Q2 2021 Laurentian Bank of Canada Earnings Call
Good day, Boswell and welcome to the second quarter of results 'twenty 'twenty, 1 for Laurentian Bank Financial Group Conference call. Today's conference is being recorded at this time I would like to turn the conference over to MS. Susan Cohen Director Investor Relations.
Please go ahead ma'am book.
As you'll have tooth and good morning, and thank you for joining US today's opening remarks will be delivered by Ranya Llewellyn, President and CEO and the review of our second quarter of 2021 financial results will be presented by Yvonne Day Shah Executive Vice President and Chief Financial Officer. After we.
Which we will invite questions from the phone also joining us for the question period of several members of the bank's executive leadership team Liam Mason, Chief Risk Officer, Kelsey Gunderson head of capital markets and I think puzzle head of commercial banking and for the first time clean of God Teslik.
Head of personal banking.
All documents pertaining to the quarter can be found on our website and the Investor Center.
I would like to remind you that during this conference call forward looking statements may be made and it's possible that actual results may differ materially from those projected in such statements.
And for the complete cautionary note regarding forward looking statements. Please refer to our press release or to slide 2 of the presentation.
It is now my pleasure to turn the call over to Ranya Llewellyn.
Okay.
Thanks, Susan Baas, you'll let us good morning, and thank you to everyone and for joining us today.
I would like to begin by expressing my deep sadness about the recent discovery of the remains of 215 children buried on the grounds of the former of residential school in Kamloops BC.
As we pause and honor the lives of these 215 innocent children and the countless others.
We must also make a commitment to them and their families that are individual and collective action as a nation must focus on writing these wrong.
Moving now to our second quarter on behalf of the entire leadership team I want to thank every 1 of Laurentian bank for their efforts over the last quarter and for their ongoing commitment to our organization and for the new leadership team.
You have continued to grapple with the competing priorities of home life and your ongoing commitment to the work of the bank.
And your efforts are very much appreciated and directly contribute to our positive results.
As of the country continues to work its way through the third wave of the pandemic, our priority remains of health and safety of our employees and and supporting our customers and communities. During these challenging times.
For our part we are offering all our employees pay time off to get vaccinated and encourage everyone to do so as soon as possible.
With a number of new Covid, 19 cases, declining and with increasing vaccination rates across the country.
There is reasons to feel optimistic.
Turning to our results and the momentum we built and the first quarter of 2021 continued into the second quarter delivering adjusted net income of $56.7 million.
This represents an increase of 19% quarter over quarter and is almost 4 times higher than a year ago with adjusted earnings per share of a dollar of 'twenty 3.
Our results were driven by strong performance and capital markets.
Lower provisions for credit losses, and our continued focus on cost discipline.
The PCL includes a reserve release on performing loans of $9.9 million, reflecting improvements and economic forecast.
The bank has also maintained its healthy liquidity levels and a strong capital position with of CET, 1 ratio of 10, 1%.
This quarter also saw some key developments that I would like to highlight.
Following the employee vote, the Canada and industrial Relations Board revoked the Union certification covering the unionized employees.
Both <unk> and S&P upgraded their ratings outlook on the bank from negative to stable recognizing the solid progress that the bank is making.
The bank launched its inaugural covered bond program issuing $250 million at the beginning of the third quarter to further diversify and optimize sources of funding.
And we announced the issuance of $125 million of limited recourse capital notes.
But for the proceeds are earmarked to redeem the preferred share series and 15 with a positive impact on the cost of capital.
While I am pleased with our overall performance for the quarter and the first half of the year. There continues to be much work to be done to position the bank for sustained growth and profitability.
As a result, we do not expect this year of transition and strategic refocus to be a straight line to success.
You will recall from previous quarters that we've established 3 strategic pillars that are guiding all of our efforts and actions they are.
Cultivating a customer first culture.
Driving and agile and innovative mindset.
And engaging and empowering our employees to work as 1 team.
From those pillars, we identified 3 key priorities in 2021.
Number 1 and renew the senior leadership team and organizational structure.
Number 2 increase our efforts on cost discipline, while pivoting to structural cost opportunities.
And number 3 conduct a thorough review of the bank's operations and develop and new strategic plan.
I would like to provide a brief update on our progress against each of those priorities.
First as part of renewing our senior leadership team, we appointed Kevin of ground Test Lake as executive Vice President and head of personal banking.
With 25 years of financial services experience, Kevin has a strong track record of transforming businesses and driving our customer first strategy. She is leading our 1 team approach to personal banking, which includes the Quebec branch network digital banking and B to B Bank.
With the acceleration of Digitization changing consumer needs and speed of change technology has become a key enabler for all organizations, especially financial institutions.
In order to support our need to become more agile as an organization and more digitally enabled and we will be conducting a formal search for a new chief Technology officer.
Second.
I would like to highlight the continued efforts and the bank to carefully manage our of discretionary expenses are.
Our focus on cost discipline enabled us to improve our adjusted efficiency ratio in the second quarter by 490 basis points from last year.
Maintaining this ratio below 70 per cent.
We are now pivoting towards cost optimization.
And alignment with our overall theme of simplification. We are reviewing several of our key partnership agreements to ensure that we are getting the best value for the bank's dollars.
As we continue to review our end to end processes, we will look to leverage partnerships as a way to drive further efficiencies.
Last quarter, we mentioned that addressing the underperformance of our mortgage business was a high priority and committed to sharing our progress as we embarked on an end to end review.
This quarter, we conducted a review of our mortgage broker channel origination process and found that the customer experience is complex and the process is lengthy and there is an inconsistent level of service for our brokers.
As a result, we are instituting a number of improvements including.
Piloting a program that segments and differentiates brokers to improve the customer experience.
Reducing overlap and duplication to streamline and simplify the end to end process.
And establishing a dedicated and to and file ownership structure to improve our response time and service levels on.
And while maintaining our disciplined underwriting standards.
We are now extending this review to our mortgage broker channel retention process and to our branch channel.
On our last call I talked about the ESG journey that we have begun at Laurentian bank and how committed I am to it.
That's why I announced at our AGM that I am personally taking the lead of Laurentian Bank ESG champion, making myself directly accountable for our ESG strategy and we will be working closely with the board.
We've also included ESG and Eni targets and all leaders of scorecards linking these initiatives directly to performance as part of our efforts.
To further support our ESG initiatives. This past quarter, we established and executive ESG Steering Committee and cross functional working group and we have appointed our CFO Ivan to shop, and the lead of our Tcf D Task Force.
And we launched our first courageous conversation series led by the newly formed Black employee resource group.
I look forward to continuing to update you on our progress in the quarters to come.
On May 26, Laurentian bank celebrated its 175th anniversary.
Not too many Canadian companies can say they have been part of the fabric of our country for 175 years.
This is an incredible milestone and it is an opportunity to reflect on our remarkable past and to celebrate the strength of our routes.
Our evolution as an institution is 1 built on prudence innovation and dedication to serving a market that was previously underserved.
What hasn't changed and nearly 2 centuries is our unwavering commitment to serving the financial needs of our customers our shareholders and our communities.
To promote our customer first approach, we have launched several deposits and credit card 175 branded cash back offers to reward our existing customers and acquire new ones.
As we continue to celebrate throughout the year and to support our renewal and growth strategy additional product offerings will be launched.
Across the board our people are telling us they want to play a vital role in our future success and I am pleased to say that I and see a renewed sense of pride and of winning attitude across all business lines.
As we look towards our exciting future. Our continued success will be the result of how we move forward together as 1 team and as 1 bank.
I am now pleased to turn the call over to Eva for his first earnings call as our CFO.
Let's see right now both of them.
And good morning, everyone.
I would like to begin by turning to slide 9 which highlights of the bank's financial performance.
Other revenue increased by 4% and adjusted non interest expenses decreased by 3%.
And positive operating leverage from last year.
Adjusted net income reached $56.7 million and the second quarter of 2021 and.
Adjusted pre tax pre provision income totaled $75.1 million up 14.6 million from last year.
And more granular review of the drivers of our performance begins on slide 10.
Year over year, net interest income and Thats and the rest of margin were relatively unchanged as improved funding costs were largely offset by new words on volume.
Turning to slide 11.
Other income was up 13% from a year ago.
The increase was mainly due to the strong contribution from capital markets and treasury activities, which improved by $4.5 million as well as from hard landing fees and stemming from increased commercial activity and commissions from sales of mutual funds, which benefited from the strong performance of <unk>.
Financial markets.
We continue to have a discipline and focus on costs.
Slide 12 highlights and Jeff.
And non interest expenses were 3% lower than last year.
Salaries and employee benefits increased by 4%, reflecting higher performance based compensation related to strong capital markets revenues and the overall improvement and profitability.
This was partially offset by lower salaries from a reduction in head count.
Premises and technology costs were 2% lower year over year, reflecting good cost control.
Other non interest expenses declined by 22% stemming from a general reduction of expenses and swing from efficiency measures and the current economy conditions.
Yes, Justin efficiency ratio remained below 70%.
Normalizing for the higher performance based compensation and the efficiency ratio would have been similar to the first quarter on.
Underscoring our continued cost discipline.
Slide 13 presents our sources of funding, which we continue to strengthen diversify and optimize further.
The bank increased its use of securitization over the past year by $1.6 billion.
Considering this increase and the lower loan volumes and we chose to reduce total deposits from advisers and brokers by $1.7 billion.
And wholesale deposits by zero point $6 billion.
These decisions and optimize our funding costs and contributions of the improvement in net interest income, while providing greater flexibility and growth resumes.
And that Kim personal branch notice and demand deposits increased year over year by $300 million.
For 12%.
Finally, we recently came for the market with 2 inaugural issue.
Establishing of covered bond program and shortly have third quarter and we closed our first 250 million covered bond issue.
So on the first sorry. This is the most efficient form of funding of conventional residential mortgages and will allow the bank to deliver a competitively priced product to our customers.
The bank also issued $125 million of limits.
Limits of the recourse capital notes at the beginning of the third quarter with the proceeds to be used to redeem the preferred share series for 16.
This will generate more than $2 million and net.
<unk> for the bank.
Slide 14.
Our strong capital position.
The CET 1 capital ratio presented under the standardized approach stood at 10, 1%.
Internally generated capital and other gains related to employee benefit plans and equity securities to use designated at fair value for OCI, whereas the main drivers of a 30 basis point sequential increase.
And the currency 1 level the bank as of about $350 million of excess capital based on the midpoint of our risk appetite range of 8.
Just wanted to 8.5%.
Slide 15 highlights of the commercial loan portfolio, which grew by $59 million sequentially or about 1 other than $15 million, excluding the impact of foreign exchange.
Growth and our real estate lending was mostly offset by a decrease in inventory refinancing risk.
Collecting seasonality the impact of foreign exchange and continuing high consumer demand for recreational day.
The latter has kept the dealer for the utilization of the rates and the mid thirties compared to the mid fifties historically.
Over the past year, our business development team is expenses and network the dealer and Thats worked by approximately 20%, which positions us well for the post pandemic of recovery.
Furthermore, the bank's exposure to sectors, most impacted by the pandemic, namely restaurants hotels, and retail models business aircrafts and travel as well as oil and gas is low of about 2% of of our total loan portfolio.
The strength of our underwriting good diversification and strong collateral and contribute to the high quality of the commercial loan portfolio.
Slide 16 presents the Pan Canadian residential mortgage loan portfolio.
Residential mortgage loans slightly declined by 1% of during the quarter.
And as Ron mentioned, we are thinking of actions to review our end to end mortgage processes to improve the customer experience and to renew growth.
The loss ratio improved to 6 basis points from 10 basis points last quarter and mainly reflects the conservative credit quality of the portfolio.
Insured mortgages accounting for 57% of the portfolio is 1 of the highest ratio was in the banking industry and.
And when combined with a low LTV on the uninsured portfolio contribute to reducing the overall risk of this portfolio.
Turning to slide 17.
Allowances for credit losses totaled $185.5 million.
Sequential decrease of $8.1 million includes $9.9 million of releases of provisions on performing loans, reflecting an improved economy outlook.
ACS continues to take into consideration our cautious approach given the uncertainty related to new variants vaccine and sensing.
And province of Lockdowns, as well as decreasing and government support.
Mario weights were unchanged from the prior quarter with higher weight attributed to the base and downside scenarios and the lower waste through the upside.
As shown on slide 18 the.
And the provision for credit losses was $2.4 million and the second quarter of 2021.
Compared to the last quarter PCL decreased by $14.4 million.
Mostly due to the releases of provisions on performing loans, reflecting an improvement and the economy outlook as well as lower provisions on commercial impaired loans.
PCL on loans ratio stood at 3 basis points and the quarter compared to 20 basis points last quarter.
Gross impaired loans on slide 19.
Decreased by $18.8 million from last quarter, reflecting the return to performing status of some commercial and personal on the loans as well as some for repayments.
I would like to offer some thoughts on how we see the third quarter of developing.
Despite the longer quarter net interest income is expected to be in line with Q2, mainly to the recent and anticipated decrease in inventory financing volume for Q3, reflecting seasonality the impact of foreign exchange and dealer for this utilization of arrays of that yet to normalize.
Net interest margin is expected to be a few basis points of order for the same reasons.
Capital markets has begun the third quarter with positive momentum following a record quarter and Q2.
The commercial banking pipeline of strong particularity and real estate lending, but loan growth is expected to be offset by the temporary softness and inventory financing that I just mentioned.
We will continue on a heightened focus on cost discipline and the hain to keep the efficiency ratio below 70% for 2021.
Finally provision for credit losses continues to be difficult to predict on a quarterly basis.
Uncertainty around the pandemic is lingering while economic indicators are moving and the right directions.
Furthermore, we have not yet seen the expected.
Migration and credit, which led to low provisions for credit losses this quarter.
Our approach to credit losses remain prudent and we believe we remain debt quarterly provision.
We may see additional releases and the second half of the year should conditions continue to evolve favorably.
Considering these factors, we expect pretax pre provision income for the third quarter to be similar to the second quarter.
I will now turn the call back to Susan.
Yes.
At this point I would like to turn the call over to the conference call operator for the question and answer session.
<unk>.
Thank you, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star 1 to ask a question.
And we'll pause for just a brief moment to allow everyone an opportunity to signal for questions.
We will take our first question from many Coleman of Scotia Bank. Please go ahead.
You mentioned that.
According to the bank calculation of about $350 million of excess capital and I'm wondering what your capital deployment priorities are and how you think about that $250 million.
Thanks, Sean.
Thanks, Thanks, Manny so yes, we are well capitalized of 10, 1% based on a standardized approach.
And it is above our risk appetite, which is between 8.1% to $8.5 which leaves us with approximately $350 million and access capital. Our number 1 deployment strategy is really we see a lot of opportunities from an organic growth perspective, so to redeployed and reinvested in our business, but as we said in the past if there is and <unk>.
Opportunity for any and strategic tuck in acquisitions that are not distracting, but more importantly are accretive and are on strategy that is that is definitely something that we will consider at the appropriate time.
So even though you're still going through sort of the strategic review that wouldn't preclude doing a deal for radio came here was that correct.
So what I would say is that we are open for any strategic transactions that are opportunistic debt are on strategy and that are accretive and but we will continue to be prudent in terms of our capital deployment strategy.
That's helpful. And then just following up in terms of the organic growth comment that you made in terms of.
Our <unk> growth, how do you see that developing over.
Over the second half of the year and as you look on when do you expect to really see.
And that start to expand.
Expand meaningfully.
Yes, many of them going to turn that question over to our CFO Eva. Thank you for your question. So as I mentioned in my script. We currently have a very strong pipeline and commercial banking, particularly and real estate, but.
But we do have softness and inventory financing.
And the main element there is debt.
We've mentioned over the last few quarters of demand.
It's still pretty high for the consumer recreational goods, so that will temper, what we see in terms of assets for the next few quarters. So my comment was related to the <unk> as well.
That's helpful and then apply and I'll just follow up on the mortgage side. In particular, you mentioned, a few changes that you're making and expanding the review.
When do you expect the changes that you've made to bear fruit and what's a realistic timeline, there and and.
Will we see it in terms of the in terms of volume growth and over.
For what timeframe.
Yes, so apps of great question, what I would say is that as anybody who has done and to and process reengineering for the mortgage business in particular, it's not going to happen overnight and so what we've done is we've started with our broker origination business.
Started identifying some quick early easy wins, which we've kind of shared with you today in terms of piloting a few things segmentation and producing our overlap and for example of putting in a quarterback who's responsible for.
Making sure they own the file from start to finish and we're starting to see some early positive results coming out of that and so we will continue to expand that and we're going to be very cautious in terms of our approach in terms of how we roll things out. The next thing is everybody knows retention is a big part of the mortgage business and so thats.
Why we're going to be undergoing an end to and review on the retention side and then we'll also be expanding into our entire branch network and Quebec as well. So so all of IC is there's lots of upside there is lots of opportunities. We just have to be patient, we're probably going to start seeing results and the next 12 to 18 months.
Thank you very much.
Thank you, ladies and gentlemen, if you find that for your questions have been answered you may remove yourself from the queue by pressing star 2 and as a reminder of it is star 1 to ask a question. We will now take our next question from GAAP, who got on Duchenne of National Bank. Please go ahead.
Hi, good morning, just to stick with this.
Some of the.
And so from touched upon already here, but the.
Mortgage distribution Channel review book.
The branch and the broker.
You identify origination processes that are getting fixed.
And then but you're also talking about renewables.
And what's going on there as far as some problems you're seeing and then I mean just.
Benchmarking.
The retention rates.
And see how how and.
And where are they and where do you want them to be.
Yes.
And so Gabriel thanks for the question and so we did start in this quarter of this past quarter focused on the origination and we're now pivoting to retention. So it's early days in terms of identifying benchmarks and.
Where we're at at this point, which is why we are undergoing youre absolutely ranked retention is key to this so that's what we're going to be doing and this quarter and we will be providing the analysts and the market with an update and the next quarter or 2 based on our key findings, but it's all hands are on deck in terms of making sure that we identified.
Issues map it out figure out what some of the quick wins and early fixes are that we can we can do to right. The ship it and it's no news based on our performance, we are underperforming and that business, which is why it's a high priority for us and it's a big opportunity for us.
No no I get that and I'm not asking to be.
The glass half full perspective, because a few of you.
Years ago, we were absolutely no and be 'twenty was coming in for.
And this effect and we were.
We're asking all of bank rote retention rates and I was surprised here with over 90% for pretty much all of them on our U D and all of your quite a ways off from that because that does represent.
If you can fix it of big Big opportunity of you probably say.
Yes.
Yeah, So so Gabriel and what I would say is that based on our underperformance that we are below market on all benchmarks, whether it's faster time to decision and improving our funding ratio as well as our retention rates, which is why we see this as a big opportunity for us and we are focused on fixing it.
Okay expense optimization that was something that I haven't heard of it before and you mentioned and the reviewing partnerships is that more of a.
Supplier kind of focus the initiative for you.
I don't know the 1 with Mackenzie on.
On the mutual fund, but is it more and.
More of the former of the ladder.
Yes, so what I would say Gabriel we actually conducted a complete cost of my optimization program that we had shared with the market back in Q4 as well as Q1 so.
And so now we are and the process under our new leadership team in terms of reviewing what are some of the strategic priorities how does it fit into our overall strategic review, while we continue our heightened focus on cost discipline and so as I had mentioned, we need to pivot from not just being cost discipline, but identifying cost optimization some of the early find.
<unk> are yes, there are a number of key strategic partnerships out there in terms of contracts, where there may be opportunities for us to renegotiate the levels of service.
Share that we're getting our money's worth sometimes you end up paying for things that you don't even use sell some of these key strategic contracts are currently under review.
And then as part of our ongoing and to end process reengineering and reviews. It seeing if there's other opportunities for us to partner up to create more efficiencies in our business.
Okay, and then lastly on the deposits funding side.
And the message on I'm getting here is and then and then.
On the tapping into covered bond book.
Wholesale funding.
And maybe the emphasis of the broker channel for deposits.
Reduce your funding cost there.
Is that.
Correct interpretation, but.
Would that kind of perspective of de emphasis of.
Certain deposit products and without extend to the broker sorry, the branch channel of the core branch channel or is that still an area of at your Youre focused on to grow.
Yes, so no so gabriel.
Positive quarter of the bank and making sure and that we get personal deposits as well as commercial deposits is going to be key to our success going forward. So it's not deemphasizing it whatsoever on the contrary our digital play is going to play a critical role in terms of building that so we will be focused on deposit growth what we've done in the meantime.
And as Ivan mentioned, we proactively manage our deposits to really optimize our margins and making sure. We're getting cheaper sources of funding and also make sure that we're managing it against our asset growth and so that's.
And that's a strategic direction that we've refocused on but thats not to say that deposits are not part of the bank and just in terms of our celebrations for 175 year celebrations. We've launched a couple of new products and cash back offers and the market again to acquire new customers new deposits as well as increased.
And that's from our existing client base. So we will continue to be of focus of the bank.
Perfect. Thank you and.
For the rest of your day.
Okay.
Thanks, Hey, Dara.
Thank you we will now take our next question from Paul Holden of CIBC. Please go ahead.
Thank you and good morning for the.
The quarterly guidance you provided was helpful, but maybe I want to drill down on a few of those items just kind of extend the outlook belong and book beyond the next quarter because there are some positive trends here so may.
Starting with the inventory finance.
The customer demand clearly.
And there, it's really supply supply chain issues that would be and well documented that seems to be.
Limiting the lending opportunity. So when do you think this might turn around and start becoming a source of growth clearly not next quarter, but.
Could it be as early as Q4 or is this more of a 2022 type of story.
Yeah. So thanks, Paul for other questions. So so maybe if I can just kind of paint the picture. So in terms of our inventory financing, 85% of our businesses and the U S, 15% us and Canada and as you know the reopening plans are different depending on the market. The consumer demand has definitely outstrips the supply. So there is a.
Supply chain issue and as Ivan had mentioned in his opening remarks, our utilization rates pre pandemic, where and the mid fifties and right now we're sitting at the mid Thirty's.
So just in terms of simple math for 1 extra percentage point of utilization and that translates into $50 million of additional assets and so if we were to return back to our pre pandemic utilization rates that would generate an additional $1 billion and assets.
It is of seasonal business also there is of seasonality to it as well and so from a timing perspective, we anticipate that this will be recovering and the next I would say 12, so it would be of 2022 story and beyond.
But in the meantime, we have been adding dealers as well to also mitigate some of that mitigate some of that risk. We've added 20% year over year. So we're quite optimistic 1 when the tide turns and the seasonality issues out of the equation as well as of supply chain issue that this will continue to be a growth engine for us.
It is a very helpful answer just just 1 follow on and that in terms of the dealers. You've added is that also mostly in the U S as well.
It's a combination so we're constantly looking to grow our business in Canada, as well as and the U S.
Okay.
Similar question on equipment finance and maybe about 1 recover as my thinking would be maybe that 1 covers a little bit earlier again positive demand backdrop, but maybe less supply constraints, maybe you can help us with and outlook. There in terms of when that can get back to growth trajectory again.
Yes, So Paulo, who is the head of our commercial bank is on the call. So I'll turn that question over to him Paul.
Yes. Thank you Ryan, yes, and in terms of equipment finance, we are well position us well to benefit from the recovery.
And most of our our positioning is and transportation construction.
As well as technology and equipment finance equipment. So so.
So we will ramp up following reopening and again the.
Depending on the geography, but most of the portfolio out there is actually in Canada. So.
So driver for us and the next few quarters.
Depending on.
And it makes situations.
Got it okay and.
And then final question noticed on the.
On the fee based income service charges were up 10% quarter over quarter I'm. Just wondering is that all volume based or are there some.
Price increases include.
Included there.
Yes, so I would say.
And the fee income there is lumpy fees that are up so of lending fees were up 15% year over year, and 6% quarter over quarter and Thats really just a reflection of the increased commercial lending activities, particularly in our real estate lending portfolio, but the other thing too that we introduced is.
Fees relating to paper statements and that was really to incentivize our customers to access digital statements, which is obviously more environmentally friendly and as part of our ongoing review will be continuously looking at all of our product offerings, and our services and and benchmarking it from a fee and pricing perspective.
Got it okay. That's all for me. Thank you.
Thank you we will now take our next question from Doug Young of additional debt capital markets. Please go ahead.
Hi, Good morning, just 2 quick ones on on the credit side.
And I look to the.
And you release it seems like there could be and you can correct me if I'm wrong, there might be a bit of a negative migration and the rest of the book and I'm just curious what that might relate to your I guess I'm curious if I'm right and what that might relate to you and then just the net write offs increased quarter over quarter more on the personal side and just hoping to get a little bit of color on that as well.
Yes, Thanks, Doug I'll turn that question over to Liam and good morning, Doug What I would say is there is a slight.
Net of migration in solely of the mortgage book as it relates to a few of.
And of the mortgages linked to rentals.
And it's not material, we don't expect it to persist.
That is not unexpected given the COVID-19 situation.
And then on the personal write offs.
On the on the first of all sides.
Actually theres not theres not a lot of migration at all as we've explained on the past we were prudent in terms of our reserving around anything that had a deferral program.
We've seen things behave.
Well on that and as a result, we're not seeing any anything adverse and that space.
Okay. So the write offs.
And maybe Ikea.
Yes, sorry go ahead, sorry, Doug.
No I was just going to say there is net.
Like the personnel and write offs were up but I just wanted to.
As usual, but it doesn't sound like there is.
Your guidance normal variations of normal variation.
Okay. Yeah, I just wanted to just kind of reconfirm that we have we have no concerns with any of our underlying assets at this point, we feel that we're adequately reserved and.
And just a reminder, that we have of minimal exposure to pandemic impact impacted industries that are represent less than 2% of our overall portfolio.
Okay, Perfect and then just on the capital side and then maybe just early on like March 11, and Bosky came out with the proposed 2023 Basel III related changes for small and medium sized banks.
There is some interesting changes that are better and there.
That potentially could benefit.
Yourselves and I understand that the IRB conversion is under review and it seems to be delayed and.
I'm, just curious and net debt capital is an issue for you, but with these revisions help you, which I think they would and can you maybe talk a bit about how that and how they would help you at all.
Yes. Thanks, Doug there are a lot of it gives and takes and the Basel III revised where and the process of working through that and <unk> in terms of the impacts and what we're seeing generally is it gives and takes and some areas it's going to be positive and other is.
And it might have a slight impact on our business.
Following on our working through it and we'll provide further guidance and the future as as we work through those numbers and so maybe what I would add is that we are taking those changes into consideration as we continue to do our deep dive in terms of our strategic review is because obviously as Lee and said it'll it'll depend on what industries or what.
Sectors that we look to grow and and so that's definitely going to be taken into account as part of our overall strategic review.
Okay, so more to more to come on that and then just lastly on the Nic side and you've done a wealth of good job on on on noninterest expense of 1 of the things that caught my eye was it was down partially due to lower regulatory costs and every bank go talk to your talks about regulatory cost inflation. So I'm just curious what would that relate to that in terms of lower regulatory paths.
I'll refer that to Eva Thank you Doug for your question.
I will start by answering and generally we really have a focus on cost for last year, we reduced the cost materially as you can see from the improvement of the efficiency ratio. So its really impacts of the total.
The other volumes of expenses and not only of regulatory costs, but overall cost of 3 gives us already programs could have been business continuity email initiatives. It was a whole slots of things, where we did invest some money for some programs.
And most of them are now in place. So that's how we see the benefits of the expense reductions going forward.
Okay, great. Thank you.
Thank you we'll now take our next question from the Mall Prasad of <unk> Securities. Please go ahead.
Thanks, perhaps more of a big picture question for ran yes, so as the economic recovery gains momentum here and we see the benefits of strong volume growth whether it'd be on the.
The personal or commercial side, I guess, how does the laurentian position itself to benefit from that recovery I guess, it's kind of unfair question given the magnitude of the strategic review. Your you are undergoing right now, but I just wanted to I wanted to get your philosophy on how you balance and need to participate and the economic recovery, which seems like it is.
And to be over the next couple of quarters.
<unk> is positioning the bank for success over the longer term.
Yes, so think of Laura and I think that's of Great question in terms of the balancing act quarter to quarter versus longer term and so I would say as I had and I as I had mentioned our commercial book of business is well positioned to benefit from that upside.
And and even though our utilization rates are down and what we're seeing is the real estate business has been picking up and we're looking at we've been growing and the multi residential area.
We're expanding in terms of adjacent sectors.
In terms of our equipment financing as well as our dealers looking at new product offering. So I would say commercial is definitely well positioned to kind of ride that wave when it comes and we're already starting to see the fruits of our labor labor, there and and in general based on the specialization where and it's an attractive margin business, we have and.
Deep expertise excellent customer experience and really a specialized work force there. So I am quite quite optimistic that we will ride that wave on that front I think in terms of our capital markets, we had a record quarter.
And our strength continues and the fixed income platform. What we're seeing is that government issuances will continue and so that'll continue to drive some of that business for us as well, but the key thing that we've done differently and the capital market space that I think is going to really position us well is that we have better alignment now between our capital markets covered.
Model as well as our commercial clients and so as those 2 businesses work hand in hand that will also generate some additional core and growth opportunities for us as well and we've already started seeing that in Q2 and and.
And moving forward and the personal banking base listen everybody knows it is challenged we need to unlock the potential is going to take time, but we also identified that there is a lot of low hanging fruit.
And so versus some of the longer term fixes so it's trying to balance out.
And what can we do and the short term, while we're trying to fix things for the longer term and so I feel optimistic that things are argon and start turning around under <unk> leadership.
Listen we had too many brands, we need to simplify it and we need to rationalize our product offerings and we need to streamline our processes and digital is definitely going to help us unlock some of that potential and so while doing all of that we're going to continue our heightened focus on cost and.
And because I always say, there's 2 levers it's revenue and costs, but you can't do 1 without focusing on the other you need both and.
So.
Pivoting of cost optimization will also allow us to reinvest in our businesses, where we need to.
To ensure that we can maybe potential new faster, where we can and <unk>.
I believe that answers your question and Lamar.
No that's very helpful. Thanks for the.
Additional detail there and then I just wanted to flip over to non interest expenses and I'm, referring to 2.
Slide 12 here and the comment that.
Other income other expenses decreased $767.6 million.
From a lower regulatory costs advertising business development and travel how much of that would you suggest is going to come back when the economies reopen.
Yeah, So maybe I'll start and then I'll turn it over to Ivan I mean, I think every every institution out there has benefited from some of the reductions and the pandemic costs, but the pandemic has also generated some additional costs, whether it's maintenance it's cleaning its equipment. Its right. So I mean, our branches have been opened and so we've got staff going into the branches. So some of that will lever.
And as we know when the economy opens up there will be a return and we've already started seeing and and our operations and the U S business development costs will start going up.
So as long as we will continue to focus on those that are within our control.
And we'll be very disciplined and prudent and making sure that where we invest if its business day of element that is going to generate revenue and so every leader is responsible and accountable for that which is why we need to pivot very quickly to cost optimization, alright. So that we don't waste that we don't waste our our.
Our efforts and so we are starting to pivot very quickly on that but I don't know if that Yvonne My CFO has a few words to add.
Thank you for the good that's a good answer and Lamar, but as we look at it is there is probably if you look at the card based currency versus what was free.
Covid Theres, probably $2 million that you cannot even despite what I call throughout and living business development, but if you offset that with the additional cleaning and.
And some of the stuff.
All of the $1 million of this trends per quarter and the only other element I would add is that the.
Environment post Covid is not going to be the same as prior to Covid. So definitely there is going to be a different way of working maybe not the same level of scrapping and all that.
And we'll offset some of this and maybe the last comment is what we expect is as we restart doing business development and we would expect additional revenues coming from debt as well. So we're not too concerned with the evolution of and I mentioned currently the lock the Lockdowns are opening up and Quebec, and Ontario, and and some other places.
Liz.
So we are forecasting of the efficiency ratio of below 70% for the whole year of 2021.
Okay. Thanks, that's it for me.
Thank you, ladies and gentlemen, as a reminder, if you would like to ask a question and please signal by pressing star 1 we'll now take our next question from Sohrab <unk> of BMO capital markets. Please go ahead.
Right.
Okay. Thank you very much hopefully a couple of quick ones a lot of other questions have been asked and answered.
And Liam just first for you I am looking on your slide 18.
There you show your PCL.
Trends relative to the big 6 I think the bank has taken great pride.
And saying that it's always been consistently below 6 and as you think over the next 4 quarters do you see the risk that you may actually fall above the big 6.
Yeah.
Thanks for startup and good morning.
Yes.
It's difficult to assess right now certainly of our predicted for the.
Of the quantity and perhaps how things will play out.
And and how things stabilize the <unk>.
<unk> do look.
Appropriate what I would say is that we have a very disciplined and prudent approach to our underwriting the sectors. We're in and the specialized experts on that and I would expect our credit discipline and to continue.
And our results too.
Similar.
And subject to business mix and how things evolve.
It's difficult to predict how things will evolve.
And of the pandemic plays out.
And maybe I can if and when you add to that for Ralph.
And if I can just talk about maybe fiscal 'twenty, 2 and beyond because I think in terms of this year.
We had said provided things continue we will be looking at releases and the and the next 2 quarters, but as we continue to kind of finalize our strategic review.
That could potentially change our business mix mix and making sure that we have of risk adjusted return model that we're comfortable with that the board is comfortable with and our investors and comfortable with right. So the risk appetite will well determined that based on the strategic direction that we take going forward, but we will continue to be discipline.
And.
And we took and we do take great pride in terms of making sure that our quality of credit is strong and that we are well reserved.
So maybe Ron Yeah, maybe it's for you and maybe it's for NIM, but I.
Thank you.
And you gave that Barry.
Think full answer as to where the utilization rates for example, and.
And inventory finance are and what of 1% utilization increased media and for in terms of share.
Of loans can you also say what of dollar.
Incremental zone will mean in terms of additional reserve requirements.
What I'm trying to figure out here is a volatile can this line and up getting are you trying to grow into of reserves or these reserves coming out and <unk>.
Once the guidance and economic rebound.
And then you'll have to kind of build it back up.
No Im sorry.
And we're very happy with where are our provisions for today and as we readiness articulated as well as advanced.
And right now based on what we're seeing and the third quarter, so far and given the recent reopening by the provinces. We would anticipate further releases, but we're going to remain disciplined and we're glad to respond to the economic conditions and that will really drive how our reserves play out but at this juncture.
Would anticipate further releases and based on reopening and what we're seeing so far in the third quarter and and so Rob I think you can kind of probably go back and look at our pre pandemic rates our business mix hasn't really changed much rates of our commercial business has always been our growth engine.
And so.
It's fair to say all things being equal it would look more or less like our pre pandemic PCL rates, which which have historically been lower than.
And then than our than the other banks, but the strategic review will come into play and as.
Things unfold at the end of the year.
Okay.
You made mention of the certification of the Union and I think you've on.
And I mentioned that on a full year basis, the expense to revenue ratio.
Should be sub 70%.
Are you in a position to quantify what are the financial benefits of the day certification of <unk>.
And so what I would say listen the Union was and employee led process as far as on concerned it's business as usual.
We're focused on renewing and growing Laurentian bank and charting the path forward and we will continue to focus on our employees, making sure they're empowered they're engaged and they are operating as 1 team.
I mean.
And like how should I think about this from an expense to revenue ratio or expense growth prospects or the mix of expenses.
No change.
Yes, I think no change of the best answers of Rob some of the conditions of the <unk>.
People will pretty much remain the same may improve for some of them, but overall, it's not material and expect any change from debt.
Okay. Thank you and then 1 last question, maybe maybe not so quick but I think.
On.
And number of common comments that you mentioned I think you've talked about.
More fundamental and reviews, but also finding low hanging fruit or some quick fixes.
And the corn and take steps and mortgage and review process. For example, you said.
On the channel of the broker channel.
Got some quick fixes and some more I guess more fundamental ones coming through can you give us some specific examples of some of those quick fixes.
So that we have a sense of where the starting point is if you will as far as debt.
The process just.
To be able to get a feel for what the size of surprises idea.
Yeah, Yeah, so sort of on what I would say is I think in terms of like let's just stick to mortgages because that's 1 that we started of kind of working on so it's as simple as having a dedicated end to end file owner and <unk>.
And that's an easy low hanging fruit, having 1 person responsible for making sure that the file is going from front and in a timely fashion moving from 1 department to another and it's fully accountable. So it sounds simple sounds basic and it is and those of that a little fixes that will change.
And our sense of accountability ownership and ensure that we're tracking it against key kpis, so introducing new funding after time and to end process turnaround time.
Improving our funding ratio improving our retention rates, while maintaining our disciplined underwriting standards I would say that that's an easy 1 there that we can kind of.
2 because that's something that we've delivered on and we started seeing how that helps even on a big believer and agile standup huddles people talking to each other whereas the file is this a priority file is a complex of streamlining.
<unk> difference.
A different screen for different transactions, depending on complexity and depending on what the expectations of the customers are so so to be honest. There's a lot of these that are not rocket science, it's a mind shift it's a change and culture I believe.
We brought and the right team and.
And and that we're ready to execute and so stay tuned out like I said, there's lots of lots of opportunities, but it's going to take time.
And maybe on just 1 last question and maybe it's too long of an answer we can sales for another time, but you said you're still in the market for.
I think of Chief Digital Officer for Technology Officer, I may get the characterization of wrong, but what is what would be the.
What is the goal for that individual what are you looking for that individual to deliver to the bank and over what sort of timeframe.
Yeah, So Rob I'm not sure. If you are applying for the job, but I'm happy to share with you and I'm looking for and a chief Technology Officer.
And I'm, just being and those decisions here.
So listen technology of the foundational components of any institution, particularly financial institutions, given the changing consumer behaviors and acceleration of digital adoption.
And so I'm looking for somebody who will help us in terms of making sure. We're building on our strong foundation and I do have an interim CIO.
Have an entire team so I'm looking for someone who will bring leadership skill and someone who will help us architect the future technology roadmap for Laurentian to support the strategy that we will be launching at the end of this year.
That's what I'm looking for.
But.
Does that indicate we're on here that you expect personal banking will be a growing piece of the overall pie. When do you think about the business mix in the future at Laurentian Bank.
Yeah. So we've got 3 businesses and I expect all businesses to contribute to our growth commercial banking capital markets and personal banking.
And it's.
And it's gonna be underpinned by digital as well as our technology platforms.
Yes.
Thank you.
Thank you we don't have any further questions at this time I would like to turn the conference back over to Mr. Ron dwelling for any additional or closing remarks. Thank.
Thank you.
Okay.
In closing I'd like to leave you with a few key takeaways.
The momentum we built at the beginning of the year has continued into the second quarter, the bank's capital and liquidity positions are strong and its credit quality is sound.
And this quarter also included some significant achievements.
Including the credit outlook upgrades the launch of our inaugural covered bond program and the issuance of limited recourse capital notes.
At the same time, we continue to maintain a focus on cost discipline as we pivot towards identifying more structural cost optimization opportunities.
Over the next few quarters I plan to provide additional updates on the review of our mortgage process as we aim to further improve the customer experience and renewed growth.
As the digital channel is integral to our plan we are initiating a review of our digital strategy and we will also share of these insights.
And finally across the board the leadership team is hard at work to identify key areas of strategic focus and priorities to chart a new path forward.
Thank you for joining the call today have a happy and safe summer and I look forward to speaking with you again in September.
Thank you for joining us today should you have any further questions. Our contact information is included at the end of the Investor presentation, our third quarter of 'twenty 'twenty..1 earnings call will be held on September 1 and we do look forward to speaking with you then have a pleasant day.
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