Q1 2022 Laurentian Bank of Canada Earnings Call
Thank you for holding ladies and gentlemen, your online for this Laurentian Bank of Canada Conference call. At this time, we are still gathering additional participants we will get started momentarily.
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Good day and welcome to the Laurentian Bank of Canada first quarter results 2022 Conference call Today's conference is being recorded.
At this time I would like to turn the conference over to MS. Susan Cohen, our head of Investor Relations for Laurentian Bank. Please go ahead ma'am.
Thank you.
Good morning, and thank you for joining us today's opening remarks, we'll be deliberate bahrainian Llewellyn president and CEO and the review of the first quarter financial results will be presented by your bond is sure 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.
Nathan Chief risk officer.
Global head of commercial banking, I mean, Oh, Tesla head of personal banking I'm, Kelsey Gunderson head of capital markets.
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's 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.
I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance.
Ron you any bonds will be referring to adjusted results in their remarks, unless otherwise noted as reported.
Now my pleasure to turn the call over to Ranya Llewellyn.
Well good morning, and thank you for joining us today.
Before I begin I want to acknowledge the significant human toll is a current conflict in Ukraine.
Support and respond to the humanitarian needs in Ukraine and surrounding countries. We have made a donation to the Red Cross Ukraine humanitarian crisis appeal.
Now turning to my prepared remarks.
At the end of last year, we unveiled a new three year strategic plan for the bank to drive long term sustainable and profitable growth.
While it has only been a few short months we.
Have already taken action on a number of fronts.
And I want to sincerely. Thank all of the Laurentian Bank employees, who have worked together as one team to deliver on our new strategy.
The COVID-19 vaccination rollout in developed countries continues to contribute to a robust economic recovery.
In Canada solid GDP growth was driven by robust spending intentions, the reopening of the economy and the continuation of targeted federal government support despite high CPI inflation.
However, the answer would be all across various latch a brief shutdown disrupting the initial positive momentum in the quarter.
Notwithstanding uncertainty related to labor shortages, what was supply chain bottlenecks in the more recent geopolitical risks, we continue to see positive momentum heading into Q2.
I would now like to review, our Q1 2022 results.
The bank delivered a strong start to the year.
If you will by top line revenue growth of 4% net income for the first quarter was $59 $5 million or 25% higher than a year earlier with earnings per share of $1 26 up 22% year over year.
Army reached nine 2% up 170 basis points from a year ago.
<unk> were primarily driven by strong performance in commercial banking, our continued focus on cost management and sound credit quality.
Commercial banking grew its loan portfolio by $2 $2 billion or 17% year over year, and was up $1 3 billion or 9% quarter over quarter.
Inventory financing exceeded our expectations with loan growth of 39% quarter over quarter as manufacturers delivered more equipment to our dealerships.
This quarter the dealer credit utilization rate increased to 43%, which is up from 35% last quarter, but still below the historical level in the mid fifties.
Given our success in increasing our dealer network over the past year, a 1% increase in utilization rate is currently equivalent to $60 million in assets to our balance sheet.
We were encouraged by better than expected Q1 results, which will continue to have a positive impact on Q2, but for projected seasonal reductions occur in the latter half of the year.
With our continued focus on cost management, the efficiency ratio improved by 190 basis points year over year.
As the economy reopens inflation and normalization of business activity may put some pressure on cost and caused some variability in our efficiency ratio.
However, our focus on disciplined expense management and structural cost optimization should set the stage for continued improvement over the medium term.
Our sound credit quality was evidenced by the declining trend in impaired loans and low provision for credit losses.
While the PCL ratio came in at 11 basis points. This quarter, we continue to expect that the evolving business mix will lead to a PCL ratio in the mid teens this year.
The bank continues to maintain healthy liquidity levels and a strong capital position to support our strategic plan with a CET one ratio of nine 8%.
As outlined at our Investor day, our business lines play a key role in the success of our strategy.
To recap commercial banking remains our growth engine.
Markets provides us focused and aligned offering.
In personal banking is repositioning for growth.
This is all underpinned by a strong culture and focus on making the better choice by living our values and integrating ESG best practices.
2022 is the year of execution and we have already made good progress.
As I outlined in our financial results, our commercial bank continues to execute on our proven business model with robust loan growth.
This quarter, our focus on our specialization and additional relationship managers led to strong origination capacity.
Allowing us to grow our inventory financing credit line authorization by 13% quarter over quarter, reaching <unk> 6 billion.
Expand our real estate pipeline to $4 3 billion up 9% versus last quarter as we were able to benefit from the high volume of new construction projects in the Canadian real estate market.
And generate close to $200 million of new business volume and equipment financing, bringing us back to pre pandemic origination levels.
With significant growth in inventory and equipment financing the percent of commercial loans in the U S reached 17% in line with our commitment to continue to diversify our portfolio by geography.
We also continue to maintain a net promoter score of over 50 or excellence based on our latest customer survey conducted in November with both our equipment and inventory financing customers.
These scores reflect the deep relationships, we continue to have with our commercial customers.
In capital markets, we continue to offer a focused and aligned approach to differentiate differentiate ourselves from the competition.
Q1 results remained solid, particularly in fixed income, although overall have moderated somewhat from last year's strong pace.
In line with our strategy, we are further aligning our capabilities with the broader bank and have hired new talent in our diversified group to augment our offering and provide strategic advice to commercial clients.
I heard a new real estate research team, which is a key focus area in our specialized sectors with a commercial bank.
<unk> us to triple issuer needs under coverage.
And participated in multiple government Green bond issuances in Canada in the first quarter, including those issued by the city of Ottawa and Province of Ontario in line with our strategy to offer value added ESG capabilities.
In personal banking, we are focused on closing key foundational gaps to drive customer retention and acquisition, while deepening existing relationships.
I'd like to provide three updates related to our strategy.
First efforts related to customer retention continued including the use of predictive analytics and the launch of our new customer loyalty.
The virtual team was launched on boarded and trained throughout November .
And started making proactive calls to our customers in December .
This team is initially focusing on customers with mortgages coming to maturity and locking them into new term.
Initial results are encouraging and the team is gaining momentum.
While improving the performance of the mortgage business is expected to be a multiyear journey.
We are confident that it should gradually yield benefits along the way.
Second.
Following our commitment to transform our visa product suite, we have.
Announced a new strategic partnership with <unk> financial.
This partnership will fuel our digital transformation and enhance the end to end customer journey for our suite of visa products.
At the end of this year, we will have reduced the credit card adjudication time from 25 days to instantaneous while also delivering a robust rewards platform aligned to our new brand purpose.
In keeping with our focus on simplification. The partnership also reduces the number of vendors we used to issue a card from five to one and reduces manual processes by 19%.
This will close the key foundational gap for the bank and will allow us to continue to grow our national presence.
Third I am pleased to report strong customer demand for our recently launched mobile App.
<unk> customers to do their most common banking transactions on the go.
Using an agile approach the bank will continue to update and enhance its app and customers will see improvements through ongoing releases.
In just three months over 25% of our active online banking customers have now downloaded the app doubling our Q1 target.
Finally, our strategic plan is underpinned by a strong culture and an unwavering commitment to ESG.
I will now outline key developments related to these priorities.
As part of our focus on cost optimization, and our future of work strategy.
I'm pleased to report that we have made significant progress on reducing our lease corporate office space and have signed an agreement for our 199 base Street location in Toronto.
This is in line with our objective to move to a hybrid work for Hall first model for all tasks that can be performed remotely.
Second as part of our commitment to build a one winning team I am pleased to announce that <unk> could Joe has joined Laurentian bank as the new Chief legal officer and corporate Secretary.
Then drew brings over 20 years of experience in legal and regulatory affairs, corporate and board governance strategic partnerships and compliance.
Third in line with our strategic pillar to make the better choice I am very proud that today, we published Laurentian Bank first ever ESG report, which highlights a number of key initiatives, including a.
The materiality assessment to identify key ESG priorities for the base disclosures.
Disclosures aligned to the Tcf D recommendations, including a climate risk assessment and heat map and.
And new equity diversity and inclusion policies.
Additionally, the bank has also joined the partnership for carbon accounting financials.
Caf initiatives enable collaboration among the world's financial institutions to develop standardized methods for measuring and disclosing carbon emissions from their financing and investment activities.
We are in the early stages of our ESG journey and this report represents another key step towards delivering a comprehensive sustainability program across the organization.
To conclude my opening remarks, I am pleased with the progress we have made this quarter and I will now turn the call over to evil.
Hey, Ron Yeah, a bonus.
I would like to begin by turning to slide 12, which highlights the bank's strong for financial performance for the first quarter of 2022.
Reported EPS was one daughter, and 17% and net income was $55 $5 million.
Adjusting items this quarter amounted to $5 $4 million before taxes and included $3 million related to the amortization of acquisition related intangible assets.
$2 $3 million of impairment and restructuring charges.
The latter related to the successful completion of the reduction in lease corporate office space in Toronto.
It's required a $2 $3 million adjustment to the charges recorded in the fourth quarter of 2021.
Details of adjusting items for the quarter are shown on slide 26.
The remainder of my comments will focus on adjusted results.
EPS and ROE or $1, 26, and nine 2% an increase of 22% and 170 basis points respectively.
Bear two a year ago and ahead of our 2022 targets.
Pre tax pre provision income more PPP.
With $85 million, a 10% increase compared to last year, driven by both strong revenue growth and good cost discipline.
Compared to the fourth quarter of 2021, EPS and ROE increased by 19% and 170 basis points, respectively, mainly due to lower PCL.
Note that in the fourth quarter of 2021.
Provision for investment loans of $19 $3 million was taken.
<unk> decreased by 2% driven by higher non interest expenses.
This increase was mainly the result of higher payroll charges to do.
Due to a higher level of performance based compensation paid in January .
Also note worthy semi annual payments on that RCM are made in the first and third quarters as such we made a payment in Q1, which accounted for six cents per share.
Slide 13.
The improvement in net interest margin.
At one point, 88% NIM was four basis points higher than a year ago, mainly due to higher inventory financing volumes and lower funding costs.
Net interest margin increased by five basis points versus last quarter.
Mostly due to the strong growth and invest the refinancing volumes experienced over the past two quarters.
Other income as presented on slide 14.
<unk> by 3% compared with a year ago, mainly due to higher commissions on sales of mutual funds, reflecting higher asset sales and net sales as.
As well as higher lending fees, primarily driven by the strength in our real estate financing.
Sequentially other income was 1% of the war impact.
Impacted by lower fees and securities broker commissions.
The pace of capital markets activity as somewhat moderate.
Slide 15 presents non interest expenses increased by $2 $2 million or 1% compared to a year ago.
This was mainly due to higher payroll charges, resulting from a higher level of performance based compensation.
In January as previously mentioned and higher professional fees to support our strategic initiatives.
Partially offsetting these increases were lower amortization charges and ramp expenses stemming from our decision to reduce the footprint of our corporate offices.
50%.
Sequentially.
Non interest expenses increased by 5%, mainly due to higher salaries and employee benefits.
The efficiency ratio stood at 67% in the first quarter of 2022 and.
An improvement of 190 basis points year over year and in line with our 2022 target of less than 68%.
Operating leverage was positive 3% year over year.
Sequentially the efficiency ratio increased by 150 basis points.
While we continue to focus on cost discipline as well as revenue growth there can be variability from quarter to quarter in this measure.
Slide 16.
Our well diversified sources of funding.
Our objective is to align deposit growth and loan growth.
In the first quarter total deposits increased by $1 $1 billion as loans increased by <unk> 7 billion.
Growth in personal notice on demand deposits was particularly strong reflecting our strategy to deepen and expand the relationships with advisers and brokers.
Slide 17 highlights our healthy capital position.
The CET one capital ratio, which is presented under the standardized approach stood at nine 8% at the end of the first quarter compared to 10, 2% at year.
Right.
During the first quarter, we deployed capital to support organic growth, which is our priority.
We also repurchased 294000 shares under the NCI.
The average price of $42 six sets for a total of $12 6 million.
Our capital position remains strong and supports our strategic plan towards sustainable profitable growth.
Slide 18.
The commercial loan portfolio, which delivered strong growth.
Loans increased by 9% quarter over quarter, driven by growth and invest the refinancing of over $700 million or 39%.
And the real estate financing of $400 million or 5%.
Slide 19.
The Pan Canadian residential mortgage loan portfolio.
Residential mortgage loans declined by 2% sequentially.
We previously mentioned that improving the performance of the mortgage business is expected to be a multiyear journey as we take actions to improve the customer experience rethink customers and are in the growth.
The bank's residential mortgage portfolio remains relatively weighted towards insured mortgages when compared to the industry.
56% and combined with a low LTV on the uninsured portfolio contributes to reducing the overall risk of this business.
Turning to slide 20.
Allowances for credit losses totaled $208 $9 million.
The sequential increase of $6 $3 million.
This quarter, the bank or at least $5 million in ACL for performing loans, which was offset by growth in the commercial loan portfolio as well as the normal variation and a few commercial loans without any particular trends.
As shown on slide 21.
Revision for credit losses was $9 $4 million in the first quarter of 2022, decreasing by $7 $4 million from a year ago.
Lower provisions on impaired loans and lower level of write offs were partly offset by higher provisions on performing loans.
Sequentially the provision for credit losses decreased by $15 5 million.
The prior period included provisions of $19 $3 million for the investment loan portfolio.
The PCL ratio stood at 11 basis points.
Slide 22 highlights the improving trend in gross impaired loans, which decreased by 15% quarter over quarter.
Impaired loans declined mainly as a result of loans returning to performance performing status and our repayments.
We remain adequately provisioned.
I would now like to offer some thoughts on how we see the second quarter of 2022 developing.
The shorter quarter effect is anticipated to be offset partly offset by the impact of the solid loan growth experienced in Q1.
NII and NIM are therefore expected to remain strong although slightly lower than in Q4 and Q1.
We anticipate good performance from our capital markets business line.
With remain cautious as market activity has moderated somewhat and uncertainty remains elevated.
Our focus on cost discipline will continue.
We aim for our efficiency ratio to remain lower than 68%, even though overall spending will increase gradually for the year as we invest in our growth and strategic initiatives.
Provisions for credit losses remains difficult to predict on a quarterly basis.
We continue to expect that the evolving business business mix will lead the PCL ratio to gradually increase towards the mid teens.
For the rest of 2022.
Uncertainties remain.
<unk>, the developing Russia, Ukraine conflict, the potential emergence of new variants and continuing supply chain challenges.
Strong commercial banking loan growth over the past two quarters is expected to moderate in Q2, and then contract in Q3.
The latter as a result of the seasonality of our inventory financing activities as a large portion of our portfolio is in the RV and marine products.
For these verticals our dealer base is signaling a high level of pre sold equipment, which is expected to lead to a reduction in credit utilization in Q3.
This anticipated reduction may moderate profitable growth in the second half of 2022.
Overall, despite the uncertainties and potential quarterly fluctuations, we believe that the strong results delivered in Q1 position the bank to meet or exceed its performance targets for 2022.
I will now turn the call back to Susan.
At this point I would like to turn the call over to the conference call operator for the question and answer session.
Yes.
Thank you if you would like to ask a question. Please signal by pressing star one 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.
Press Star one to ask a question.
Pause for just a moment to allow everyone an opportunity to signal.
Okay.
Our first question comes from many Grumman of Scotia Capital. Your line is open. Please go ahead.
Hi, Good morning first question is just on the inventory finance business.
The growth that we saw.
Even outpaced the Q4, you talked about the seasonality last time around and emphasize it.
Now as well and I'm just wondering.
Is that what we're seeing here seasonality is or is there something else going on.
That surprised you to the upside.
I mean, it's Eric Thanks, Thanks for the question actually Q4 and Q1.
It will be impacted by this seasonality is.
<unk> bye.
Over 50% right now of our inventory finance business is towards RV and marine and we saw.
Good supply capability from mostly the RV side of the business.
So so right now we do expect.
This to continue.
In the beginning of Q2, but definitely with product demand is still.
Very strong out there we feel that.
Credit line utilization should.
Klein.
End of Q2, beginning of Q3 and for the summer period.
So maybe just I just want to make sure we've answered your question.
So it's sort of seasonality unusually in Q4 and Q1 and then based on the presale as Eric was saying that when you start seeing the utilization rates of our credit lines going down it usually in Q2 and Q3. However, we have strong momentum. So we've already started seeing a moderated pace going into Q2.
We see the.
Credit utilization lines going down a little bit more in Q3 now what the business is done under Eric's leadership is over the past year. We grew the number of dealers year over year, and so that's helping with the moderation as well as starting to look at different industries outside of RV and marine.
So so obviously, where it's going to continue to be a growth engine, but yes.
This is going to be seasonally lower utilization in Q3 because of the pre sold inventory.
We hear a lot about that.
From your perspective is there any change there.
In terms of things improving that or not yet obvious to US is are you seeing anything like that or that's not the case at all.
To clarify improving Manny just to make sure.
Are you talking about just in terms of the macro trends.
I'm just I'm wondering about what youre seeing in your business in terms of I guess its supply chain, becoming less of an issue.
In that business or is that not really what's driving these numbers at all.
Well like I said like we.
We have some.
Some business lines like RFP is more consolidated in terms of Oems.
They've been more resilient through this supply chain.
Situation with Marina is more fragmented so.
There is still.
Way lower credit utilization than they were pre pandemic situations. So right now we feel were.
Moving towards.
More.
Normalized situation in some industries, but still still some pending.
Certainties regarding supply chain there, yes, so maybe just a few additional comments. If you were to if we were to just break it down as to what happened in the inventory financing business. So this quarter alone saw an increase of $700 million in an asset that's up 39% quarter over quarter, 70% of that growth.
Came from existing dealers, 30% came from new dealers. So that was one of the key drivers. The second driver was as Eric mentioned.
We were pleasantly surprised with the supply chain kind of easing up in particular sub segments, and so that boosted the credit utilization to 43% versus 35% in the last quarter, but that is still below pre pandemic utilization in the mid fifties right and so that's why.
What we're seeing now is there will be moderation in Q2, and then liquidation or less less inventory needed because they're already pre salt, but we're trying to minimize that seasonality by adding more dealers, we're trying to do that as well.
By going into different segments, now, obviously, the Russia, Ukraine as we heard this morning in terms of the number of sanctions theres still a lot of uncertainty and that may have a bigger impact on the supply chain and so this is kind of our best estimate at this point in time.
That's helpful.
Especially the utilization numbers.
The second question I had was just on capital.
The CET one ratio go down a little.
A bit over 40 basis points quarter over quarter and I'm wondering.
Given the changing business mix.
And and the outlook that you have is there a risk that <unk> growth will continue to pull down your CET one.
How is that business mix changes and where do you see that bottoming out.
Yes.
Yes. Thank you for your question Mehdi so deploying.
So we're deploying capital for asset growth internal asset growth is really the priority of the bank and that's what's happened over the last quarter.
The key thing also there is that we have a very strong capital base at some point too and Thats reflected also the reductions that we have an event of refinancing. So we were anticipating that the industry to come back. So it is not a surprise in fact, its a positive surprises if I can say that it came a relatively quick.
The point there is that there is no issue on the capital we were reserved and we have enough flexibility to take that going forward and if you look at the flow chart that we havent representation, we do generate good internal capital.
<unk> growth as well.
That's probably 15 to 20 bps going forward quarter, and we believe that that will on a normal basis support the growth that we have in the Midland.
So in terms of your outlook could you see that CET, one ratio continuing to fall or is it likely, especially given that seasonality you're talking about.
We should see the CET one ratio start to climb again from here.
Yes at this.
Points, mainly.
Definitely is going to move a bit up or down depending on the growth, we yet, but we see now the level of the capital.
<unk> is much more and thats been driven as we mentioned by the big growth. We had an event of refinancing in our real estate and Eric and Ron you just mentioned that that's going to temper in Q in Q2 and reduced in Q3, so that may bump a little bit the capital, but overall by the end of the year, we expect to be a realm.
Lee in the same order.
Got it thank you very much.
Okay.
We'll go next to Paul Holden CIBC. Your line is open. Please go ahead.
Thank you good morning.
I do.
A couple more questions on the commercial loan growth was maybe sort of putting seasonality of saw heightened sort of focusing more on.
Year over year growth rates.
So my first question there is how should we be thinking about.
The ability of strong commercial loan growth too.
And I guess, specifically as you move towards that 2024 target of over $18 billion.
How are you thinking about funding mix and funding costs.
Associated with that type of loan that loan growth.
Yes. Thank you a few things in there in terms of NIM definitely we see that the growth that we got in commercial over the last two quarters definitely improve and fuel the NIM and got to 188% this quarter with the mix that we see in the <unk>.
That's pretty competitive out there as well so our expectation is that this.
It's probably going to go down by a few beeps, but is going to be sustained at the very good level.
And in terms of funding I would say it really depends where the growth's coming from but the good thing. This quarter is we had a very strong.
Both in our deposits, which is definitely core for the bank and we intend to continue pushing on the on the deposit growth as well, but very pleased with the growth. We had this quarter, which was in excess of the growth we have on the loan side.
And Paul just to add to that to put that in perspective as to how it relates to the commercial banking growth in the business mix that Ivan was mentioning inventory financing attracts around a mid single digit margin now obviously because of competition theres a little bit of margin compression that's happening there, but it's a high higher.
<unk> business, then you would say on our real estate business, which is in the multi RASM construction. So it really depends on the mix of growth that we're going to be reaching on a quarterly basis.
But as as Ivan said.
We're very comfortable and confident in terms of what we're forecasting for from a guidance perspective.
Got it Okay, and then second question again.
Sort of related to that commercial loan growth and maybe also importantly, the mix if I look at lending fees.
Down 1% quarter over quarter like does that tell me inventory finance business is not a driver of lending fees.
More importantly.
How do we think about the correlation between your commercial loan growth objectives.
I think fees over time.
No you are totally right in your assumption so the inventory financing business as a very nice margins, but does not generate fees.
The fees that we've seen the growth that we've seen lending fees very strong up 8% over last year came in is related to the real estate business growth that we have that business generates good fees and that's what we've seen in the result, the small reduction of 1% is almost I would call it a rounding impact because.
The strong as the strong sorry, the growth of commercial has been pretty strong over the last two quarters.
Both of those quarters were very strong from a lending fee perspective.
Okay and then last question for me because we've focused a lot on the inventory finance business is maybe going back to the real estate finance business.
From what I can read in terms of.
Other banks and industry sources, it looks like the outlook. There is very strong for the year ahead. So maybe you can give us your perspective on on the outlook for real estate finance specifically.
Yes. Thank you for the question it's Eric.
Right now our real estate pipeline.
Highlighted in the opening remarks is very strong at $4 3 billion, so 9% quarter over quarter increase so we feel very comfortable right now with.
The demand level the team is.
Well deployed across Canada to benefit from from that strong demand and we feel we're very well positioned to.
To continue.
Originating in commercial real estate throughout 2022.
Okay I'll leave it there thank you.
We'll go next to Nigel D'souza with Veritas investment Research your line is open.
Okay.
Thank you good morning, I wanted to follow up on.
Your line of questioning if I look at your outlook.
Although you've outlined on slide 28, I'm trying to dig a little deeper on your net interest margin forecast.
Year to date, $1, 88, and you're forecasting lower one nine and I understand if you could.
Break down the factors driving that because you have.
The shift in loan mix towards commercial which should benefit more from rising interest rates or anything else at play there that.
Be sort of a more conservative outlook, either interest rate hedging or funding mix or anything else, we should think about.
Yeah. Thank you I'll go back in and Nigel to some comments that has done a few minutes ago, but I'll try to add color and you can ask more if you want. So 188 is a pretty good result, this quarter and as mentioned it was fueled by the growth we had in commercial so you're totally right about that but specifically as mentioned by Ranya.
Invent the refinancing is a pretty good margin business mid single digits. So movements in that portfolio does move the NIM as well.
With the.
Tempering of the volume in Q2, and the reduction in Q3 that will impact.
The NIM by a few basis points. So thats why this year. Our objective is to remain above $1 85 and at this point, we're comfortable with that the 190 that I think you are referring is on the midterm.
Otherwise as interest rates increase depending of course, what's happening from the competitive side in the portfolio mix. That's more of a midterm objective, but I agree that this quarter, we were getting close to 190 <unk> next quarter I would see the NIM, probably being a few basis points lower than what we had this quarter based on the pipeline.
We have and the competitive nature, we see out there.
Yes, and just to add the target for this year is greater than 185%. So we're confident confident that we're going to meet or exceed that target.
Great and how many rate hike assumptions are embedded in that medium term outlook for one 9% on the NIM.
Yeah. The one 9% is definitely based on the portfolio mix that we anticipate having in terms of growth. So I cannot really go in much more detail than what we outlined by growing commercial about 45% in the medium term is definitely a factor there.
And it does also embeds some interest rate increases so the markets to be clear did change a bit from last week. So we'll see how the interest rates increases play out, but we still expect for interest rate increases this quarter or two and then sorry. This year two in the next quarter or two towards the end of the year.
So that will also help the NIM, but the main impact is going to be towards 2023, because two of those are only at the end of 2022. So the one above 190 on the medium term it takes into account the portfolio mix as well as the rate increases.
Okay got it and if I could just finish on your credit outlook on Pcl's high teen number and that's above your PCL ratio pre pandemic and is that entirely driven by a shift in mix and maybe higher wheat inventory financing and we also noticed that PCL ratio in the commercial book was a little bit.
With elevated year relative to prior periods. So just any more color on what you expect.
Credit.
Loss provisioning because the risk adjusted NIM would actually be moving lower based on your guidance.
Yes, Thank you Nigel it's Liam Mason.
We have a very prudent disciplined approach reserve management, you saw that through the pandemic.
And with our approach this quarter the credit quality is really strong.
We do expect as Randy has said in her remarks mid teens.
That said that reflects the good underlying credit quality and also the business mix.
Youre going to get ebbs and flows in that as as the economic environment.
<unk>.
We're very comfortable with where we are today I'm very comfortable with that target of mid teens.
Well in the high teens target for the medium term any comment on that.
It's al.
As the business mix evolves and we take a very risk return based approach here at the bank. So if the <unk> were to trend up we would expect that more than offset by additional revenues.
I can add one comment and then Joel I think you mentioned the growth of the inventory financing if it wasn't backing this its not related to inventory financing is it's related to the change in the mix in commercial is usually a business that attracts them.
PCL, yes, and Thats normal, but we're going to get higher returns and higher than them going in that business as well. So overall, it's positive it's not targeted to any single product yeah and in the medium term as we build out our credit credit card capabilities as well that usually attracts a higher PCL, which is why we also.
Our showcasing a little bit more high teens in the medium term is where.
We're pretty confident that once we launch our brand solution and start marketing it out there that portfolio will also grow.
Okay. That's helpful. Thanks.
Okay.
We will go next to Marseille Mclean of TD Securities. Your line is open. Please go ahead.
Okay. Thank you.
Most of my questions have been asked and answered already but just looking at the credit a little bit deeper.
<unk> performing ratio was around six basis points.
This quarter, there is a little bit higher than its been I think in a more normalized environment.
How do we think about the small part is that the new mix that we're dealing with.
Where that should be a run rate I should expect in my model or.
What wasn't a little elevated it could come down.
Sort of going forward by a few basis points anyway.
Yes, Mark so what's really driving the performing ACL is the commercial loan volume increase so it will move in tandem with that I would note, though that a portion of that was offset by the reserve release of $5 million that we indicated but it really is exactly as you said.
Driven by the mix.
Okay.
Thanks for that.
Yes.
And then.
I think thats.
All I have today actually I think most of mine answered already thank you.
And as a reminder, ladies and gentlemen, and star one if you had a question well go next to Joey at Barclays. Your line is open. Please go ahead.
Yes. Good morning. Thank you for taking my call just a quick question on CE tier one ratio the 40 basis points drop in the quarter, it's quite a step down.
How should we look about the outlook for Q1.
Evolution through the year.
Here.
Yes. Thank you for your question Joe.
So the 40 basis points. So as I mentioned, our first priority is first and in fact I'll step back. The first thing is we have a strong capital base right and Thats allow us lots of flexibility second point is if you look at the flow chart that we have in the presentation Youll see that the reduction is coming from internal <unk>.
Deployment and that came from the strong.
Growth that we had in commercial.
As previously mentioned we have.
In fact, the rate or the <unk>.
One was high.
With the fact that there was a reduction of that portfolio in the past and we expected that it would get back. So we are using that flexibility to grow the business, which will benefit the profitability going forward, but as we mentioned a few minutes ago, we expect the growth of commercial to temper in Q2 and in fact reduce a bit.
In Q3, so we would see the ratio of <unk> one by the end of the year to relatively normalized level that we have right now may be a bit up or down, but the internal capital generation that we have on a quarterly basis now expects to fuel normal growth of that business for the coming years.
And just as a reminder, gel is calculated on a standardized approach as well and so that's an important distinction.
Okay. So we should probably see it bounce around call. It the 10 10 to $9 eight level.
Thank you Lee and I wouldn't call it for themselves at this point.
At this point.
I wouldn't expect it to be around the same level that we have by the end of the year.
Okay, Joe remember, our internal our internal capital targets are at eight 5% eight 5% to 9% that's what we need to support the existing business. So we have a very strong capital level with adequate more than adequate to support.
The business growth at this juncture.
Okay. Thanks for the added color.
Okay.
We'll take our next question from Lamar Prasad at core Mark. Your line is open. Please go ahead.
Yes. Thanks, I just wanted to come back to that line of questioning on margins in PCL is when I look at your slide 28 here. So I guess, if you go from the 185 basis points to 190 on NIM and then mid teens to high teens PCL ratio. It seems like it seems like youre, adding additional risks in the loan portfolio, but not really getting compensated for it as the fact that youre going to tell.
That's not the case, so maybe some some helpful commentary on.
Why this strategy makes sense would be very helpful. Thank you.
Thank you.
Thank you for your question and in fact to be honest. That's a question that we get to regularly. So I think we may have been a bit conservative on our expectations.
What the markets, but we do anticipate that the growth that we have is definitely funding more than the PCL increase so that's that's definitely clear and we expect that that's going to grow as we move forward. So we're going to reassess it at the end of the year and we'll come out with a new objectives, yes. So.
Again as the business mix the key growth engines within.
Realistically within commercial that will drive the higher potential tcs as well as margins are really inventory financing equipment financing. We said in our strategy that we're looking to continue to grow those assets, particularly in the U S.
And then I would say the other component is our.
Our credit card business as well.
At the time, when we are putting our strategy together.
We're taking a prudent conservative approach, but thats something that we will continuously revisit.
Okay, and then just on that line of on your answer there. What do you think is the more reasonable revision.
The margin side or the PCL side or would it be both.
Omar I think we'd have to do some more analysis.
At this point so we can't we can't provide any guidance at this point on that front.
Okay. Thanks, that's all I can say is that we're going to meet or exceed our 2022 targets.
Okay, great. Thank you.
We'll go next to Marseille Mclean with TD Securities. Your line is open. Please go ahead.
Thanks, I just had a follow up on the capital side. This is the first quarter you guys did a buyback in quite a number of years.
Just wondering what the thoughts are on that going forward, you still have a bit of room on the NCI b.
Do you anticipate completing it or how do you think about that decision.
Yeah. Okay. Thank you for your question and you're right should have mentioned it. So we've done about one third of the share buyback that we expect to do this year and at this point, we believe we still have a strong capital and a good strategy to grow the assets in line with the capital.
So we're still comfortable with continuing the share buyback as we plan.
Okay. Thanks.
And we'll go next to Nigel D'souza Veritas investment Research. Your line is open. Please go ahead.
Thanks for taking my follow up I, just wanted to switch to the different line of questioning on the.
Capital markets I believe we outlined that.
Commissions and fees, there really do capital markets business is a bit softer and.
And I'm wondering on the backdrop of your peers post some pretty strong results for capital markets. This quarter or is there something structural to that and how would how do you expect that performance to evolve as you.
Yes.
Option your strategic transformation for the business.
Yeah. Thanks, Thanks for the question Nigel It's it's kelcey here, yes.
We had a solid quarter in capital markets in particular on the on the fee side I think what you're seeing there.
A bit of a normalization keep in mind, we had a very good Q4 of last year. So we had a couple of big transactions closed in the quarter. So the quarter over quarter comparison was a little bit challenge from that perspective as well but.
We're optimistic this strategy Hasnt change, we're aligning our capital markets franchise.
Leading our banking side of it with the rest of the bank under the one team approach and so I'm optimistic that our run rate will continue through the course of the year and we'll finish off strong.
Okay, that's helpful and I'm going to ask a bit more feet granular question, but when I look at your balance sheet.
Interest bearing deposits with banks that jumped quite a bit quarter over quarter I believe about.
$400 million or so.
And Thats all in the short duration due to three month bucket. So any color there on what's driving that jumped sequentially.
Yeah on the deposits were really happy with the performance we have this quarter.
It has increased by $1 1 billion and we do recognize that we have a need for a strong deposit base and as mentioned we our objective in 2022 is to grow that in line with the asset base in fact with the loan base and that's what we've done in fact, it's a bit more in Q1.
The biggest increase this quarter came from.
Deepening and expanding the relationships that we have any of the advisers and brokers.
So we're really working hard in that segment to increase and continue to build the relationships and this quarter, we have pretty good results on that side. So we intend to continue doing this.
And we already look forward for additional relationships.
Okay. That's it for me thank you.
And a final reminder, ladies and gentlemen, if you had a question or comment it is star one on your Touchtone telephone.
Yeah.
And with no other questions holding I'll turn the conference back to Rodney you Allen for any closing remark.
Thank you <unk>.
Housing I'm pleased with our strong results this quarter and the momentum we are building as we head into Q2.
Our one winning team is engaged and focused on putting our customers first and executing against the bank's new three year strategic plan to deliver profitable growth and drive shareholder value.
Spike the uncertainties in the market, we are confident in our ability to continue to meet or exceed our targets. This year.
Thank you for joining the call today.
Ladies and gentlemen that will conclude today's conference. We thank you for your participation you may disconnect at this time.
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