Q3 2021 Laurentian Bank of Canada Earnings Call
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Good day Boswell and welcome to the third quarter result, 2021 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.
Bushel I choose good morning, and thank you for joining us today's opening remarks will be delivered by Ron here Lewellen, President and CEO and on the review of our third quarter of 2021 financial results will be presented by E. Bondi Shah Executive Vice President and Chief.
Financial Officer, after which we will invite questions from the phone also joining us for the question period are several members of the bank's executive leadership team Liam Mason, Chief Risk Officer, Kelsey Gunderson head of capital markets.
<unk> head of commercial banking and counting a gala teslik head of personal banking.
All documents pertaining to the quarter can be found on our website in the Investor Center.
I would like to remind you that during this conference call forward looking statements may be made and it is possible that actual results may differ materially from those projected in such statements.
A complete cautionary note regarding forward looking statements. Please refer to our press release or to slide two of the presentation.
It is now my pleasure to turn the call over to Rania Llewellyn.
Thanks, Susan.
Good morning from Sunny Montreal, and thank you for joining us today.
As summer comes to a close I hope that everyone had an opportunity to disconnect and recharge, particularly this year as the impact of Covid continues to take its toll on everyone's physical and mental health.
To support our employees I encouraged everyone to take their vacation days and as a bank. We provided an additional four paid Friday afternoons off this summer.
Over the past few months, we have been working to refine our future of work plans.
We conducted a companywide survey to hear directly from our employees on their work habits expectations and preferences.
One thing we've learned is that a one size fits all strategy is not realistic and that we must adapt to new ways of working.
That's why we will be pursuing and employee centric strategy and adopting a hybrid model or working from home is our first approach for all tasks that can be performed remotely.
We will also not begin any mass returned the head office and corporate office premises until at least January 'twenty 'twenty two.
We are closely monitoring the impact of the Delta variant on the economy, particularly labor market conditions as Canada plans to phase out government income support programs. This fall.
We expect that interest rates will remain low and spending intentions of both consumers and businesses should create a favorable backdrop for loan growth.
Turning now to our results.
The momentum that we have been building over the first half of the year continued into the third quarter delivering adjusted net income of $59 million.
This represents an increase of 4% quarter over quarter, and 25% year over year with adjusted earnings per share of $26.0
Our results were driven primarily by strong performance in real estate financing lower provision for credit losses, and our continued focus on cost discipline.
The PCL includes releases of allowances on performing loans of $9.0 million, reflecting improvements in economic conditions.
I'm also pleased with another solid quarter from capital markets growing fee based based revenues from the equity and Advisory group helped produced our second highest quarter on record for this business.
The bank also continues to maintain healthy liquidity levels and a strong capital position with a CET one ratio of 10, 3%.
20 basis points quarter over quarter, and 90 basis points year over year.
Okay.
In the third quarter inventory financing was impacted by continuing supply chain disruptions and high consumer demand for recreational vehicles, which resulted in the lowest dealer credit utilization rate on record of 28%.
We expect the supply chain disruptions and high consumer demand will continue to remain a challenge for most of 2022.
To counter these impacts and to position us well for the post pandemic recovery or business development team has expanded the dealer network by more than 20%.
When credit utilization rates rebound every incremental one percentage point of utilization results in $50 million of assets and a return to pre pandemic utilization levels in the mid fifties would generate over $1 billion in additional assets.
This quarter also saw some key developments that I would like to highlight.
The bank purchased group annuity contracts to Derisk, our pension plans, which reduces our non operating financial risk and administrative costs. The transaction resulted in a net after tax settlement gain of $7.0 million, which is excluded from adjusted earnings.
The real estate Finance group had very strong performance with growth of 6% quarter over quarter and 18% year over year.
The pipeline is at an all time high level of $4 billion, which is expected to fuel future growth and profitability.
While I am pleased with our overall performance for the first three quarters of the year, we do not expect it to be a straight line to success.
You will recall from previous quarters that we've established three strategic pillars that are guiding all our efforts and actions they are.
Cultivating a customer first culture.
Driving an agile and innovative mindset and engaging and empowering our employees to work as one team.
From those pillars, we identified three key priorities for 2021.
Renew the senior leadership team and organizational structure.
Increase our efforts on cost discipline, while pivoting to structural cost opportunities.
And conduct a thorough review of the bank's operations and develop a new strategic plan.
We have made significant progress on all three of these priorities and I would like to provide a brief update on each one.
First following up from last quarter, where we announced a search for a chief Technology Officer I am pleased to announce that Balearic who've joined Laurentian Bank as the new Executive Vice President and Chief Information Technology Officer in July.
He brings over 20 years of experience in digital technology business transformation and data insights to the bank and we are extremely pleased to have him on the team.
Second as I have said before a key focus area for the bank. This year is in managing our costs.
While we continue to pivot towards identifying large cost optimization opportunities, we are finding low hanging fruit and executing against those initiatives.
A few examples include <unk>.
Consolidating vendor agreements to bring more value for the bank, including an instance, where the bank entered into seven agreements with the same partner.
Simplifying our visa product offering from eight to four to enhance the customer experience, while reducing costs.
And conducting a strategic sourcing exercise to consolidate our printing service contracts, resulting in cost savings for the bank.
I am a big believer in every penny counts.
We are looking at all opportunities that contribute to our cost savings and this work is starting to be reflected in our results with our adjusted efficiency ratio improving by 150 basis points quarter over quarter to 68, 4%.
Third as you know we are continuing to conduct a thorough review of the bank's operations.
Over the past two quarters, we identified shortfalls in our mortgage business, including a complex customer experience lengthy processes and inconsistent service levels.
To improve the customer experience, we are ensuring we have the right people processes and technology in place.
Initiatives. This quarter include first the.
The creation of a new residential real estate secured lending business unit within personal banking.
This new unit will allow for greater accountability, and cross functional collaboration and delivering a seamless experience for our customers and renewing growth.
Second the implementation of Docs, you sign a digital tool for ease convenience and collection of customer signatures.
And third the integration of technology like an automated valuation management system, which enables the bank to save processing time in valuing properties from days to seconds and saves customers hundreds of dollars per transaction.
While we know that this is a multiyear journey to improve the customer experience and to renew growth, we do expect to reap benefits along the way.
Last quarter, we committed to completing our strategic review of our digital roadmap and to sharing our progress.
As a result of our review we have identified three key focus areas.
First we will work to close foundational gaps in our offering.
For instance, we currently have two different experiences for our retail customers, depending on which platforms their accounts reside on.
We will streamline the process and provide new digital offerings, such as our mobile App and tap enabled debit cards for all our customers.
Second we will enhance our digital onboarding sales and servicing capabilities to allow us to expand our reach to new customers and deepen relationships with existing customers.
And third we will simplify our offering and improve the end to end digital customer experience.
Similar to our mortgage review, we are ensuring that we have the right people processes and technology in place, we will come back in future quarters with further updates.
As you know the bank's ESG journey remains a key priority to.
To further support our efforts of making Laurentian bank, a place where people businesses and communities thrive I'm pleased to share some key developments over this past quarter.
We launched our pride employee resource group and courageous conversation series for LGBTQ, two S plus community and allies.
We rolled out a mandatory unconscious bias training program for all employees.
We initiated an RFP to conduct a climate risk assessment for the whole bank to better understand our impact on the environment and areas of opportunities.
And we continue to be an active participant in green bond issuances.
As we head into the fall, we will continue to work with our employees to ensure their safety and that of our customers remains our top priority.
We will also look for opportunities to generate new business and grow revenues as the economy reopens, while maintaining our disciplined management of expenses.
I am now pleased to turn the call over to evolve.
Let's see Ranya.
And good morning, everyone.
I'd like to begin by turning to slide 10, which highlights the bank's financial performance.
For the third quarter of 2021, adjusted net income and EPS reached $59 million and $26.0, respectively.
Materially lower provisions for credit losses contributed to adjusted net income improving by 25% compared to a year ago.
Total revenue grew by 3%.
An improvement in economic activity contributed to an increase in lending fees and continued good performance in financial markets drove an increase in markets related revenues.
Adjusted non interest expenses increased by 3% due to higher performance based compensation.
This resulted in adjusted pre tax pre provision income more ppb growing by 1% year over year.
Reported net income and EPS in the third quarter were $63.0 million and $33.0, respectively and were higher than adjusted results.
<unk> with adjusted results is partly explained by the banks purchased a group annuity to Derisk expansion plans.
Specifically the bank purchased $346 million.
Annuity contracts from a Canadian insurer.
Transferred $353 million and obligations.
This transaction this transaction strengthens the balance sheet lowers the risk from pension obligation.
<unk> cost and further simplifies operations at all.
Also resulted in the recognition of a net settlement gain of $8.0 million or $7.0 million on a reported net income in the third quarter of 2021.
And it is included in the reported results adjusting items.
I would now like to review the drivers of our performance begin on slide 11.
Year over year net interest income and net interest margins were relatively unchanged as improved funding costs were largely offset by lower average loan volumes.
Turning to slide 12.
Other income was up 7% from a year ago.
The increase was due to higher lending fees stemming from an improvement in economy activity and commissions from the sales of mutual funds.
Compared to the second quarter, the 2% increase was driven by the strong performance in our real estate lending.
Slide 13.
Highlights that adjusted non interest expenses were up $7.0 million or 3% compared to last year.
Salaries and benefits increased by $9.0 million on an adjusted basis due to performance based compensation as the bank delivered stronger results.
The adjusted efficiency ratio of 68, 4% was 30 basis points higher than a year ago and improved by 150 basis points compared to last quarter as a result of higher revenues.
Slide 14.
Presents our sources of funding, which we continue to strengthen diversify and optimize first.
Bank increased its use of securitization over the past year by $5.0 billion.
Considering this increase in loan volumes, we chose to reduce term deposits from advisers and brokers by an equivalent amount.
These decisions optimize our funding costs and provide greater flexibility as growth resumes.
Second personal branch notice on demand deposits increased year over year by $200 million or 7%.
Third.
We issued $250 million of covered loans, which is the most efficient form of funding conventional residential mortgages that will allow the bank to deliver a competitively priced product to our customers.
The covered bonds were classified as wholesale deposits.
Finally, the bank issued $125 million of limited recourse capital notes with the proceeds used to redeem the preferred shares series 15.
Slide 15.
Highlights of our strong capital position.
Tier one capital ratio presented under the standardized approach stood at 10, 3%.
This was an increase of 20 basis points sequentially, and 90 basis points year over year and it was mainly driven by internal capital generation.
Slide 16.
Highlights of the commercial loan portfolio, which grew by 2% sequentially.
Growth in our real estate lending of approximately $500 million was offset mostly offset by a decrease in inventory refinancing of about $300 million.
The soaring prices of single family owned glass created strong demand for multi residential and condo projects fueling the pipeline of our construction lending group.
We continue to maintain discipline underwriting standards as evidenced by LTV on the term loan portfolio of 57%.
And the LTV on the uninsured multi residential mortgage portfolio of 55%.
Overall, the strength of our underwriting good diversification and strong collateral contribute to the quality of the commercial loan portfolio.
Slide 17.
Presents the pound Canadian residential mortgage loan portfolio.
Residential mortgage loans slightly declined by 1% during the quarter.
As Ron mentioned, we are taking actions to review our mortgage processes to improve the customer experience and to renew growth.
Although improving the performance of the mortgage business will be a multiyear journey, we expect to gradually reap benefits along the way.
The bank's residential mortgage portfolio remains relatively weighted towards insuring mortgages when compared to the industry at 56%.
And combined with the low LTV on the uninsured portfolio contributes to reducing the overall risk of the business.
Turning to slide 18.
Allowances for credit losses totaled $186.0 million.
The sequential decrease of $4.0 million includes $9.0 million of releases of allowances on performing loans, reflecting an improved economy outlook.
Sierra continues to take into consideration our cautious approach given the uncertainty related to new variants as well as the winding down of government support programs.
To date, we have released about half of the pandemic related buildup of reserves and may release more over the coming quarters should macroeconomic conditions continue to improve.
Scenario weights remain unchanged.
As shown on page on slide 19.
The provision for credit losses was $9.0 million in the third quarter of 2021.
Compared to last quarter PCL increased by $3 million due to lower releases of provisions on performing loans and was partially offset by lower provisions on impaired loans.
The PCL loan ratio stood at seven basis points in the quarter compared to three basis points last quarter.
Gross impaired loans on line on slide 20.
Increased by $16.0 million from last quarter, mainly reflecting an increase in commercial impaired loans, which relates to a few loans with no industry concentration.
We remain adequately provisioned.
I would like to offer some thoughts on how we see the fourth quarter developing.
Net interest income and net interest margin are expected to be relatively in line with Q3.
We continue to expect good performance in capital markets, Although financial markets may gradually normalize.
The commercial banking pipeline is strong, particularly in our real estate lending.
However loan growth is expected to be impacted by the lingering softness and inventory financing.
Previously mentioned, we now expect that supply chain disruption and high consumer demand will continue to remain a challenge for most of 2022 based on feedback received from our customers and industry participants.
In the interim we continue to expand the dealer network position this positioning us well for the anticipated recovery.
We will continue our focus on cost discipline and aim to keep the efficiency ratio below 70% for the remainder of 2021.
Provision for credit losses continued to be difficult to predict the search and the Delta variant is adding to economy uncertainty, even though economic indicators have been moving in the right direction.
Consequently, we will remain prudent in managing ACL in the coming quarters, but could see further releases should the economy recovery continue.
Considering these factors, we expect <unk> for the fourth quarter to be relatively in line with the third quarter.
I will 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 period Valerie. Please proceed.
Okay.
Thank you.
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We'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we will take our first question from the line of many Grumman.
Of Scotiabank. Please go ahead.
Hi, good morning.
You've talked to over the past two quarters, but in a number of changes you're making in the residential mortgage business and I'm wondering when do you expect to see growth in bell sequential basis is it clear to you.
When when Youre going to see that what's your expectation from your team in terms of that specific indicator.
Yeah. Thanks, Sam Thank many for the question so yes.
Yes over the last couple of quarters, we've really been focusing on really completing a thorough end to end process review of.
All aspects of our mortgages, whether it be origination or retention both in our <unk> distribution network as well as in our branches.
And and obviously thats uncovered that we really have a highly complex customer experience as well as a lengthy process and inconsistent customer service.
We had highlighted in the last quarter that we've kind of launched a couple of key pilots are one of them was segmentation of our mortgage brokers, where we assigned one individual contact to follow the file from an end to end perspective and early it's early days. It's a small pilot what we've seen is that it did improve our funding ratio in it.
Did increase the origination volumes recent.
Recently in this past quarter. We also introduced a new pilot focused on retention. So we've created a centralized retention team and that's really to proactively reach out to those customers who their mortgages are up for renewal.
Well before then so that we can proactively manage that and.
And as I said in my opening remarks, we've introduced a number of other things, where it's the new unit and Thats really to bring in focus and accountability under one leader, who has a deep understanding of mortgages and will be responsible and accountable accountable for the growth of that business as well as improving the customer experience and introduced a couple of <unk>.
New digital tools to improve the customer experience as well as speed up the process. Many of you and everybody on this call would appreciate mortgages. It's a multiyear journey, it's going to take a lot of hard work, it's not rocket science, it's making lots of little fixes, while we're looking at technology solutions and partnership opportunities for us to speed up the pros.
But at this point I would say you know, it's a multiyear journey 18 to 24 months.
It's going to take around 18 to 24 months to really start seeing some benefits, but we're hoping to reap some benefits along the way as we introduce some more changes.
Thanks for that and then maybe just as a follow up.
From the outside looking in.
How should we measure success here.
As time goes on.
Maybe it was on balance sheet or are there other indicators.
That.
That are going to be important to track or are you thinking about providing.
<unk> disclosure to that point.
Yes, so I would say many if if we were to look at 2021. The theme of this year has really been a theme of resetting and rebuilding and so our focus has been renewing.
Renewing our senior leadership team, which we've had significant progress and Bell was the latest edition to our leadership team and really focusing on ensuring that we have the right strategy to enable sustainable profitable growth and that's something that and we will share.
In due course.
For next year.
Given some of the macroeconomic concerns that we have softness that we're looking at from a <unk>.
Supply chain disruption perspective.
Delta variant so theres a lot of macroeconomic conditions that are beyond our control I would say 2022 is really going to be year of mobilization in execution. So we will have a strategic roadmap will have the right team and now we need to start executing and that will take time I would say the commercial bank is well positioned.
Particularly in our real estate lending portfolio. We are also going to see growth in our equipment financing business.
But again the biggest headwind there is our inventory financing I mean, it's a it's a high margin business in the mid digits mid single digits that generate some revenue and so we're really at the mercy of the supply chain disruptions coming back loosening up so and then on the personal side as I mentioned and in responding to your previous question.
<unk> is going to be a longer road to recovery. So we're going to continue to focus on cost cost optimization, while we're building the right platforms for our future growth I mean, the other thing too. Many is we don't have a mobile app at Laurentian Bank, we don't have a cap on our debit cards. So those are.
Things that we are working on which will also generate growth opportunities. Once we launched them in the market to attract new customers New business and then we can cross sell them on all of our products and services.
And then maybe just you touched on the commercial loan portfolio definitely looks like.
The real estate.
That is really driving the growth that we're seeing.
You talked about sort of.
Fly shortages.
I guess when you look at the numbers and even digging deeper what gives you confidence that.
It's really about the supply side.
There's nothing more fundamental here in terms of maybe more of the.
The non real estate side of the commercial lending what gives you confidence.
But you're on track there and.
Theres no other sources.
Beside.
Supply side issues that you highlighted.
Yes. So many we have three key specializations that are within our commercial book of business inventory financing real estate financing and equipment financing and so.
Like you said inventory financing is the one that's really impacted by the supply chain disruptions and so as I mentioned every 1% increase in utilization is an additional $50 million in assets. So if we were to return to pre pandemic levels, which is mid fifties and utilization and currently we're sitting at a <unk>.
<unk> low of 28%, that's an additional $1 billion in assets. So so thats inventory financing and we're not standing still our business development salespeople are out there and they are bringing in some more business.
They've expanded that we've increased our network of dealers by 20% year over year. So so that's really one aspect real estate financing was up 6% quarter over quarter, 18% year over year.
And we're optimistic in terms of that business, because we have a strong pipeline of projects in our pipeline of $4 billion and that's a 10% to 15% increase is higher than our 2020 in 2019 average. So we're quite confident there that the growth trajectory will continue there.
And I would say on the equipment financing again, there are macroeconomic conditions and it is also impacted in certain respects by supply chain, but not as much as inventory financing. So we will see some growth.
So I would say you know 2022, we'll see some growth, but really the big growth is going to come probably in the years to come once once the macroeconomic conditions return to normal.
Thanks, so much.
Thank you.
If you find that your question has been answered you may remove yourself from the queue by pressing star two.
We will take our next question from the line of Paul Holden of CIBC. Please go ahead.
Thank you good morning, I have a few questions.
For your related too.
The digital journey are going through and I guess the first question I have is just noticed looking at technology cost down a little bit on.
On a year to date basis. So just wondering one is.
Why is that a number that's showing year over year decrease and maybe there is some efficiencies or vendor.
Fender.
Vendor consolidation Thats benefited that line and then two should we expect to see higher growth in that line in 2022.
That's great. Thanks for the question Paul So maybe I'll start with kind of the digital journey, what we've uncovered and then I'll move into like technology, and how technology will be an enabler for us for growth in and why you are seeing like a little bit of a drop.
So let me let me start there and if any of my colleagues want to jump in they can I would say in terms of the digital journey.
We've identified some key foundational gaps in and like I said it may be a surprise to everyone on the call, but we don't have a mobile app and we're hard at work in terms of delivering that to the market.
We don't have a cap on debit, which is obviously restrictive particularly during a pandemic.
We have two platforms, which gives you two different experiences and so I would say if there's one theme that is a guiding principle for everything that will be doing at Laurentian Bank is simplification, we need to simplify our platforms. Our technology platforms are complex. So there is an opportunity for us to simplify as we modernized.
And so we're reviewing all aspects of the technology to ensure that we're spending money, where we need to to enable and drive sustainable profitable growth. So there are two leavers is either sustainable revenue growth or if there are opportunities for cost efficiencies. So with bell joining the team now there is an opportunity for us to continue.
To review all aspects and all technology projects, but it's also part of a bigger cost optimization initiative as I said in our opening remarks.
We've had lots of agreements with different vendors, so theres lots of opportunities low hanging fruit for us to simplify as well as generate some cost efficiencies as we go along however, we will need to invest in technology, we just need to be more strategic as to ensuring we're investing in the places that are going to help us drive revenue.
As well as find savings.
And improve the customer experience obviously.
Got it okay.
And then hearing the comments you've made on sort of some some gaps in the product offering and customer experience how should I look at the trend in digital deposits, because that's clearly not where you want it to be again with year over year deterioration quarter over quarter.
Creation on digital deposits.
Yeah. So Paul that's Y mobile is absolutely crucial. So that's it's you know once we have a mobile app it'll definitely help and assist in terms of attracting net new deposits, while returning in retaining existing deposits.
The thing too is enhancing our digital onboarding right. It's a very complex digital experience right now to get on boarded to open a bank account. So those two things combined will will be absolutely critical for us to bring in some more deposits. The other thing too that we're working on is a cash management digital solution for the commercial bank.
Because we don't have one right now either and so that's something that we're looking at looking working hard in terms of scoping it to launch it. So I would say those two critical components, but just to keep in mind. When we're managing deposits. We're proactively managing the amount of deposits that we have in the bank relative to the growth in our assets so that.
Is a deliberate move that we have as well and then making sure that we're optimizing our source of funding.
Got it.
As I think about that equation sort of longer term, how should I think about the relative cost of those digital deposits I would've thought of those as being margin enhancing over time am I correct in that assumption.
So I would say I mean, it really depends on the customer base is going to attract what the product offering is and thats going to be directly connected to the margin and the value proposition that we're offering I think that in a mobile world youre going to be attracting all kinds of customers and you can you can leverage the platform too.
To offer different deposit offers or is it for your core customer base that you are cross selling but it'll definitely be a customer acquisition.
Play for us.
Which will which will ultimately drive deposits as well as cross sell opportunities for other products that we have.
Okay.
Final question I have on this topic is related to open banking I mean, youre aware and probably everyone.
On this call.
The federal government wants to push through open banking, starting 2023, not that far down the road.
Wondering how youre thinking about that maybe and maybe it's too early in your process in terms of in terms of the digital review, but just thinking about the opportunity broadly in terms of open banking and how that may benefit Laurentian.
Yeah. So what I would say Paul is I I think open banking is a is an opportunity for all service providers, particularly in the financial industry space to enhance the value that we can deliver to our customers. So I think it's an opportunity that we can sharpen our value proposition to our customers work.
Work with other partners to help.
In terms of delivering even additional services beyond financial services I think the most important thing that all banks are thinking of including Laurentian Bank is how do we protect the customer information and data that is going to be absolutely Paramount as we move forward with open banking. So it's definitely something that is it.
Is going to be embedded in our strategic roadmap, whether it be from a product design and technology partnership strategy and so on so.
I truly believe it's an opportunity to enhance the value proposition and help us differentiate our offering in the market.
Got it okay.
One small one for me just on the lending fees.
It was abnormally high this quarter and that was attributed to real estate lending volume. So appreciate the explanation, but just trying to think about where it came in this quarter versus typical run rate.
If we assume that CRE remains strong should we assume similar fees going forward or is there anything.
Normal in this quarter.
Yes. This is Eva I'll take that one so the lending fees Youre right are pretty good and strong this quarter and that definitely came from the performance in our real estate.
So the level that you should assume in terms of run rate it would be a good guess to look at the average year.
Last few quarters that we have so it may be a bit lower than what we had in Q4, but based on the pipeline and what we expect from real estate should be a good level going forward.
Thank you that's helpful and that's it for me.
Okay.
Thank you.
We'll move to our next question from the line of Lamar Prasad of Cormack Securities. Please go ahead.
Yes, I wanted to start off by turning back to the residential mortgage business.
I'm just wondering if there's anything you saw ran yet through the course of your review this quarter that.
Caused you to push out the timing of the recovery in that business I seem to recall.
12 to 18 months last quarter being the timing of the NIM.
Mortgage your view and then I think I heard you mentioned it was going to be 18% to 24 is am I just.
Reading too far.
Too deep into your comments or is there something that you uncover there.
Yeah. So Omar I think there are two different comments one is how long it's going to take us to actually review the entire business and come up with our strategic plan and that's why you know we said, it's going to take almost 12 months to just.
Figure out and come with that with kind of the details of that but we've always said I mean anyone who has kind of run the mortgage business. It's it's it's going to take time for that ship to turn around it's not a start up business. It's complex it's highly regulated.
And so there's lots and lots of moving parts, we have different distribution channels. We've already like I said started seeing some improvements in a very minor way, but really it's going to take 18 to 24 months for us to really start seeing the impact of our efforts. So it's not like we're standing still we're making the changes.
But it's part of our broader strategic review.
Okay. So there was nothing then there that that caused you to push out the timing throughout the course of Q3 that you uncovered.
No no Lamar no no I think I think we very quickly highlight it to you like our are our processes are complex and.
We had mapped out last quarter really just the origination journey and now we've expanded it to the retention journey.
And last quarter. It was focused on the advisory we mapped out just the advisory business and the <unk> business and now we've expanded it to include the branches and I would say that it's quite consistent the issue is we have different journeys for the b to b business versus branches, so we really need to simplify bringing in and creating.
That new unit will bring that focus and and will help us really kind of come up with one one journey for each of the applications and then that way. It will just make it easier for us to figure out what is it that we need to.
Automate what do we need to digitize, how can we improve things.
And so yes, so stay tuned on the on the on how.
How we're going to move forward going forward.
Okay. Thanks, Thanks for that that's helpful. And then maybe just flipping back to digital and just going to the digital deposits would it be fair to suggest that the digital deposits are going to coincide.
Inside with the introduction of the mobile banking App. So maybe my question then boils down to when when do you see the introduction of the mobile banking App.
So we're hoping to introduce the mobile banking app by the end of the calendar year, but as you know it's going to be we're building in an agile. So it's going to have so youre going to launch your first minimal minimal viable product, which will have you know.
Certain foundational element, it's not going to have all of the functionality that we need and so it's going to be a continuous release is different.
Functionality, that's going to happen over the next 12 months.
And it's not one of those things, where you just kind of turn it on in the deposit start coming in so it will obviously have to be supported by our proactive sales campaign product offering. So it's going to take some time, but yes. We are very excited in terms of clothing that GAAP because that will be a key enabler for us to attract deposits as well as new customers to the bank.
Great. Thanks, that's it for me.
Thank you.
And we'll move to our next question is from the line of sort of move ahead of BMO capital markets. Please go ahead.
Hey, Thanks, I just wanted to clarify one question.
Question and <unk>.
Alright, one answer and get it to a couple of other questions and I think you mentioned grown yet.
Utilization rates I think on the <unk>.
Herschel.
Products were back at pre pandemic levels.
That would be the equivalent of about.
The $1 billion in additional assets.
Would that also be about the same amount of incremental RW aid.
On the balance sheet.
Utilization rates.
Yeah, I would say, it's not exact but its pretty close to assume it's roughly in line yes.
Okay, and sorry, just to be clear, that's just for the inventory financing.
So it's not that it's not just all GAAP inventory financing within commercial yes.
Okay. Okay. Thank you.
And then secondly, when you looking good when Youre looking at the residential real estate review I think that you've kind of alright.
Particularly it has over the last number of quarters.
Is it is it only a process improvement review or do you anticipate that one of the outcomes could be that.
The composition or the risk.
Fixture of that portfolio may change between I don't know insured and uninsured door.
Origin nation, ltvs or <unk> or.
Or something like that is it possible that your risk appetite may also.
As you improve on that.
Processes there.
Sara Lee and thank you for the question.
Right now, we're very happy with our risk appetite in the mortgage review indeed, our product offering was recently recognized with an award.
We operate both in the all the primary insured spaces and.
Clients seem to like our broad offering we don't have any change in our risk appetite that said, we have a very high proportion of our mortgage portfolio insured as Ivan mentioned and we have a relatively low LTV. So.
So that will ebb and flow as as we build the business.
Yes, so what I would add to that Rob is we're obviously going to be looking at all aspects.
In terms of the sales process are.
Our product construct our end to end process, how we interact with the customer our back end processes.
Can we actually make it a lot more efficient by partnering up with somebody else how can we make the experience a little bit more enhance so so we're looking at all of those aspects, but from a risk perspective, we're quite comfortable with our current risk appetite and we're not anticipating any changes at this point.
Okay, that's perfect and then.
And then last one I think we've talked a little bit about.
I think you have.
The last couple of quarters anyway about the core banking system.
Some work that maybe has been put on hold and.
Next I'll review over there I mean, as you think about Europe.
Digital deposit capture and some of those technology type.
Jack's here how.
How dependent is that on oven resolution if you will on what's happening with the core bank.
Yes, what I'd say is a lot of the accounts.
Customer facing technology can be quite separated from the backend systems, but we are looking at things Holistically and so with bell coming in right now and we're in the midst of our strategic review and so he will be coming up with kind of a technology architectural roadmap of how can we best deliver that in the timeframe that we need to <unk>.
<unk> growth.
While kind of modernizing and building for the future right. So he's coming at an opportune time.
But yeah.
So stay tuned for more on that.
Okay. Thank you very much.
Thank you.
I will move to our next question is from the line of Darko Mihelich of RBC capital markets. Please go ahead.
Okay.
Hi, Thank you good morning.
First a very high level question for sure.
Ronny I think.
And I. Appreciate this is difficult right every quarter with spring you for more information on your screen you insulin is there going to be like.
A big reveal of this strategic review and kind of what you guys and if so when is that I'm just.
I'm sort of trying to piece together every quarter kind of what we're building on here with respect to the outcome of that strategic review.
Is it next quarter or is there something sort of lined up.
Yeah, So so darko yes.
Yeah, I know, it's a little frustrating and and I kind of feel sometimes like I'm a broken record.
But we are going to be hosting an investor day and in early 2022, we haven't set the date yet it's part of my closing remarks, but Yvonne and I are hoping that we can provide some form of guidance and a very high level in Q4, but yes stay tuned for more on that Darko.
Okay. Okay.
Just wanted to make sure I had this is something as we sort of go.
The next couple of questions.
Related to your position your capital position.
And the upcoming potential removal of restrictions from the regulator whenever that may be.
Your capital position is relatively strong your stock trades, well below book value and one of your one of your one of your peers has now adopted like an ATM.
So the question sort of naturally.
<unk>.
In any event.
The regulator does lift the restriction on capital return.
Would you would you consider doing something similar ripping down the ratio of buying back a lot of stock, which makes a ton of sense for shareholders and then potentially sort of engaging an ATM should.
Should growth reappear.
In a much stronger than anticipated fashion or do you view or do you see yourself running a bit a bit differently with a bigger question to the minimum capital ratio.
Yeah. Thank you for your question Darko. This is Eva I'll take this one so as you mentioned very pleased with the capital level that stands at 10.3 increase quarter over quarter and year over year and the good news is that it came from internal generation of capital, which is a good sign.
But our first objective remains to grow the asset base.
Currently where we intend to use the capital. So at this point, we don't intend to use an ATM.
Definitely our focus on growing this business and we're taking actions like we mentioned on mortgages and other products as well so stay tuned for the end of the year. When we unveiled our strategic plan, we will give you more guidance on this.
As you know all of that has prevented at this point. So we also need to wait for RSV before providing any more guidance on it but.
Yes, just to reiterate when you launched that are our number one deployment strategy is organic growth rate and so that's really that's really our number one.
You know, where we're going to use the excess capital.
Okay, but it would take.
J quite a reversal of fortune.
To use up.
Capital was just organic unless on.
In any event what about the dividend as is.
Is it pre tax pre provision earnings that will guide your dividend decision.
Yeah, I'll take that one as well so if I keep going on the asset side that we just mentioned by example, the inventory financing, which is over $1 billion down. So we don't see that coming in the next few quarters, but that will eventually coming back we're pretty optimistic and we like that business. So thats. An example.
Hold up where we're going to use it as we fixed some mortgages, we're going to use some there as well so we don't manage the capital on a quarter to quarter basis, we do manage.
On a more medium term basis, where we do envision to increase.
The assets as mentioned in terms of dividend.
Unfortunately, I'm, probably going to sound broken record as Ron you mentioned that this one has prevented by Osophy. So it's reviewing on a quarterly basis by the board and as the lift restrictions we will revise what we do but if you look currently our payout ratio if you adjust the PCL to a more normal level.
We wouldn't be relatively close to the low end of the payout range that we provided to the market.
Again, we will just wait for restrictions to be lifted then reevaluate that on a quarterly basis.
Okay.
<unk>.
The pension.
Pension.
Buyouts. This quarter is that is that over I didn't quite catch your understand is that completely and what does it do for you does it completely remove all risks around the pension or is it just some sort of longevity or is it investment returns can you just maybe expand a little bit upon what you did there with the pension risk.
Yes, definitely happy to take that one because I think it's a great transaction for the bank and are really happy with the outcome of it. So what we've done Darko is that 60% of the obligations of the pension fund was for retirees and the roughly 40% for the active employees.
So what we've done is that we bulk annuities from a Kenyan insurer.
This is look this is done.
Pretty much what we've done is that we took those annuities versus 60% for all of the retirees of the bank. We now have an annuity that fix fits perfectly.
Obligations of the bank. So we took out 60% of the longevity risk market risk related to those.
So for US we feel that's a great way of improving the risk that we can use somewhere else at the bank and not necessarily in our pension plan.
And definitely it simplifies the operation everything around it so it's a great transaction.
And we did generate a gain out of it which is to be honest pretty exceptional. So we were really pleased with the outcome of that transaction.
Okay. That's good color. Thank you.
Thank you.
Once again, if you would like to ask a question. Please press star one.
And we'll take our next question from Marcel Mclean of TD Securities. Please go ahead.
Okay. Thank you.
Just wanted to get a quick look at capital markets.
Looks like you guys have materially outperformed.
The peer group.
Down only 4%, but if I compare to sort of pre pandemic levels of.
Q1, 'twenty you guys are up 60% from from those levels.
Which is more than double your highest im just wondering what.
Sort of driving your outperformance.
Not a huge.
Contributed revenue only about 10% for you guys, but still this.
So just wondering if this is something we should expect going forward or whats really behind this growth.
Yeah, I'll, let I'll, let <unk> answer that question Kelsey go ahead.
Yeah, I mean, thank you very much for it as well.
Very pleased with how the business has performed.
As you pointed out not only in this latest quarter, but since the Europe again, three good quarters of performance building on what was a record year for us last year as well.
We are benefiting from some changes we've made over the last couple of years.
In particular realignment of our really our entire capital markets franchise with the rest of the bank something that I would think was happening as effectively in years past for instance, we're doing a much better job of aligning our equity and advisory bankers to our commercial lending footprint.
Things pay off over the last couple of quarters in terms of securing mandates, but the big part of our business remains fixed income and that business has certainly been strong of late we've seen some good market share gains and and so it's been what I would characterize as leveraged performance, which which is largely which is largely driving what are where you're correct.
Laid out some pretty pretty solid performance out of the business in terms of sustainability going forward.
Like a lot of others, we expect to see normalization of capital markets activity, we saw a little bit of that in the <unk>.
A quarter for us as well although.
Although what I would say is normalization in fixed income was for us more than offset by good performance in our equities business.
But in our business mix is as I said tilted towards fixed income and in particular are tilted towards government finance and I think as we all know the.
The provincial governments are going to need to continue to finance these deficits and we're in an excellent place to capture the capture of that that business and capture market share as we continue to build so.
I am optimistic that the performance will continue.
Okay. Thank you for that.
And then just a second question here moving over to PCL.
Phase III commercial PCL.
Jumping back up a bit this quarter just wondering if there's any trends if thats related to specific sectors. If there's anything you want to highlight there that maybe we should.
Be aware of.
Marcellus William I'll take your questions. Thank you for the question on the PCL.
We have seen a slight increase in our gross to gross impaired loans as <unk> articulated. It's a we consider that variation within the normal course of business.
And if you look at our overall gross impaired loans have been relatively stable.
There's no industry concentration per se.
We.
I believe that were adequately reserved but we do expect that level to decrease as the economy improves based on our disciplined and prudent approach to underwriting.
Okay, Alright, that's it for me thanks.
Thank you.
It appears that there are no further questions at this time.
As Luann, one I'd like to turn the conference back to you for any additional or closing remarks.
Okay.
In closing I would like to leave you with a few key takeaways our momentum from earlier this year continues into our third quarter.
<unk> capital and liquidity positions are strong and our credit quality is sound.
This quarter also saw some significant achievements, including the recruitment of our new Chief information Technology officer, the establishment of our residential real estate secured lending group and the Derisking of our pension plans.
We also remain focused on enhancing the customer experience and driving revenue growth, while continuing to identify structural cost opportunities.
We will continue to provide you with updates on our mortgage business and digital roadmap.
Finally, I would like to thank the leadership team and all employees of the bank as we continue to focus on our strategic plan and charting a new path forward.
We look forward to providing you with an update on our strategic plan by hosting an investor day in early 2022.
They tuned for additional details.
Thank you for joining the call today.
Thank you Ron you should you have any further questions. Our contact information is included at the end of the Investor presentation.
Our fourth quarter of 2021 earnings call will be held on December 10th.
Forward to speaking with you then have a pleasant day.
This concludes today's call. Thank you for your participation you may now disconnect.
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