Q3 2022 Laurentian Bank of Canada Earnings Call

the products are still being sold, and there is really no aging in the inventory. So from a PCL perspective, we are very, very comfortable, and we know that our dealers are being prudent in terms of their ordering season going into this session. I just have two quick questions, one follow-up to that. I mean, Liam, if your borrowers end up having to sit on inventory, because of lack of demand, what ripple effect does that have on your, what implications does it have on your reserve building requirements? Liam You've got the backing of the dealership, many of the dealers have personal guarantees on the dealer. Your OEMs, your manufacturers have repurchased arrangements, and then we have a curtailment process where if you're not seeing the turnover, but right now the liquidation rates are normalizing, as Eric said. We're not seeing a lot from an aged inventory standpoint. This is a very operational business. We're on the ground doing inspections, looking at the inventory, but we really don't see any cause for concern, given the layers of protection and given our reserving, comfortable with that portfolio at this juncture. It's more of a return to normal than a slowdown or a recessionary impact. Okay, so just for crystal clarity, you will earn higher spreads when –

dealers are using the facility because of a slowdown in demand without any implications for reserve building. Is that what you're telling me? No, no, no. Just to be clear, as we earn those spreads our discipline is to maintain appropriate ACLs against that growth and indeed if I if I might jump in here sort of one of the big drivers of our increase in ACLs was our prudent measured approach and we increased reserves.

commensurate with that volume. That's our discipline. That's how we maintain ensuring that we have the credit protections that we need in addition to the layers of protection our guarantee by cardinal narrative.

Okay, and Yvonne, I think to an earlier question, you suggested that the circumstances, let's just say....

meant being a bit more prudent on reserves, sorry, liquidity, higher liquidity levels was prudent.

Why don't you think you will have to retain a higher liquidity, let's say, for the next couple of quarters because the macro uncertainty certainly not lessening is intensifying?

It's a good question, Saurabh. I didn't say that we would let it all go in Q4. To be clear, we're going to look at what's happening in the environment. We're going to look at the growth that we're having as well. We will redeploy some of it in the growth because currently we did gather a lot in last quarter. So, we believe that we're at the point we can use some of it. But definitely, we're going to look at the growth that we're having in the environment.

I think we can be accused of being prudent and we'll probably continue to be prudent for a few quarters. So we may hold a little bit of liquidity for the next two quarters, but I would expect gradually to see that.

Thank you for taking my question.

We'll move on to our next question from Doug Young with the capital markets. Please go ahead.

Hi. Good morning. Just on the performing loan build, just trying to get a sense of, I believe it was more associated with the commercial side. Is this related to the inventory finance book? Is this across the board? And I do think there was a bit of an uptick in commercial write-offs this quarter. Correct me if I'm wrong. Again, was this more related to the inventory being longer dated or is this across the board? Just hoping to get a sense of what

those two themes and what segments they relate to.

Why don't I have my colleague, Derek, speak to the growth of the portfolio and then I'll take the runoff question there.

Thank you Doug. The growth was really from all across but mainly driven by commercial real estate as well as inventory financing.

To pinpoint inventory financing, actually, we are at record low aging. Coming out from these two years, definitely the dealers and the portfolio there is very healthy.

And like Liam just explained, we are well reserved and protected into this segment and we feel comfortable there. So Liam, maybe more details on the write-offs? Sure, thanks Eric. You've got to be really pleased with that growth. The write-offs are normal ebbs and flows in our commercial file management. The files were fully provisioned. And if you look at our gills, I'm actually really pleased. Our grocery pair of lemons are coming...

So this is if I can be extremely crystal clear, the performing loan increase in commercial was due to the macroeconomic factors. It was not related to any particular portfolio, so it's really driven by the environment. And as Liam mentioned, the right stuff is much more clean up than something new, right, that they were fully provisioned before.

Yeah, just the other, just to drive that point home, if you think back to last quarter, we were one of the banks that looking at the economic environment saw, you know, sort of the volatility and the weaker economic environment coming and we updated our economic assumptions and the weightings of our outlook and that served us very well. And this quarter, given the change in the macroeconomic outlook that's been highlighted by many of the banks.

And in line with our prudent approach to reserving, we made further adjustments to the assumptions and the weights. And that's really, to Yvonne's point, what's driving it. We continue to be prudent and measured and that's part of our DNA and how we operate.

Okay, so what we are seeing in the write-offs and the performing loan builds around the commercial side, this isn't anything to do specifically with a particular portfolio like inventory finance. This is more...

as you say, clean up across the book and across the different segments.

Yes, yes.

Okay, and then just on the set one ratio and the sequential decline, you know, and this might be a simple answer, but I mean, RWA was up 4% quarter over quarter. I think the loan book was up 2% quarter over quarter. So there's a bit of a difference there. Can you maybe detail a bit of what the driver was? Is this my, are you seeing migration impacting the RWA? I guess it wouldn't be migration, but is this just a portfolio mix?

Just trying to get a sense of that.

It's really portfolio mix. We're not seeing any adverse migration. You can see that in our Stage 1 and Stage 2 elements across the commercial books. So it's really portfolio mix.

Okay, that's all for me. Thank you.

We'll go ahead and move on to our next question from Nigel DeSosa with Veritas please go ahead.

Thank you. Good morning. I had a question for you on your Pinterest account.

sensitivity disclosure. I noticed that

The increase in NII over the next 12 months last quarter that was about 12 million from a 1% increase and this quarter is less than a million. So just wondering what led to that decrease in NII benefit is that mainly on your expectation for higher deposit beta then color there would be appreciated.

Thank you for your question Nigel. So the first thing is we definitely dynamically manage the balance sheet and that stress test is really the position that you have at one single point in time which is exactly at the end of the quarter. So if you look at the last few quarters I think if I round the numbers we have one million this quarter, we had 12 last quarter. If you look at the one before we had three and the one before we had 15. So plugs withments the system works I mean which ones don't and which ones isn't! But in my opinion if I start withilly.org and then get one after I see it as it all comes in I guess there's some involvement to be done and try to find a solution for that

I wouldn't see too much in it at this point. We remain in no position to take advantage of increases in the risk rates. And as I mentioned, we're gonna see, or we expect to see two phases points increase next quarter. And I mentioned already a few drivers of increase in terms of margins and NII, coming from reducing gradually the level of liquidity. The portfolio mix is gonna be an impact as well. And I mentioned the repricing. So I wouldn't read too much in this stress test.

It's really a single point in time and that does fluctuate on a daily basis.

Okay, and then maybe tie that together with your NIM outlook on slide 29 for NIM to exceed 1.9% over the medium term.

Could you remind me again, that expectation, is that driven by your expectation for margin expansion in the existing portfolio or a change in the long portfolio mix?

I would simply just in fact repeat what I just mentioned Nigel because it's a contribution of various factors. Definitely the portfolio mix has an impact so we've seen growth in commercial and that does contribute. A reduction that we would expect a little bit on the liquidity side with impact as well and at one point the repricing of the assets will have an impact. So it's really all those points and that's all understanding that the discipline has to be in the market.

How does that feel?

I'll have you change, let us change.

Well, why don't I talk about the scenario that I'll pass it to Rania on the strategic side. You know, we have updated our scenarios as we do every quarter of the regular process and look forward. Our pessimistic scenario does include moving to a lower economic growth pattern, call it recession, and how long and prolonged that is depends on how the macroeconomic conditions evolve.

I mean, you heard from Jackson Hole, the Fed Chair, you heard the Bank of Canada indicate they are going to be moving to reduce inflation and that's going to have a direct impact on the economy and we factor that in. As I mentioned earlier, we've also adjusted the weightings on our outlook across our economic scenarios both last quarter and this quarter to put more weight on the weaker scenarios.

and our reserving will remain prudent and we'll adjust accordingly. In terms of the strategic implications for that and how the economic profile might affect our strategy, Rania.

Yeah, so thanks for that question. What I would say is, as I had mentioned, we've delivered on a lot of things this year, right? So, you know, we said, you know, it's a digital first approach. We said we were going to grow the commercial book of business. We're going to diversify. So, we feel pretty confident that we built a lot of foundational pieces that, you know, should we decide to slow down some other strategic projects, we have enough of a foundation that we can, you know, use it as a launching pad for growth.

We're very committed to our three-year strategic plan. We've been executing according to the plan, and so we'll continue to, like I said, dynamically manage where we need to, depending on how the conditions change.

Thank you.

Yeah, that was helpful. Thank you.

Thank you.

And we'll move on to our next question from Marcella McLean with TD Securities. Please go ahead.

Okay, thank you. Two real quick ones for me. Just going back to the capital, you said you had a toolkit there that you can deploy if Lone Wolf continues to exceed expectations. Just wondering if an ATM is part of that. I know one of your peers has been using it for a number of quarters. And maybe if there is a certain level where that does get implemented, I should imagine these people will be able to explore it more.

When you dip below this 9% that was your pre-pandemic level or are you comfortable letting it drop to 8.5? Just kind of wondering what your thoughts are on that.

Thank you for your question. That's a good one. I don't want to go too much in the details of my toolkit as you can imagine, but what I can say definitely is ATM is not at the top of the athletes, right? So at this point we're pretty comfortable with the level where we stand. And I mentioned pre-pandemic we're at 9%, so it's not like we're very low. We're just getting back to where we were, which is normal level for the bank. Our minimum is 85%, so we still have a cushion.

So again, I'm going to repeat a bit myself. We stopped the share buyback. We reintroduced the drip. So there's a few things like that we can easily do. But the ATM is not on the forecast for now.

Okay, and then secondly on the NIM, if I'm hearing you correctly, we're going to have to wait until we see a period, a quarter where we see stability in the Bank of Canada right before we really start to see an improvement in your NIM and that's when the improvement might come through more. Am I hearing that correct or?

Is there more to it? Yeah, I'll answer with a yes and a no to that. So the first thing is we mentioned that we're going to see an expansion of the name where we expect to see one in Q4. And we'll provide more guidance on 23. And again, I don't want to be too much myself, but liquidity level lasts up mixed.

and the lag of repricing. What I'm gonna answer, you may be right in a certain way, is the repricing of the loans. Because the fact that for the, the part of the loan that I have that has a repricing lag of a month or a few days or something like that, definitely as the interest rates stop increasing, we're gonna catch up fully. So that will have an impact. And the other pricing lag that I discussed is relative to the market, and that one is a bigger question than the industry-wide question.

Okay, thank you. That's it for me, then.

And we'll go ahead and take our last question from our audience.

Juho Kim with credits, please go ahead.

Hi, good morning and thanks for taking my questions. Just had a couple of quick ones here. Just on tax rate, it was lower than what we saw in prior periods, so just wondering if there's anything unusual or one-time in nature. I'm just trying to get a sense of what about 15%?

effective tax rate is appropriate going forward.

It's a very good question, Joe, and a big portion of that is technical. So this quarter about 16, last quarter 20, about close to half of it is coming from the repayment of the LRCN because the way it's done is the interest payment is done below interest net, sorry, is done below the net income while the tax is impacting the net income. So every time we have the interest payment.

it does reduce the tax rate. So you would see that every six months because we pay that every six months. The rest is a mixed bag depending on the level of profitability of the various elements. So next quarter, just pick something in the middle of that and you should get closer to what we would expect for you.

for. Thanks for that and last one for me just on your non-interest revenue when I look at the sort of more traditional retail banking revenue we saw a decrease in lending fee service and sort of card revenue on a year-over-year basis just wondering what's from that year-over-year decline this quarter.

Sorry, if you can just speak up a little louder. It was really hard to hear. Oh, sorry. I'm sorry. Can you hear me better now? Okay. I mean monsterispers you could really hear me come getting dead because I know of those

It's still a little staticky so.

I just had a question on the non-interest revenue. When I look at the traditional retail banking revenue like the cards fees and service fees, they were downing over here. I was wondering what drove that decline this quarter.

Yes, the key element this quarter relative to that would be card services. So it's lower this quarter because we have a promotion program to increase the velocity and use of the credit cards. So that impacts Q3 in fact by a little bit more than the mailbox. So this one is the one time so you would see that being corrected in Q4 in terms of.

of revenue. The rest I would say is relatively in line versus what you would have seen over the last few quarters. So again, just to be very clear, we would expect the Visa revenue to increase back to pretty much where it was in Q4.

Thank you, that's it for me.

And with that, that does conclude our question and answer session for today. I would now like to hand the call back over to our CEO , Ronya Llewellyn, for any additional or closing remarks. Ronya, thank you for being here.

In closing, following a solid Q3, we will continue to execute against our strategy as we head into Q4.

Our credit quality is sound and we are confident in our strong underwriting practices and highly collateralized portfolio.

We will continue to apply strong cost discipline across the organization and identify additional cost optimization opportunities.

Our one winning team is engaged and continues to show resilience through this period of volatility.

We remain confident in our ability to exceed our 2022 financial targets.

Thank you for joining the call today.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.

And.