Q2 2022 Laurentian Bank of Canada Earnings Call
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Good day and welcome to the second quarter result was 2022 Bank Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to MS. Susan Cohen had investor.
Head of Investor Relations Laurentian Bank. Please go ahead ma'am.
Thank you Bruce Shaw a tooth 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 second quarter financial results will be presented by Ivan de Shaw Executive Vice President and Chief Financial Officer, after which we will.
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, I think puzzle head of commercial banking.
In our cloud Teslik head of personal banking and Kelsey Gunderson head of capital markets.
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.
I would also like to 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.
<unk> will be referring to adjusted results in their remarks, unless otherwise noted as reported.
As many of you know several months ago I made the decision to retire from Laurentian bank after more than 10 fulfilling years as head of Investor Relations.
During that time I've had the pleasure of working closely with the investor and analyst community and communicating the Laurentian Bank story the.
The bank is entering a new chapter and I look forward to the progress. It will continue to make I would also like to formally introduce Andrew Czarnecki, who joined the bank in me as Vice President and head of Investor Relations.
<unk> has extensive experience in banking and Investor Relations and has worked closely with the bank over the last 18 months I know that he will be a great collaborative partner with all of you.
It is now my pleasure to turn the call over to Ranya Llewellyn.
Well she will let us.
Thank you for joining us today, we continue to make good progress against our strategy. This quarter. We are confident that our strong prudent risk culture and disciplined focus on cost management will allow us to manage through the evolving macroeconomic environment and we expect to exceed our 20.
22 financial targets.
On behalf of the entire leadership team I would like to thank everyone at Laurentian Bank. The results this quarter demonstrate their commitment to working as one winning team and putting the customer first.
I will now review, our Q2 2022 results.
Driven by top line revenue growth of 4% year over year net income for the second quarter was $61.6 million or 9% higher than a year earlier with earnings per share of $1 39 up 13% year over year, leading to our most profitable.
Quarter since Q2 2018.
Army reached 10, 3% up 110 basis points from a year ago and pretax pre provision income improved by 20% year over year.
Results were primarily driven by strong performances in commercial banking and capital markets and our continued focus on cost management.
Quarter over quarter net income was up 4% and earnings per share increased 10%.
ROE was up 110 basis points sequentially and pretax pre provision income improved by 6%.
With strong revenue growth and our focus on cost management, our efficiency ratio improved to 65, 2%, a 470 basis point decrease year over year, and 180 basis point decrease quarter over quarter.
Operating leverage was positive at two 7%.
The bank's CET, one capital ratio, which is presented under the standardized approach was nine 3% compared to nine 8% last quarter.
This variance was a result of redeploying capital accumulated during the pandemic and is in line with our strategic plan to invest in profitable sustainable organic growth.
Given the current macroeconomic conditions and ongoing market volatility if you additional highlights from this quarter showcase the continued confidence in our strategy, including the successful issuance of $300 million of covered bonds and $350 million of subordinated debt leveraging our diversified source.
There's a funding.
And the confirmation of our long and short term credit ratings from S&P with a stable outlook.
We're also pleased to announce a one cent increase to the bank's dividend to <unk> 45 cents per common share. This is a 13% increase compared to the dividend declared the previous year.
As I outlined at our Investor day, our business lines play a key role in the success of our strategy.
Commercial banking continues to be our growth engine and is executing on a proven business model highlighted by a record quarter for organic loan generation led by inventory and real estate financing.
Inventory financing was up by over $800 million or 32% quarter over quarter to $3 4 billion.
Real estate financing grew by over $300 million or 4% to $9 4 billion over the same period.
And equipment financing is tracking to plan driven by strong originations and asset price increases.
In capital markets, we saw a strong rebound in revenues compared to last quarter reflective of active debt markets and continued progress on our strategy to provide a more focused and aligned offering birth.
We improved our syndicate position with several provincial borrowers in line with our objective to grow with core issuers. While also participating in the government of Canada's inaugural Green bond issuance as well as a sustainable bond issuance from the first nations financing authority.
Second we achieved our fiscal year 2022 goal to provide coverage to at least 75% of our top tier commercial clients up from 50% last year.
And third we integrated our new real estate research capabilities, and our offering which has led to improved deal pipeline conversion.
In line with our strategy to reposition for growth with a digital first approach personal banking continued to make progress in closing key foundational gaps to drive customer retention and acquisition, while deepening existing relationships.
First the bank launched a new contactless tap debit card with Interac flash functionality.
The launch of the new card closes a key foundational gaps and supports the bank's strategy to drive customer acquisition and enhance the customer experience the.
The new card continues to give customers access to more than 1 million Atms across Canada and around the world.
Second following our commitment to improve the Onboarding experience, we've announced a strategic partnership with a third stream to enable digital account openings Rowley.
Rolling out later this year existing and new customers will have access to a simplified fully digital application process to open an account in minutes.
Third we have reduced redundant systems and processes by more than 60% for mortgage originations. So far this year and we remain on track to meet our time to yes target of three days by year end.
As we said at our Investor Day, our strategic plan is underpinned by a strong culture and commitment to ESG.
Recently as part of making the better choice. We added four new ESG themed funds and launched Green teams at the bank and employee led initiative to identify low cost and innovative ideas to make our bank more environmentally friendly.
We've also been taking action to support our employees, including a work from home first approach, reducing commuting time and expenses for employees, allowing them to spend more time with their families.
Providing for summer afternoons off as well as the day off on their birthday for a total of three additional days off per year.
And the launch of life speak a new mental health resource and wellness platform that provides education and advice on mental health issues.
The physical and emotional strength of our one winning team is a priority and we believe that maintaining good mental health contributes to personal and professional development.
Our culture is our driving force and our employees are the biggest stakeholders in our success.
Over the past few weeks, we have held a series of employee appreciation events to thank them for their contribution to the bank their energy and ongoing commitment will help fuel our path forward.
I would now like to offer some thoughts on the evolving macroeconomic environment and potential impacts on the bank rigs.
Regarding our loan portfolio, we are pleased with our recent results.
Inventory financing is significantly ahead of expectations as a result of three factors.
First Oems are recovering faster than anticipated from the pandemic and are able to ship more product than expected.
Second the successful growth of our dealer network, which is 20% larger today than it was last year.
Third an increase in the cost of goods driven by supply chain issues and inflation impacting the cost of materials.
Looking forward, we expect a tempering of consumer demand as a result of the current macroeconomic environment and as seasonal volume reduction in Q3, followed by a gradual recovery in Q4.
Turning now to our real estate portfolio, we have a healthy pipeline of $4 $4 billion up from $4 3 billion last quarter.
While growth is expected to moderate the country is still experiencing a structural housing supply shortage, especially in certain regional markets.
Given our specialization in the sector, we continue to support our long term top tier clients as they work to meet demand and.
In speaking with them they see further opportunities as a result of future immigration waves, which will lead to sustainable population growth in Canada, and the continued need for more housing.
As we look to the residential mortgage sector, we expect loan growth to moderate in this rising rate environment.
With a potential cooling period it enables us to continue to make the strategic improvements we laid out at our investor day to enhance the customer experience and better positions us to capitalize on future growth.
Across our loan book, our underwriting practices are strong and our portfolio is highly collateralized, we've taken extremely disciplined approach in dealing with uncertainty and remain adequately provisioned to whether the rapidly changing environment.
Before I conclude my opening remarks, I would like to personally thank Susan Cohen for her dedication to the Bay, leading Investor relations for the last 11 years.
She has played an important role over that time in establishing strong relationships with our analyst and Investor community and we would like to take this time to wish her all the best in her retirement.
I'm also pleased to welcome Andrew sure Nike to the bank his background and extensive experience in banking and financial communications will be an asset as we continue to execute on our strategy.
He knows the bank very well and I know he is looking forward to meeting and working with all of you.
I would now like to turn the call over to evil.
Yes, Iran, yet and those will get to us.
Like to begin by turning to slide 12.
Highlights of the bank's strong for financial performance for the second quarter of 2022.
EPS was $1.34 and that's income was $59 $5 million.
Adjusting items this quarter amounted to $2.8 million before taxes and included $3 $1 million related to the amortization of acquisition related intangible assets and a favorable adjustment of $300000 to the provision related to premises.
In December 2021, we estimate the charge related to sub leasing of our corporate office spaces and for the write off of the related to leasehold improvements.
On a quarterly basis, we review and update our estimates as a result, there may be further adjustments, including once the sub leases are finalized.
Details of adjusting items for the quarter are shown on slide 26.
The remainder of my comments will focus on adjusted results.
EPS an hour, where you wanted to what were one dollar and 39 cents and 10, 3% an increase of 13% and 110 basis points, respectively compared to a year ago and ahead of our 2022 financial targets.
Pre tax pre provision income more P. D. P. P was $19.3 million, a 20% increase compared to last year, driven by both strong revenue growth and a reduction of net.
Non interest expenses.
Compared to the first quarter of 2020 to EPS, which increased by 10% and the 110 basis points respectively.
Mainly from sustained growth commercial loan growth other income related to financial markets and continued cost management.
<unk> increased by 6%.
Slide 13 shows the net interest margin.
At one point, 87% NIM was relatively flat down one basis point year over year and quarter over quarter as the improved commercial banking contribution was offset by a lower contribution from personal banking.
Regarding of rising interest rates as outlined by the sensitivity analysis in the MD&A.
A 1% parallel rates increase on the yield curve.
The positive impact of $12 million on NII over the next 12 months.
Other income as presented on slide 14.
Increased by 2% compared with a year ago and 4% sequentially.
Mainly due to our strong performance in financial market related revenues being fees and securities brokerage commissions as well as income from financial instruments.
Slide 15 presents non interest expenses decreased by $5 $3 million or 3% compared to a year ago.
This was mainly due to lower amortization charges and rent expenses, resulting from the strategic review and our decision to reduce our corporate office footprint by 50%.
Partially offsetting this decrease were a regular salary increases and the higher level of performance based compensation related to the banks improved performance.
Sequentially non interest expenses decreased by 2% due to lower premises and technology costs as well as cost discipline and other expenses.
The efficiency ratio this quarter, so that 65, 2% an improvement of 470 basis points year over year.
Sequentially, the efficiency ratio improved by 180 basis points.
As a result, as a result of revenue growth and our focus on cost discipline and efficiency ratio has exceeded our expectations this quarter.
Given our strategic investments to close key foundational gaps and improve the customer experience with a digital first approach in personal banking.
We're all spending will increase in the second half of 2022.
Operating leverage was positive at 2.7%.
Slide 16.
<unk>, our diversified sources of funding.
The last two quarters deposits increased by nine 8% or $2 3 billion and loans grew by six 6%.
Deposits grew by four 7% or $1.1 billion, while loans grew by four 3%.
The deposit growth tracks positively with our objective to grow deposits in line with asset growth on a relative basis.
Wrote and personal notice on demand deposits reflect our ongoing strategy to deepen and expand our relationships with advisers and brokers.
Slide 17 highlights our capital position.
So you said you wanted to capital ratio, which is presented on the standardized approach stood at nine 3% at the end of the second quarter compared to nine 8% last quarter.
This quarter's variation was directly linked to the redeployment of accumulated capital during the pandemic to sustainable profitable commercial loan growth in line with our strategic plan.
Considering the current macroeconomic environment and in line with our disciplined approach to capital we have taken the prudent step of pausing our activities to repurchase additional shares as part of our normal course issuer bid.
We have redeemed 401000 common shares or about half of our entire program.
We will continue to monitor the macroeconomic situation and reassess the program throughout the rest of the year.
Even though our prudent approach we are confident that our internal capital generation well sustained loan growth for the remainder of the year.
Slide 18 highlights our commercial loan portfolio, which delivered strong growth loans increased by $1 $3 billion or 9% quarter over quarter driven by growth in the event, the refinancing of over $800 million or 32% and real estate financing of <unk>.
<unk> million dollars or 4%.
As Ron you mentioned the ability of Oems to ship more product the growth of our dealer network and the increase in the cost of goods outpaced the expected normal seasonal volume reduction in event of refinancing this quarter.
Slide 19 presents the Pan Canadian residential mortgage loan portfolio.
Residential mortgage loans increased by 1% sequentially.
We previously mentioned that improving the performance of the mortgage business is expected to be gradual and we continue to take actions to improve the customer experience retain customers and renew groups. The.
The bank's residential mortgage portfolio remains relatively weighted towards insured mortgages at 56% when compared to the industry and combined with the low LTV of 44% on the uninsured portfolio contributes to reducing the overall risk of this business. Despite.
The challenging macroeconomic environment.
Turning to slide 20.
Allowances for credit losses totaled $196 9 million, a sequential decrease of $12 million, mainly due to write offs of previously provisioned accounts in the commercial loan portfolio.
As shown on slide 21, the provision for credit losses was $13 million in the second quarter of 2022, increasing by $10.6 million from a year ago.
This was mainly due to releases of provisions on performing loans of $99 million last year.
Sequentially the provision for credit losses increased by $3.6 million due to volume growth in commercial loans and changes in the macro economy outlook.
C L ratio stood at 15 basis points.
Slide 22 highlights the improving trend in gross impaired loans, which decreased by 12% quarter over quarter, mainly due to write offs of previously provisioned the counts in the commercial loan portfolio.
We have a prudent and disciplined provisioning process, which includes assessing the reserves that allow us to be responsive to changing macro economy conditions.
We further stress the portfolio against various scenarios and this quarter given the heightened level of uncertainty we increased the severity of our pessimistic scenario and its way thing and setting our ECL.
Given the level of uncertainty in the market, we continue to manage our risk with a cautious approach and remain that liquidity provisions.
We would now like to offer some thoughts on how we see the remainder of the year developing we.
We expect revenue growth to continue in Q3 as a result of three additional days in the quarter as well as to other wins from reason commercial loan growth NIM.
NIM is expected to move north on the of 119%.
We expect continued good performance from our capital markets business line, but remain cautious as uncertainty and market volatility remain elevated.
Our focus on cost discipline will continue.
Overall spending is expected to increase in the second half of 2022, as we delivered strategic initiatives to improve the customer experience in personal banking and invest to support our growth.
Despite the in space of increase we expect to remain below our 2022 efficiency ratio target of less than 68% leading to a positive operating leverage for 2020.
The provisions for credit losses remains difficult to predict on a quarterly basis.
Given the macroeconomic environment.
We efficiently redeploy previously accumulated capital into profitable organic growth during the quarter, leaving two leading to an improvement of our financial results.
Now expect more tempered growth for the balance of the year with internal capital generation expected to sustained loan growth during the second half of the year.
As a reminder, next quarter semi annual and RCN interest payment will impact EPS by six cents.
Despite the current environment and related uncertainties, we expect that the strong results delivered in the first half of the year positioning us to exceed our 2022 financial targets.
I will now turn the call to Andrew.
Thank you Rania and Susan for those introductions Susan.
I'd like to wish you all the best in your retirement.
Have you on the call I look forward to introducing myself either in person or virtually over the coming weeks and working closely with you in the future.
At this point I'd like to turn the call over to the conference operator for the question and answer session.
Operator.
Thank you if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment again. Please press star one to ask a question, we'll pause for just a moment now everyone an opportunity to signal for questions.
And we can take our first question now from many cumin of Scotiabank. Please go ahead.
Hi, Good morning, I wanted to start off just.
Asking a question about loan growth commercial loan growth up very strong sequentially and year over year I'm. Just wondering if you could break that out between.
Increases in line utilization versus new business, how that how that would break out in terms of the growth.
Right.
Yes. Thank you Manny are Eric here.
It's a good question actually our utilization right now is at a 50% so closer to the mid fifties, we guided you towards and significantly significantly above.
The mid thirties, we've experienced last year and like I mentioned in the opening remarks like the team did a great job in terms of growing our dealer base over 20% year over year. So I'd say those are the biggest drivers for that growth increase in inventory final.
Ensign.
We were seeing a more more of a trend towards normalization in that portfolio.
For what we've experience.
Meyer to depend that mix situation.
So just specifically digging into that inventory finance business I, just wanted to clarify relative to the expectations that you provided when.
When we spoke on the back of the Q1 results.
Just whats happening there I know you spoke to it a little bit, but just to clarify in terms of.
Clearly the environment is better than you expected. So so is that sustainable and in terms of the seasonality that we would typically see.
Is that something that is going to be observable in Q3 or.
Bigger growth trend is going to.
Are they going to not make that observable in Q3 either.
Yeah, Manny what we expect is really a volume reduction in Q3 due to the seasonality of the product. So we expect we expect some reduction but that will be followed by a gradual recovery in Q4 in terms of growth.
The Big Big driver is the fact that some Oems are just recovering faster in terms of the supply chain and they're able to to replenish the dealerships, but again in terms of line utilization at 15%. This is pretty much where.
In normal trends, we should expect.
The dealers to be right now so we're very comfortable where we are in.
And we expect seasonality to <unk>.
Again, an impact this year for Q3 in terms of volume reduction there.
Maybe if I can just add to.
Eric's comments are as we said in all of our remarks. The results this quarter did exceed our expectation. So based on the guidance that we provided last quarter. This did exceed our expectations and primarily driven like we knew we had grown our dealer network. We said we put the pipelines in place the Oem's recovering faster was really.
The biggest the biggest driver here in addition to the increase in the cost of goods.
So, but as Eric mentioned in terms of the utilization, we're going back to pre pandemic levels. So in terms of the Q3 forecast as Ivan mentioned in his remarks, we're likely going to see a small seasonal reduction in Q3, which is why we're still forecasting that revenues are going to continue to grow.
Because of that tailwind and commercial with a gradual recovery in Q4.
Got it so just putting it all together in terms of overall loan growth. So it seems pretty reasonable that that utilization piece.
Largely run its course, and so going forward.
Is it reasonable to expect a moderation in loan growth just because utilization is not going to be a driver as much of a driver as it has been.
Yeah. Manny this is Eva for the second half of 2022 definitely you should anticipate that the grille, it's kind of temper and that's impacted by what we just discussed so.
That's also why the internal capital generation has gone to sustain it or even more than sustained it for the next six months and next year, we're going to restart as well to grow within that portfolio with normal normal seasonality that we're going to see but for the second half expect a tempering of that growth.
Got it and I guess you preempted my question on capital, but maybe I'll just.
As you know.
We've seen one of your peers are tapping ATM to help fund growth is an ATM something that you would consider if growth exceeded your expectations. So once again is that something on the table for you.
Yes, since you opened the capital the topic, many Oh I'll just use a few messages and finish and then sort of about your ATM question. So we have a solid capital base right now we're at nine 3% CET, one we do manage capital prudently and as a reminder, we always thrilled that we're on.
There was a standardized method, which is important to note for some investors. Our objective is to manage above eight 5%. So we're still quite above that level. As a reminder, creep endemic we were at 9%. So we're still ahead of where we were pre pandemic. So the present they may cause a deceleration or a.
And have some portfolio, we had to catch up to do so we've seen the up and now a recovery of that portfolio, but we're still that is a good place in terms of capital. Our first priority has always been and remains to deploy that capital through organic growth and that's what we've seen over the last six months.
And that definitely contributed to an improvement of the financial statements. So as I mentioned that we expect now tempered growth for the remainder of the year and the internal capital generation to cover that which leads to finishing the year probably around the same level or slightly a little bit.
Depending on the what's going to happen exactly so to answer your question. The ATM is definitely part of any toolbox in terms of management of the capital but at this point based on the comments I just provided we're comfortable with the level and we don't anticipate having to use them.
Thanks for that for them. So thank you.
Okay.
And we can now take our next question from Doug Young of Lazard capital markets. Please go ahead.
Hi, good morning, just going back or going to net interest margins given the.
Pick up quarter over quarter in commercial loan balances and decline in the personnel side and deployment of capital and deployment of funding and whatnot I would've expected nims to be actually up sequentially.
Is this is there something else going on here in terms of asset yields are a competitive pressures or funding costs, hoping you can just kind of like maybe elaborate a bit.
Okay.
Yeah, it's definitely a good question and what do I can't do is explain a bit gives you a bit more color in there as well as a bit of guidance going forward as well. So the NIM was relatively stable this quarter.
So the higher commercial loan growth definitely contributed favorably to it.
But as I mentioned in my comments, where personal but that will generally realize that there was definitely in the back of higher funding cost this quarter.
And they're very competent is a pricing environment for all the banks so not just for us. So on the funding side by example in a raising rate environment with happens is as an example in the sea, though are rates going to move faster based on that the spacing and the prime rate is going to move after when the rates.
So that delay is something that kind of are.
The lead the recovery of the NIM, but we now expect that for the second part is where are you going to be north of 190, and a few basis points, probably about that to one side 90. So we will see the tailwind of that growth for the Kenyan over Q3 and.
And depending on the level that we will experience in the portfolio mix in Q3 that should be sustained in Q4.
And then just a follow up on that is that because the the delayed prime increases starting to kick through post the funding costs going up is that the main driver that's pushing it up over 190 in Q3.
Yeah, there's there's two impacts definitely that as an example, we've been competitive from a funding perspective as well because we have strong growth and we have to sustain it.
What do you see also is that the full growth or the full impact of that growth usually kicks in the next quarter right. Because there is off of a quarter and then you get the full benefit of the next quarter. So that's really for the remainder of the year that will be north of the 190 and that you'll get the full benefit.
And that's factoring in.
In terms of bank of Canada rate cuts. Obviously, there has been what already is that factor and then two more additional rate increases.
Increases.
Mhm, Yeah at this point, we're all looking at rates, including today, So everybody is expecting a rate increase though.
The rate increase we mentioned in the MD&A that currently the way where were positioned at the end of Q2, a 1% increase parallel.
<unk> on the rate curve would be equivalent to 12 million bucks. So depending of all the rates evolve towards the end of the year there being additional kick kick in the NIM and then the NII as well, but we will see probably most of it ticking towards the end of the year and next year not necessarily independently.
Okay. So that's not in the bank of Canada future rate increases is not in your above one <unk> guidance.
It's partially included but again, it depends where its going and everybody expect now its leading towards the neutral zone does 2% to 3%, but towards the end of the year and we all know or expect today. There is probably going to be an increase which will gradually benefit but as I mentioned there was a question of repricing of the asset.
There was a timing of all of that so.
It will be a gradual benefit for the next few quarters and with the main or the full contribution in 2022.
Okay, and then just I'm, hoping you can unpack a bit of what's in the other income specifically the income from financial instruments was a big big.
Big increase and I think there was a mention of capital markets. A few times how have you disclose like how much capital markets contributes or would you disclose how much capital market contributes to pretax pre provision earnings or what was the quantum of the benefit you got from capital markets and to your results this quarter and was that a big part of what's in that income.
Each one instruments line.
Yes. The increase this quarter is mainly related to what we describe as other income related to financial markets. We don't disclose the segments. So there is no segment called capital markets and we don't disclose that but as we have done in the Investor day, what we give as a proxy as two categories.
The other income fees.
On the you know on the fixed income deals and things like that so calces gotta go through that as well as income from financial instruments. So I'll pass I'll pass it to guests that will provide more color. Yeah. Thanks Ilan, Yes, we're pleased with the quarter in capital markets.
You know, especially in the context of what was a pretty volatile market as everybody knows you know for us our fixed income business continues to perform really well we saw good capital markets activity in the quarter, particularly with our with our core customers.
Talked about through the last quarters and lastly in your Investor day, and as already mentioned in his opening remarks as well.
Continue to align our capital markets franchise with our with the rest of the banking in particular commercial as well and again as already mentioned in her opening remarks.
<unk> improved our coverage of our commercial clients from 50% to 75% of Neulasta.
The last little while as well so.
Really good performance, there, particularly as well actually I should mention too that as Roger said in her opening remarks, we've improved our siddiqa positions with a bunch of our issuers, particularly if the government insurers. So yeah really good quarter for us I'm pleased with the results and.
And so just just mail clarify and then I'll stop asking questions, but the the capital markets go through the fees and security broker Commission line and then the income from financial instruments as a separate.
And then capital markets is that right.
Yeah those are mainline.
And then inkerman financial instruments like what was the big driver you know within that because it was up 57% you really I guess my question with what's in there what is the sustainable.
Yeah, So I mean, well I mean, those are obviously mark to market adjustments on inventory positions as well.
Rick pointed out we don't run large inventory positions here, we've been evolving our business kind of away from what you probably consider trading strategies into more kind of fee based strategies and it kind of described today.
The rationale for that kind of a minute ago.
But so that's sort of a percentage increase quarter over quarter is certainly large but the absolute dollar amounts are not particularly large.
We typically run that line somewhere between five and 6 million Bucks per quarter. We were on the high end of that this quarter and but I think that's probably a sustainable level to think about going forward.
Perfect great. Thank you.
Yeah.
We can now take our next question from Paul Holden of CIBC. Please go ahead.
Thank you good morning.
Why don't I ask you some.
Nationally the questions, but from a little bit of a different angle and that relates to.
Bank account.
Hoping you can sort of growing in those low cost deposits, which are obviously becoming increasingly.
Important given the trends you talked about four.
Deposit costs, so maybe maybe some thought.
There because I also know in terms of execution on our strategic plan.
We're on track on most objectives, and one where you're falling a little bit behind as you think account opening. So maybe you can address that and if it is becoming of increasing importance to you.
Thank you Paul for your question, it's Karen So as you know deposits are core to our bank and really a key focus in our strategic initiatives I shared for Investor day, we're focusing on three key segments, one of them being deposits and then credit cards and mortgages were well positioned to compete in the market through the competitive rate.
And we announced a strategic partnership with third screen, which is really going to allow us to enable digital onboarding and further drive deposit growth. So it will have an opportunity to grow nationally outside of Quebec. We've also introduced the loyalty team, which is really setting us up forget progress in terms of proactively reaching out to customers.
And in order to maintain their deposits, but we need to continue to improve as we build digital capabilities. Our account opening target is what's really a stretch that we've established and it's aligned to a digital journey. So it's really just a question of timing. So we believe that were building their bounce back by foundation for growth.
Okay.
When you say, it's a question of timing how should we be thinking about that comment given you know you're going to watch this.
Third stream partnership.
Sort of in the back half of this year is it reasonable to have expectation than that Brad.
Trace deposits should start to accelerate in 2023.
Or might it take longer than that.
Yeah, that's fair.
Assumption that you're making because overall the key message is it is really about the foundational gap that we're closing this year. So this year is a year of stabilization and we're focused on the customer acquisition and retention pieces and improving the customer experience. So as a digital first approach and journey mapping keeps on happening and being delivered this year.
We're gonna see key benefits as we progress.
Okay, Great and then final question on this topic any any kind of sense you can give us on.
What those digital deposit.
Cost and a funding perspective.
Versus the.
For some of the broker based deposits like is there a significant spread between the two I imagine there is but just wanted to verify.
I wouldn't say there's that much difference between the two it's a you can see in fact the rates. They are public. So you can see that then you're going to see the relatively along with the short term.
Term deposits.
So at this point I wouldn't say there is a material and the amount is starting to be relatively small what we have right now digital because we're changing the platform and we're changing that project as well so that base, we let it run off a bit this year as we transition to the new technology, the new platform that digital onboarding that getting in doing.
And next year, we're going to revisit exactly what's our strategy with those.
And Paul just a reminder, so right now to a certain extent the majority of our deposits are kind of on the retail side are kind of Quebec based with the digital Onboarding platform.
It gives us now a new platform to be totally pan Canadian and that and it's fully self serve in terms of account openings. So we're very excited about delivering that solution at the end of the year and reaping the benefits in fiscal 2023.
Got it.
Last question on a different topic.
Talk a little about the inflationary impact on some of your customers you guys, particularly in inventory.
Finance.
I'm wondering if there's any particular risks you're seeing or thinking about.
In terms of inflationary.
Impacts on your commercial customers.
From a margin or profit perspective.
Well.
Paul were really specializing in our industries and right now yes, there are some inflation pressure, but like from from our perspective in terms of how we underwrite we go to market.
We're very cautious and prudent.
And what we hear from customers that they they are.
Planning and making sure that they provide either contingency or.
Or are some some reserve on those.
Potential increase in prices. So we feel good about where we are in the portfolio and think that that can can be manage our true out our underwriting processes.
We'll send Eric I mean, Paul.
We factor as Eric said into our underwriting process the rising construction in hard cost inflation in commercial real estate.
The increased debt service into leveraged finance and syndicate portfolios.
And we really we're really very focused on how that will impact the customer.
And and managing to prudent LTV metrics and assessing as Eric said, the contingency levels and the fast so where the real estate you factor in your contingencies, when you're underwriting we're comfortable with where the portfolio is and and managing to support our customers.
Okay, Okay I'll leave it there thank you.
And we can now take our next question from Nigel D'souza from Veritas investment Research. Please go ahead.
Thank you good morning, I had a question for you on the funding side when I look at your term deposits. This quarter they were up by $1 billion.
Now last quarter I believe they declined by a buyer.
By 1 billion now that's I know that's year over year, but.
Are you seeing a shift in preference.
Away from notice and demand too.
Two to term in a rising rate environment and are you also seeing a shift maybe towards the adviser and broker channel in a rising rate environment. What's your outlook on the funding side and how does that impact your your NIM outlook.
Yeah.
For your question on deposits I would say, there's a big change of strategy between this year and last year last year, we were optimizing the funding of the bank and we use securitization much more so I'll just push that the size because we can generally discuss it if I focus on what's been happening this year this year over the last.
Six months as I mentioned, we've been highly successful in terms of growing our deposits and I'm really pleased with the performance on the demand deposits. We grew in either the relationships and that's been a very big contributor to the growth that we have so very pleased with that on the time deposits. We've been active in fact in the branch.
As we did increase the rates and got good success at stabilization of that base, which is the objective that Kevin discussed a few minutes ago fourth this year from my board broker perspective, we've been active in the market pretty competitive to sustain the growth of the bank and what we're seeing is that the market is slightly shifting.
Longer on the curve.
But I wouldn't expect that that's going to drive much on the NIM side, because if you factor all of the elements on the funding we do hedge the balance sheet and we do allowing you know the terms of the funding and the asset so IBM treasuries gotta realigning all of that but definitely from a deposit perspective the longer.
We get the term deposits deposits as it is for us because you don't need to renew with constantly which has been the trend for the last few years with shorter term like at one year was the key term deposits that people were getting in the market, but we feel and what we hear from customers and our advisors right now as the longer term are starting to.
Get some traction, but as interest rates continue to.
Increase at we will probably continue to see that trend, but again from a NIM I wouldn't put too much.
You know in back on this we do manage at the bank level the overall knowledge.
Okay. That's really helpful. Thank you that's it for me.
We can now too.
Okay.
From Jew Hawkins of Credit Suisse. Please go ahead.
Hi, Good morning, I wanted to ask on inflation, but from from expense perspective, just wondering.
If youre seeing any inflationary pressure on wages just given some of the commentary this quarter, we saw from your larger peers on rising salaries and benefits.
I'm wondering if you could give us a bit of color on what youre seeing from inflation and wage perspective, there. Thank you.
Yeah no.
So thanks for the question.
I would say is that we continue to be focused on cost discipline and not something that we embedded into the culture.
Over the last 18 months, but just a reminder, cost discipline is only one aspect of it. We've also started to cost optimize structurally our organizations. If you actually look at our expenses year over year were down 3% were down 2% quarter over quarter and so while everyone is experiencing some inflationary pressures we have lot to lever.
That we can pull on and it's something that we are dynamically managing our expenses. So.
It's really finding that right balance between investing in the future, while being prudent and as Ivan mentioned in his opening remarks, the second half of the year expenses will likely go up.
To continue to deliver on our key strategic priorities, primarily brand visa transformation and onboarding, but what we can guarantee and that's what we're very confident about at this point in time is that we will maintain our efficiency ratio below 68% with a positive operating leverage in.
In terms of your question around just in terms of compensation and salaries salaries have gone up like I said, everybody is impacted by inflation, but when we look at the war on talent out there. We view salaries is just one small aspect of what the employee experience and total compensation is and so to put that in perspective despite.
The war on talent, we've been able to attract top talent since November one representing almost 20% of our overall.
Employee base.
And that's that's a factor for a number of things, we really differentiated ourselves in the market by offering our employees to work from home first approach and that's given them flexibility and in this current macroeconomic environment. It's actually created some real cost savings for our employees. So they don't need to commute theyre not paying or not.
Spending as much on gas, they're not spending as much on in terms of workloads, we've given them some summer afternoons as well as their birthday off so additional time off and then most recently the new mental health resource life speak that we launched and we're further comforted by the fact that we have.
Hosted a thousand of our 3000 employees over the last three weeks at different appreciation event in Toronto, and Montreal, and and they told US. It's the cultural shift is helping drive that renewed sense of pride their productivity and their commitment to the overall organization, so but as any good employer were constant.
Reviewing our compensation packages to make sure that we are competitive and not that employee experience is competitive and so we'll continue to benchmark, but we're very comfortable in terms of our ability to pull the right leavers and manage our costs appropriately.
Thank you that's very clear.
Just lastly for me just on credit just.
Just looking at the performing build this quarter.
I think we saw some of the peers I guess sitting.
Similar increase to the adverse scenario weighted but.
Parts of that I guess, the impact being offset by positive credit migration wondering.
If you could give a bit more color on sort of the moving parts in the performing PCL growth this quarter. If there's any thank you.
Sure. Thank you for the question.
Q2, 'twenty two PCL of 13 million or 15 basis points is really in line with normalized run rate of <unk> given the portfolio mix. We continue to see good underlying credit quality in the portfolio. The growth in PCL was mainly due to commercial volume growth, but we did incur.
<unk> are performing ACL due to the changes in the macroeconomic outlook.
Sure.
We take a prudent conservative approach to setting Acl's, we did increase the weighting on the pessimistic scenario.
And we adjusted the conservatism of our forecast and the economic scenarios are based on the forward looking and I should note that ACL is forward looking.
Our economic outlook based on GDP higher inflation housing pressures unemployment.
So we're going to continue to drive a prudent measured reserving approach going forward and I hope that gives you the components, but topline.
Volume, but also appropriate conservatism given the macroeconomic forward environment.
Got it thank you very much.
And we can now take our next question from Sohrab <unk> of BMO capital markets. Please go ahead.
Okay. Thank you just just two clarifications just on the answer you gave.
So was there like can you talk about whether or not there was any negative migration in the overall portfolio or what was it net positive migration or was it just.
Portfolio size growth.
From a stage migration perspective.
<unk>.
I did not see new adverse formations, we haven't seen a lot of stage migration relatively stable to give you. Some context 95, 5% of our portfolio is in stage, one 4% stage two.
We're really we're not seeing adverse formation that reflects sort of current economic environment, which is really quite strong. It's the forward looking element that that is driving our prudence in setting the sails.
Okay, and just just maybe an abundance of clarity because youre still standardized.
Portfolio quality degradation wouldn't necessarily show up in <unk> is that fair.
It it would not show up in our debut as but it would very much show up in our Acs and right and so the key for me is always about that prudent measured approach to ACL and unlike some of our competitors. We took the stance of looking at that forward economic outlook.
We don't think it is as strong as where we are today and we're being prudent and measured in taking additional reserving steps and increasing our reserves for it and we will continue to operate that way.
Okay, and then just you.
You provided a relatively detailed.
Guess roadmap or dashboard on how.
People are tracking relative to some targets.
Financial and otherwise that you've got out there.
Is the intention to provide the second quarter with an update to it.
So so so Rob we it and in the appendix on the Investor and the Investor presentation. There is an appendix that actually tracks every C. K T I and we have been presenting that every quarter. So that's our intention by the end of the year as we're going into a profit planning season for next year, we will be.
Looking to revisit those and well obviously share that at the end of the year as well in terms of what we're going to be tracking to next year, but it is available on the appendix on a quarterly basis.
Perfect. Thank you.
And we can now take our next question from Mary <unk> Cormack. Please go ahead.
Thanks, I just wanted to come back to your opening comments on the strength in inventory finance and specific inventory financing and specifically.
The 20% year over year growth in the dealer network and really his questioning the 20% that seems like a big number, but maybe it's because you're going from a really small base so that 20%.
Is it really that that large so maybe if you could offer it how many additional Oems specifically was that 20% growth made up of like maybe you went from 10 to 12 relationships. So 20% is only two additional relationships. So any color there would be helpful.
Yeah. Thank you for the question. It's a good question, but no actually its team executed quite strongly on Onboarding, new programs and new dealers and when we're talking about increasing dealer base. It it's really at the dealer level. So so we went.
From just over 4200 dealers to now servicing.
And over 5000 across North America. So so we definitely saw very strong organic work.
Throughout our dealer base from from the team and then to refinancing and we service close to 500.
Plus Oems.
Into various types of products. So Oh I would I would just say that it's very good work from our our inventory finance team and it's a result of our strong specialization there.
That's good that's good color so bringing sorry next question, what's the outlook for continued growth. There is it is 20% for.
For the next few years, a reasonable expectation or is this more of a one off.
I'll tell you where I'm going with this I think one of the comments you guys made in the past was that as you add more relationships. It should over time reduce the impact of seasonality. So that's why I'm interested to see if you guys get like first of all is that true and then secondly can you continue to do to add like years of <unk>.
20% growth such that seasonality in a couple of years. This is not something that comes up in the in the Q&A for your conference calls.
Yeah again, it's a great great question as we mentioned in our events Investor day, we intend to diversify the portfolio when we've acquired.
North point in commercial finance and still know there is a strong.
Our focus into RV type dealers as well as marine so that accounts for about 60% and the expertise we have there and the deployment of our sales force really makes us very successful into winning market shares, but as we said like we want to diversify in Turkey.
The ology.
Agriculture, small construction equipment and some of them.
Also green type products.
<unk> products.
So so right now the team is building those those specialized approach. So we should expect to grow those dealers. We grew maybe 30 dealers in those segments in the last quarter.
So overall, we feel that we have good momentum and by by focusing salesforce towards those well that's seasonal type industries will reduce seasonality in terms of pace I think that our team did a great job, it's hard to predict.
The pace of dealer growth, but but we feel that that we have good momentum in.
This is a growth focus for us in terms of segment and we'll continue to pursue that.
Okay. Thanks, that's helpful and then maybe.
Maybe I'll leave it there and just.
Just coming back to one of the answers earlier I think I heard that you got in line utilization is in line with normal trends what would prevent it from going above pre pandemic trends.
Well actually pre pandemic. If we go back to Q2, just just before Q2 'twenty was a utilization at that time was around 58%. So so during the low season right now we run at about 50% utilization.
Which for us is.
It's not a question of going up or not it really depends on the type of products on the line and the ability of the OEM to replenish the dealers as per their forecast of their sell season. So so again, if we diversified that that.
Portfolio, you will see a more normalized type utilization, which should average.
Two I, fifty's, but but not being a hard number like it will always depend on the.
Economy macro environment and that is very hard to forecast or to predict.
Okay, great. Thanks, that's it for me.
We can now take our next question from Gabriel <unk> of <unk>.
National Bank financial please go ahead.
Good morning, I apologize if I ask something that's already been asked because I got.
Some technical difficulties during most of the Q&A here.
But good quarter very encouraging guidance I have a question on the capital.
You're indicating you expect it to be flat ish from here on out, but what if loan growth continues to surprise the upside like or what's your your minimum comfort level for capital.
Is there any thought towards some strategy so maybe enhance our capital position. If you like are there was one of your peers. The ATM program and I don't know if thats crossed your mind at all.
But yes you are.
That that question was asked but it's Mike it's not but no problem. It's an important one that it's my pleasure to give you the quite the same color.
So we definitely manage the capital prudently you're right and as a reminder, always remind that we're on the standardized approach.
Currently at 9.3, CET, one we mentioned that our objective was to remain above eight five so there is still a good cushion in place and the second thing is that as I mentioned, a few minutes ago is that pre pandemic. We were at 9%. So people kind of forgot that there has been the increase of the capital that was.
Due to a slowdown in the Sun portfolio, we're seeing the catch up over the last few quarters. So we're getting back to a more normal alert level in terms of what we had been running pre pandemic and that's great because we've been able to redeploy capital through organic growth, which is a redeployment.
The capital accumulated during the pandemic, but that contributed a lot.
To define show results, which are pretty good as you can see this quarter.
The remainder of the year, we had mentioned that the growth is going to temper and a portion of that is what Eric just mentioned about the seasonal reduction in inventory financing. So the for the remainder of the year, we would expect that the capital internal capital generation is going to sustain the capital or licensing.
Prove it so there's no stress at this point, we're pretty comfortable with the levels, we will reassess and provide more guidance at the end of the year or going forward in terms of growth, but the key point that they I think just mentioned is we're not yet back to historical levels of utilization, but we're getting close and we.
We're expecting that the last probably shut the catch up that we need to do is going to be more gradual than what we've seen over the last two quarters. So we're pretty comfortable and if you refer to the ATM program at this point based on the comments I just gave and we don't feel it's in the toolbox. Its one of the elements you would use and comes with her in terms of.
Capital with we're comfortable with the base that we have and we don't feel that we need it at this point.
Okay. Thanks for repeating that information again, apologies and a good quarter. Thanks.
No problem. Thank you, giving you.
And we can now take our next question from my father Makena TD Securities. Please go ahead.
Okay. Thank you most of my questions have been addressed but just on the capital one more if I could take it one step further.
Is there a level of loan growth.
Where you do start to consume that capital is it is it 70% for the overall bank or is it higher than that or.
Is it more complicated that you can't provide that simple of an answer.
I'm not sure about your 70%, but the the key comments I could give you is that in a normal year with by example, if we had to have the growth that we expected that beginning of the year with double digit or so growth in commercial with stabilization in personal then growing in 2023 with the improved profit.
The ability that we have it also adds to the capital generation that we're having but we do intend to put in place a plan, where the internal capital generation sustain bolstering that growth, but we had to catch up to do and that catch up happened over the last few quarters. It did reduce the capital but for me, it's really a positive outcome.
Of really redeploying that capital and generating profitability with it and as I mentioned, we were at nine pre pandemic. So there is no stress in the house with being at 9.3 right now because we're above where we were pre pandemic.
Okay. Thank you that's it for me.
Okay.
And we can now take our final question from Darko <unk> of RBC capital markets. Please go ahead.
Hi, Thank you.
I know we've gone over so thank you for taking my question a lot of my questions have been asked and answered. So I thought maybe I would ask you a couple of outlandish questions just to finish this off.
Because I'm sitting here punching in my model everything that you guys talked about everything.
Everything looks neat and tidy when I look at the appendix appendices everything is going according to plan and the way My mind works is when everything is going according to plan I start to worry about what could go wrong. So my question is around here is what could go wrong in the second half of the year I'm thinking about outlandish things like.
The French language law in Quebec.
The maybe the union coming back.
Can you give me what is your biggest fear in this year of execution.
For the back half of the year.
Well Darko. Thank you for these outlandish comments at the end of the call.
Delighted to answer some of them listen I I I get paid to worry and to think about the future and so I don't think I'd open my remarks by saying that we're confident that we're going to exceed our targets. If we're not comfortable as a management team in terms of the quality of our portfolio.
Our underwriting capabilities, our ability to actually manage through all of those volatile macro changing environments and I think we've been delivering quarter over quarter and showcasing that we showed that through the pandemic as well and so I think our you know our cautious disciplined prudent approach is definitely paying off.
We're confident in our ability to deliver on our digital road map and again, we've been delivering quarter over quarter.
The biggest thing that I always talk about is people people people wearing a people business and that's really where we spent a lot of time and that's why we've always said culture is going to be our driving force and so ensuring that our people are equipped we're attracting the right talent, we're retaining them, we're promoting them internally and thats really the role of leadership.
And management throughout the whole organization.
And that's why we increased our PCL this quarter as well so again it really speaks to prudently managing what we think could potentially be on the horizon.
And how do we weathered through that storm and that's why we're also prudently managing our capital and that's why we're pausing our share buyback program, it's not that we're concerned, but it's being cautious and prudent and so.
Maybe I'll just leave you on that now, but we're very confident at this point that we're going to exceed our financial 'twenty two targets.
And with respect to employees, just getting back to my concerns on costs and possibly the union coming back is there any concern or anything any indication out there at all.
That that is even plausible at this point in time.
So from a cost perspective, I mean salaries have gone up right and so ensuring that we retain our top talent, we're attracting new talent cost of attraction has gone up but we've been offsetting it with other with other things and as I mentioned in my comments salaries is just really one component of making sure that your employees are engaged so as an employer.
Here, we focus on ensuring that our employees are engaged and are happy in terms of the union I mean, that's really between the employees and the unions. So it's not something I can comment on other than we know based on our most recent engagement with a third of our workforce and we are doing in other employee survey at the end of the at the end of the year in September .
<unk>.
Which is one of the key metrics, we feel that there is the re energized theyre excited about the future of their committed about our success and so we're feeling very confident in terms of attracting and retaining talent as we stand today.
Excellent. Thank you very much.
Exactly.
I would now like to hand, the call back to Ron <unk> for any additional or closing remarks.
In closing I am pleased with our strong results this quarter and continued momentum into Q3, we redeployed capital accumulated during the pandemic towards sustainable profitable organic growth and internal capital generation is expected to sustain loan growth for the remainder of the year.
We continue to apply strong cost discipline across the organization and identifying additional cost optimization opportunities are.
Our credit quality is sound and we are confident in our strong underwriting practices and highly collateralized portfolio to manage through macroeconomic uncertainties.
We continue to make significant progress on our strategy over the second half of the year, we will be focused on initiatives that drive customer acquisition, including the rollout of our new public website with a new look and feel and enhanced and simplified user experience.
Additional targeted marketing and the rollout of our new brand and refresh logo that I announced at our AGM in April .
And the delivery of our digital Onboarding solution and re imagined visa experience, which will enable us to grow products with existing customers acquiring net new customers and continue to grow our national presence.
Our one winning team is engaged and we continue to make solid progress against this plan.
We are confident in our ability to exceed our 2022 financial targets. Despite the uncertainties in the market.
You for joining the call today.
This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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