that earnings would come back faster as we plan to you know I announced a year as being a year in which as the heavy lifting would be coming to an and how we would focus on growth.
Obviously, kobin changes that slightly by introducing higher provisions for loan losses and delays.
Just in terms of priorities in terms of serving clients, a which is the ultimate priority.
In these the in these times. So we just made the the prudent choice to say well what or how do we have better aligned.
The the dividend payout or with the policy in a pretty cold at world.
And and instead of trying to earn our way out onto like we plan to do it is that you don't make the cut right now stay prudent.
And as earnings.
Roll back to what they shouldn't be in a post strategic plan world than the dividend would grow along with it.
Yes, yes, I'm sorry, just I appreciate that said I appreciate that I think it is putting guy not questioning the prudent I just want to know how you arrived.
At the order of magnitude of reduction or what gives you comfort that.
This new level will be able to.
Ill take that tend to target there.
Thank you.
Well, we took a several factors into consideration as the first of which is the fact that a in a pre covert environment. We were at 9% CD, one and we finished the quarter 8.8 and that our revised target for operating at CP. One level is a range of 8.1 I trained.
Box so we have.
Quite a bit of capital our room here I to wave to be able to withstand.
Or any future losses, I continue our growth plans et cetera, and we didn't feel that it was required to go any further than what we did.
And from a you know trying to set the level discussions around where where are we in the last few quarters of last year.
We were at a payout ratio that was higher than our policy.
And and trying to do you said you know expectations in terms of where should we be at this level. Wes you know these are the factors that influence started decision making.
But if your question as what gives you comfort.
I would think that the buffer that we have in terms of operations is a great opportunity.
Okay. Thank you very much of that.
Well now take our next question from I guess he added a sign of National Bank financial. Please go ahead.
Good morning.
You know dividend cut a is one strategy to preserve capital I'm wondering if you're evaluating other others do them the discount the.
Are you looking at any portfolio sales potentially to reduce your WH, but not in the past, but maybe do the.
Harder look about strategy today.
Thank you for the question I I got real no. We're not looking at portfolio sale at all or we are looking at growth in our portfolios.
And no large scale acquisitions like we said in the past, but a small portfolios we'd be open to looking at that.
We want to switch more that's on the balance sheet and Weve sets over the last.
Year, or so and we've been working very hard and successfully on the business customer side as we've said in our remarks. This has continued to be a growth engine for us and turning around a personal customer side has been our focus I'm encouraged by the organic or business development activities that we've been saying.
I will then slowly.
Summing up the ranks in terms of market share on the mortgage broker business.
And we've seen our recently no our efforts start to pay off on personal loan side as well.
So we're seeing some satisfy aside signs of stabilization.
So really you know as we're going through the this crisis now that everybody is home.
Or 80% of our team members our home.
Yeah, we're open for business and we're looking for growth.
From a drip perspective.
Obviously, we discussed that every quarter.
And we'll discuss that again next quarter, but for the time being given that these are unprecedented times I. We just left the drip ads is for now and we'll see what we do it back at the next quarter for the moment. It gives us no extra flexibility on on capital.
And of course more capital means more growth.
Thank you the comments about.
Your economic scenarios and putting a.
Have you are you on the base case, and the pessimistic case too.
For the German your underperforming provision this quarter.
If I understand correctly.
These cases.
Got it pretty much a V shaped recovery for bye bye.
Q4.
For early 2021 way or back to pre Cobra GDP growth levels.
Oh Washable Gordon.
They have you want to answer that yeah. Thank you got room for the question good morning.
Good morning, we calibrated our scenarios based on a I'm sure you saw the ranges.
So snares with bank of Canada put out and all of the de ships put out a and provided economic scenarios and our calibration in terms of our base case.
The favorable case, and the pessimistic case, where based and aligned with what we saw the industry in the bank of Canada provide.
Right.
By description.
And I grew one of the based security I.
I know you like an immediate being would probably be a.
Too optimistic for our scenario.
If you look at the bank of Canada. It wasn't it immediately it was more like you ish or now.
Okay.
And lean one way I view, the performing provision regarded by category I was wondering.
What do you remember too.
The allowance or can you tell me geographically.
Through Canada, how that was split.
We don't generally comment on breaking out as you asked.
That wouldn't.
That said, we're very comfortable with it results were seeing a in our MTF portfolio.
It's a in the U.S., it's very diversified across geographies and products.
And in a in <unk> and Canadian terms.
In.
In terms of sub segments at sea, it's driven by commercial.
Largely overall.
Would it be inline with the G. Theres nothing there's nothing Alberta, I didn't get relative to your point, there's nothing else sort of specific I mean, we don't have a lot of exposure to oil and gas almost nine Alberta portfolio and from a mortgage perspective, it largely insured. So there isn't there isn't a geographical bias per se.
Okay.
I'm not I'm not really.
All right about your Alberta exposure I'm I'm wondering how much of the performing provision was assigned to north point.
Hey, Brian.
We don't generally speak to it so we're very comfortable with the numbers I, what I will say Gabriel it's where we calibrate it that is based on what we've seen in terms of losses in similar situations and factored in the government support and we're very comfortable with provisions that we have there.
Thank you also get together then if I if I may have ft here.
Ask us to fans to add to jump in and talk about RMCF business, if I might because not all geographies are living the pandemic in that in the same way.
The fan you want to jump here and here for a site.
Yes, thank you for us right the.
Just a.
North point I'd, another great sort of the year, obviously pre a co vis again into double digits area.
Later results.
North point are showing a higher level of repayment.
Then last year for April meaning that we are getting reimbursed on units that are sold by the dealer faster than last year.
But there's less new with events last new volume because the manufacturer a close for a couple of weeks and a good that's our that we're financing through a north point.
As a comparision. This morning in the newspaper there was a great articles on V RP showing that the demand right now in the crisis for these type of goods are quite high and this is what we're financing a lot of what we're financing at the North point, R&D Rvs and the boats so it.
Right now the manufacturing or reopening, they're working at 80% to 100% of their capacity with some challenges they need to reschedule in reorganize their process they need to retire staff in competition with the U.S. government program and do you need to find solutions.
To supply chain issues for parts and materials, but the demand for lots of what we're financing is close to being mark back to normal in the states.
The RV industry specialists are saying that the less travel going forward could mean more RV sales.
Same for both.
People are really director ring their leisure a budget through these type of goods.
This is what we're financing of Northpointe inventory of these type of goods, which we'll see and are already seeing at higher demand.
Which mean future growth for us.
It makes sense. Thanks.
Okay, well now take our next question from Darko Mihelic of RBC capital markets. Please go ahead.
Hi, Good morning. Thank you a question on you can provide a little more color on the commercial impairments this quarter and the stage three losses that you took against it and as well just looking at the reserve.
For your commercial.
Stacy reserves versus the amount of loans in there I wonder if you can provide some color on kind of what happened in the quarter there and in.
Provide some idea as to why we should not expect further deterioration of the size.
Sure. The Arco. Thank you. Thank you good question.
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First of all I'd, just like to talk about how we develop our pcls and just you know when I looked at the analyst calls over the past a while it seems to be a little.
A question out there as to how the whole process works and I want to make sure everybody on the same bake the two key areas of change within a when you're looking at driving your Hcl as as most of you know.
As the assets migrate across the stages and as you change your out your economic scenarios, including the waiting on those scenarios. So both of those areas are impacted by cope it and the corresponding impact on the economy.
Our approach largely models based.
Including the commercial for the commercial impairments, we have historical parameters nation.
So the previous financial crisis, we can adjust those for the government relief programs that went into our models as we've said that the PCL other side other than as the specific.
Reserves was really driven on reserves on the performing loans.
Our commercial portfolio not involved in many of the sectors that were challenge, we're not in oil and gas we're not in hotels were not in restaurants, we did a deep dive on the portfolio line by line.
And our commercial portfolio continues to perform relatively well and that's driven by our disciplined underwriting standards.
We do have the factor of bank of Canada government relief that you're factoring in but.
In terms of where we're out right now as I said Weve calibrated to historical large part of it is really against performing assets and we're comfortable with where we are overall in terms of our provisions and if if the scenarios evolve as expected.
I wouldn't we you know that says that the reserves are really going to be driven by how those economic.
Situations change in the next quarter and subsequent quarters that we see things get better then you'll see a the reserves said remember leases or if we if we don't so you'll see reserves increased but we're very comfortable where we are right now disciplined approach not in a lot of the other areas and calibrated to what we saw historically adjusted.
For the government really.
Okay, and maybe just to be very specific I mean, what I'm looking at is is really on page 16 of your supplemental.
Specifically I'm looking at the commercial loans in stage three at 152.
0.9 up from 109, Thats, a 40% quarter over quarter increased.
So I was just wondering if you can talk too.
You know, we don't typically see that kind of.
Of an increase in impaired loans about talking about the modeling of stage wonder stage two.
Specifically zeroing in on the commercial impairments rising 40% quarter over quarter.
Yeah, we have seen a couple of files.
That said that have some some challenges on it we think these are isolated.
We talked last quarter, there were a couple of files. This quarter, we've got a couple of files.
I don't believe it to be a trend, but we have had a couple of files in a in one or two segments that.
That have driven it I don't think that this is a trend I think it's a more reflective of a combination of weaker a weaker files combined with with the covenant package to push them over the over the edge in that State Street.
Okay. Thank you.
And we will now take our next question from Doug Young of that does that make capital markets. Please go ahead.
Good morning, just going maybe following on that question you know the sequential increase in the commercial loan and stage one and two.
Ah provisions and then the stage three provisions can you maybe talk about and then you can kind of build in the impairments can you talk about it by segments like what was it more the inventory finance equipment finance commercial real estate or general commercial can you just maybe give a little more perspective, what what drove the increase in impairments in the increase in the allow.
When says on the commercial side.
Well I can tell my colleague I'm talking about how the business is evolving but I don't think there's any one area that stood out.
It's in my mind, we saw a relatively consistent impacts across the portfolio I mean, the I'm. The one thing I would say is the strength of our underwriting.
And collateral positions really to mitigate a lot of the impacts I remember 97, two plus percent up our portfolios collateralized. So I wouldn't highlight any one segment as a as a as a big driver on the commercial side.
If we were talking about the personal side, obviously, a unsecured Ah. It's a you know cards is where do you see a bigger increases stuff and if you want to add anything to that on the commercial.
Yeah. Thank you William maybe just due to the point on the quality of the portfolio.
As a as our competitors, we offered deferred payments both in commercial and in.
Personal businesses and the just a one point on the the overall loan to business customers.
Only 10% of our portfolio outstanding right now so about 1.4.
Billion.
Skin were given.
30, M. for three months. So it then person for us is.
We feel it's a it's a good place to be in its low.
Maybe just on the stage three like you say, there's a number of files was it all in one like category was that it was there a particular area or a particular business line.
That drove that sequential increase in impairments can you said, there's a few pilot what.
We often get from from some of the banks just kind of this related to hospitality or transportation or whatnot like is there. Some more detail you can get Oh, we we don't have a at Doug we don't have a lot in hospitality our transportation. So that's why you know that's the big hard hit sectors were not in those.
Given like Oracle.
Yes, yes, yes, as an example of course specific that they these are more specific situations that we're facing some challenges and I think that if the current situation push them over.
In terms of it.
There's been a spillover impact going to be a few weeks, where we're facing some challenges going into this and then the impact to the call. It is as it really highlighted push them over the edge.
Okay.
Just just in France.
If there was a specific sectors I can I like I quit it's not it's it's a couple of individual buff.
That Fred slot they couldn't dividends you talked about targeting 40% to 50% payout I mean are you, suggesting that you know you simply do the math the through this these tough times.
You know 80 to 80 cents to Buck is roughly the range in which you know Laurentian bank should be she up should be operating on a quarterly basis is that is that reasonable.
I I think that's when we looked at a.
Lower dividend its was really as a matter of prudence as I've said in my previous answer what do we started the year the target of 40, 50%, we thought we would earn or wait to it.
So.
If coking coal good wasn't there.
It's likely that we or whatever.
Maintained our our course, a this is by an abundance of caution.
And and as a as a you know I've said that they are the air.
There's a lot of things are behind us.
But we've struggled a with a with a you know what a difficult year in terms of personal customers.
I'm seeing early signs of stabilization and we're working on growth as growth Commons and efficiency becomes then earnings will come but I can't really predict the next six months.
So doing you know this now I think is the prudent course I wouldn't read.
Too much into the level in terms of the.
Future earnings.
We will see I don't know housewife, you want to add.
Additional thoughts.
[noise], thank you for elsewhere.
I would just Hadnt <unk> research anyway, you said earlier when the Prequaled bid the way.
Earning power earnings that we have was also an indication of where we.
It was a touch wind and in our analysis done.
Great. Thank you.
That outside.
Yeah.
Peter or the it it just seems like it's too early to tell that it's gonna be within that range right now, but you. That's the range that you brought on a quarterly basis was reasonable, but maybe not over the next few quarters, because you kind of look through but that's tough environment is that fair.
Securitization that affairs.
Knowing that could bear assumption I mean, no knowing that coal visit we we need to get through coded as well there. So it's very difficult to make any type of a projection guidance on.
And.
The outcome of difficult bid and the impact on the bank's results going forward.
The one thing that I'd like to double back off though is there's the work that we're doing on efficiency side and.
As you know.
We had.
Talked about the latter half of the year as being better than the first half the of the year on on expenses.
And of course.
We've done some work we've done some additional work Weve released and lowered our headcount a this is work that's ongoing so.
<unk> expenses as a as a half of a have a of the recipe when we're talking about improving the efficiency ratio.
The other half being or revenues.
So I think that the work on going is still out there and the those positive impacts are gonna be felt.
But not knowing.
How the pandemic will play out gives us a little bit of of reservations about commenting on forecasting.
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Thank you.
And we'll take our next question from Scott, China Canaccord Genuity. Please go ahead.
Hi, Good morning, just on the the margin it was really strong quarter on a sequential basis that that held up here and I. Maybe can you just talking about the pieces and the quarter and and kind of maybe your outlook over the near term. Thanks.
That's what I want to comment on that.
Thank you. Thank you Scott.
[noise] when compared to sequentially and last year sequentially, it's up to 11 beeps, it's basically acquity between the higher proportion of the yielding loans to business customers and Delaware cost of funding.
And Dan was.
Partially offset by decrease in the prime be spread that we everybody lives through in the last quarter. So to give you a sense at half time between the two in time.
Two into it and then in the same thing from Q2 versus.
Last year versus year over year in Q over.
Q1 over it you too.
The same examination basically Scott.
And I didn't give maybe haven't yet right.
Andy I'm, sorry, I was getting to this okay.
On the outlook, obviously, it's dependent on the various factors as you know.
Good thing the volume mix in the second half of the year in all the factors that might influence funding costs going forward.
However, we remain in a very low interest rate environment and that could put some modest pressure on NIM.
In the new future, which kind of too early to tell to provide very clear guidance at this point.
And just maybe on the payment deferrals on me on on the commercial loans.
Can you give us a sense like of its concentrated in in any particular sector or region.
I've seen these are flexible I guess like by not on a one to one basis.
Well the M. again, Scott has as I previously mentioned, a it's not concentrated in any region or sector. These are a few files were working through them.
You know in in a in these circumstances when when you have a that an account that is.
Having negative and then you have the compounding effect the scope it tends to push them over the edge, we're working through them, but we don't like this the trend and it's not a particular sector segment. It's just a few files.
Well, we're not in the segments that are more challenged.
Scott was part of human question, that's without any or on the deferred payments through commercial accounts.
That's right yeah.
Oh in terms of deferred payments us to find you want to comment on that yeah. Yeah.
Thanks, Scott I'm, obviously, I I said that the 10% of our overall business services portfolio was under or is there room right now.
In terms of it's it's a bit higher and commercial than in real estate for example.
Commercial is roughly at the end of 15% and the real estate is is very low at four.
So so so a bit higher than commercial than than real estate that being said.
It's a in in real estate a lot of what we do it because he is construction loan or so so so they all day pay is the interest. So obviously they have not ask for any murder m.. So it's a number right, but it's not that.
That would be revealing the a inventor refinancing or is that a 19%, but but even there it's not exactly a payment because these assets are still up for sales. So what we've done is a we offered a program to all our dealers generally.
Speaking they pay 40 interest on a monthly basis and after six months. If the unit is not sold at the start reimbursing part of the capital at roughly 2% per month.
In the in it with the help of our manufacturer partner, we offered a new program whereby the dealer could or could differ some of these payments for up to four months and right now 19% of our portfolio was under does that but that being said again. These units are still up for.
So and as soon as they sell them they reimburse us so it's not comparable dollar for dollar for you standard commercial loan.
Thanks, that's helpful and just lastly, maybe French why you kind of called data that you know kind of special compensation that that impact that next is expected to continue throughout dependent.
Uh huh.
Oh.
Well, Scott, we're evaluating concentrate that position. So we don't know we don't make a commitment for the long term, but we're evaluating this on a regular basis.
Okay fair enough. Thank you very much.
You're welcome.
And ladies and gentlemen, if you have any additional questions. At this time. Please press star one now and we will take our next question from Sohrab Movahedi of BMO capital markets. Please go ahead.
Yeah. Thanks, Slim I just wanted to get it.
Clarification did that commercial stage three loans you were talking about.
You said it was it was it a couple of accounts for more than a couple of accounts.
So a couple of accounts.
So I mean, 50 50 ish million increase I mean, our goes.
Is it fair to say those accounts were on average 25 bucks each.
I don't want to comment on the sized accounts, but you know I guess I can speak to our commercial limits, which are about 40 million.
That's a couple of accounts.
Okay, and so can you comment how much you provided against whatever.
Notionals you have out on those two accounts.
I think we publish our watch list numbers I'd, rather not get into the specifics we can follow up with you offline.
Thank you.
And there are no further questions I'd like to hand, it back over to Mr. cost why does help me for closing remarks.
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