Q2 2023 Laurentian Bank of Canada Earnings Call

Welcome to the Laurentian Bank Quarterly Financial Results Call. Please note that this call is being recorded. And I would like to turn the meeting over to Andrew Chananke, Vice President Investor Relations. Please go ahead, Andrew.

Good morning and thank you for joining us.

President and CEO , and the review of the second quarter financial results will be presented by Yvonne Duchamp, Executive Vice President and Chief Financial Officer. After which, we will invite questions from the phone. Also joining us for the question period are several members of the bank's executive leadership team.

Liam Mason, Chief Risk Officer, Edekh Prabow, Head of Commercial Banking, Karim Abderal-Tesluk, 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'd 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.

For the complete cautionary note regarding for 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, unreported and adjusted basis, and considers both to be useful in assessing underlying business performance.

Ranya Anivan will be referring to adjusted results in their remarks and let's otherwise note it as a point. Now turn the call over to Ranya.

Go and Julepchus. Thank you, Andrew, and thank you all for joining us today. I'm extremely pleased with our results this quarter and the progress we have made in achieving key milestones on our digital journey.

We've also continued our focus on optimizing our funding structure, ending the quarter with very strong liquidity and capital positions.

On behalf of the entire management team, we would like to thank the Laurentian Bank team for their efforts.

Our employees continue to remain agile and pull together as one winning team to execute on our plan, proving that size really is our advantage.

Given the continued macroeconomic uncertainty coupled with the effects of the recent turmoil in the U.S. banking sector, there are three key topical subjects that I would like to address up front as it relates to liquidity management, funding, and commercial real estate.

First.

The issues in the financial services sector in the U.S. put a particular focus on the liquidity management of banks. It's important to note that our bank's liquidity portfolio has no negative mark-to-market exposure. We do not take interest rate risk, and we hedge as appropriate.

Second, funding.

optimizing our funding structure to be diversified, stable, and cost-effective. This includes issuing cost-efficient long-term securitizations and growing personal deposits of which more than 85% are insured.

We ended the quarter with an average weekly liquidity coverage ratio, or LCR, of about 200%, materially above the big six average.

ended the quarter with an average weekly liquidity coverage ratio, or LCR, of about 200%, materially above the big stakes average. Third, commercial real estate.

The majority of our portfolio is multi-residential, which remains strong due to the structural housing shortage in Canada and increased immigration levels.

Our exposure to the office sector is around 3% of our commercial portfolio and is well diversified.

because of our prudent approach to lending, low loan to value ratios, and relatively low level of historical loan losses. Turning now to our financial results.

Top line revenue for the quarter was $257 million, relatively consistent with last quarter and last year.

On a quarter over quarter basis, EPS was up 1%, and our ROE was up 30 basis points to 8.1%. PCL was this quarter where 18 basis points, up three basis points here over here, and two basis points sequentially.

We remain adequately provisioned, having prudently built reserves over the past few quarters.

Our NIM was up 3 basis points on the back of improving spreads in our commercial loan portfolio and in line with our previous guidance.

We continue to invest in our business to improve the customer experience, including the launch of our digital account opening solution and the work to begin the migration of existing Visa customers to our new platform.

As a result, our efficiency ratio was 69.7% and relatively in line with last quarter.

I am pleased to share that our capital position is solid with a CET1 ratio of 9.3% that is up 20 basis points on a sequential basis as a result of internal capital generation.

that came into effect as a February 1st had a non-material benefit on our capital, this quarter.

We remain confident in our ability to continue delivering good results, execute against our plan, and drive meaningful value for our shareholders under the current macroeconomic environment.

three priority areas to stimulate growth.

First, deliver excellent customer service.

Second, deposits and optimizing our funding structure. And third, drive efficiencies to simplification. And third, drive efficiencies to simplification.

As we said last quarter, we will continue our focus on delivering excellent customer service and removing pain points by leveraging data from our Net Promoter Score, or NPS, program.

This concentrated effort is helping us gain a deeper understanding of what drives customer satisfaction and dissatisfaction, allowing us to implement targeted actions.

Following the results in commercial banking's NPS that we spoke about last quarter, we are sharing best practices across the organization and have seen significant improvement in personal banking.

If you highlight, include a 9.8 increase in private banking.

A seven point increase in grant scores and a hundred percent increase in the score of our loyalty team.

We have been consistently taking actions to drive these results. Last year, we addressed the top five digital pain points as identified by our customers. And this year, we included NPS metrics in all personal banking score cards.

To provide a consistent brand experience for our customers, we also continue to enhance our public website by improving usability and refreshing the look and feel.

I am pleased to report that as of today, more than two-thirds of our external facing public website has now been updated. As many of you may be aware in 2019, our branches moved to a cashless advice-only model.

However, the majority of our branches are still large enough to accommodate teller lines and cash vaults. We are now taking the opportunity to move these branches into smaller and more convenient locations when current leases expire.

In addition to generating increased efficiencies, we are also able to update the designs and refresh the branding to improve the customer experience and employee engagement.

The second priority we identified this year was a focus on deposits and optimizing our funding structure.

We are committed to maintaining a diverse, stable, and strong balance sheet that supports loan growth.

I'm particularly excited that on April 25th, we officially launched our digital account opening solution to the public, allowing us to grow deposits by deepening our relationships with current customers and acquiring additional customers outside of our branch footprints across Canada.

This solution was developed through a strategic partnership with Sirth St which illustrated how we can make Zyner advantage and get to market more quickly.

For the first phase of the launch, we are offering a high interest savings account and a variety of checking accounts to meet the everyday banking needs for a wide range of customers.

To date, roughly two-thirds of accounts open are new to bank customers. In relation to this strategic priority, I would also note retail deposit growth of more than 1% this quarter and an issuance of $0.8 billion in cost-efficient, long-term securitization debt.

We remain committed to reducing our efficiency ratio over the medium term by further streamlining our internal processes and operations.

This is in line with our commitment to operate a focus and aligned offering in key businesses where we can win, such as fixed income and ethics, where we have significant alignment and cross-sell opportunities with the rest of the bank.

to reduce costs and improve efficiencies.

This quarter, two initiatives that I would like to briefly highlight that lead to about $1 million in annual savings were.

Ere evaluation and reduction of our enterprise-wide printing needs. And improve training and onboarding processes and operations, leading to increased productivity levels.

Culture and ESG also remain a significant priority and I would like to provide a few highlights.

This quarter, we launched our second annual ESG report, which outlines the progress we have made so far on our ESG journey.

As part of our commitment to support our customers on their ESG journeys, we recently announced a collaboration with Quebec Net Pleasant East, helping Quebec-based small and medium-sized businesses get ready to thrive in a low carbon and sustainable economy.

As part of our Giving Beyond Numbers corporate giving strategy, we announced a $100,000 donation to Windmill Microlending, a Canadian national charity offering affordable loans to skilled immigrants and refugees in Quebec.

As we have always said, our culture is our driving force, and our employees are the biggest stakeholders in our success. I would like to once again thank them for their collective efforts over the past quarter. Their focus, drive, and belief in our strategy has a direct and positive impact on our results.

was $257 million, which was actively in line with last year and on sequential basis.

Iron-S interest in income year-over-year was offset by lower contribution from financial markets related revenue, which was impacted by sustained unfavourable financial market conditions.

On a report to the basis, Nessie has come in the second quarter with 49.3 million dollars, and EPS was one dollar and 11 cents.

Adjusting items for the quarter amounts to $2.4 million or $5 cents per share, and are related to the monetization of the acquisition related to intangible assets.

Details of these items are shown on slide 29. The remainder of my comments will be on an adjusted basis.

EPS of $1.16 was up slightly quarter of a quarter on that income of $21.7 million.

RWE was 30 basis point sequentially to 8.1%.

As guided to the end of Q1, the efficiency ratio was relatively in line with last quarter at 69.7%. Despite unferable financial market and continued investments in key strategic priority, we are also pleased to announce a one-set increase to the bank's dividend to 40%.

As a result, we expect about $5 million of annual savings and the third-order will include in a prox-missed $6 million resort change chart.

or 2% year over year, mainly due to higher interest income stemming from commercial loans, largely offset by higher funding costs, and lower mortgage prepayment penalties.

On a sequential basis, the decrease of $2.9 million mainly reflects the negative impact of three fewer days in the second world. That's the interest margin was up three basis points to 1.80%. This is the result of an improved business mix.

Partly offset by higher funding costs.

Slide 15, highlights our diversified sources of funding and the bank security deep position.

For the past few quarters, we've spoken about matching our liquidity R due to micro economic uncertainty.

In Q2, our weekly average liquidity coverage ratio or LCR was about 200 percent up 30 basis points compared to Q1 and 60 basis points compared to last year.

and significantly higher in regulatory and internal limits as well as the big six bank average. Over a year, we've seen total deposits grow of $1.3 billion or 5%. Redisively in line with our asset growth and our strategic objectives to grow deposits and loans.

in line on a relative basis. Personal deposits were up $2.2 billion, or 11% in the same period, including a sequential $1.4 billion increase during Q1 from partnership and retail term deposits. In addition, to further strengthen our funding structure this quarter,

We showed $0.8 billion in new cost-efficient long-term debt related to securitization activities.

Given these inflows and the already high level of liquidity at the beginning of the quarter, have we took actions throughout the quarter to reduce shorter term and or more costly deposits?

including deposits from advisers and brokers as well as certain municipal sector deposits.

This led to a 4% reduction in the positive thonic sequential basis.

Out of an abundance of caution following the US banking system, so we further increase our LCR position in the second half of the quarter. And this metric was also about 200% for all the month of May.

In addition to strengthening our funding structure, our actions are also expected to improve them by about one basis points for future quarters. All of the things being equal.

It is also worth noting that we increase our core retail deposits by 1% during the quarter and by 5% since the beginning of the year and that more than 85% of our personal deposits are insured. We expect our deposits to make less than 1% during the quarter and that is why we are

further improve with the recent launch of our digital account opening solution.

Also, North Worthy is that given our hedging strategy, the federal value of our liquidity portfolio is aligned with its cost, thereby eliminating any negative mark to market exposure.

Like 16 present other income, which decreased by 8% compared to last year, because of unfavorable market conditions impacting financial markets related to the revenue, including fees and securities, mortgage commissions, income from mutual funds, and income from financial instruments.

On a sequential basis, other income was unchanged. As stated in our previous guidance, slide 17 showed non-dressed expenses up by 6% compared to last year, due to salary increases and thousand acquisition to invest in strategic priority, improve the customer experience and support growth.

A sequential basis, non-interest expenses were slightly lower, mostly due to three fewer days in the quarter and seasonally lower vacation accruals.

Turning to slide 18, our CT1 ratio was up 20 basis points to 9.3%, including a non-material benefit from the recent Basel III reports.

We continue to manage our capital to support business growth and expect to manage our CC1 capital ratio of about 9% for the remainder of the year.

Live 19 highlights our commercial loan portfolio, which was up by $1.9 billion or 11% year over year.

For value, with up $250 million or 1% quarter reported, mostly due to contributions from our inventory five things specialization.

Similar to last quarter, we are providing additional details on our commercial real estate portfolio on slide 20.

The majority of our portfolio is multi-residential housing, where demand remains resilient due to high immigrants.

immigration levels in Canada. Our office portfolio is around 3% of our commercial portfolio and consists of Class A or B assets with an LTV of 62% and financial recourse to strong and experienced sponsors.

The majority of the portfolio is multi-tenanted properties with limited exposure in single and empty buildings.

Like 21, provide details of our inventory financing portfolio, where key performance indicators, such as the age of inventories, and turnover rates are monitored closely.

We've seen the credit line utilization rate come back in light to pre-coded levels. Currently spending at 58%.

Beginning in April and for the majority of Q3, we expect to see an overall seasonal portfolio reduction in line with pre-pandemic utilization rates and behavior.

The normal pattern suggests that utilization rates should be lower in Q3 when dealers' sales to customers are high.

These errors then begin restocking in Q4 and Q1, which increases utilization rates once again.

Given the current economic environment, we are monitoring the portfolio closely and continue super-form well.

Slide 22 presents the bank's residential mortgage portfolio.

The dental margins loans were up 5% year or year and 1% on a sequential basis. The dental margins were up 5% year or year and 1% on a sequential basis.

We maintain prudence on the riding standards and are confident in the quality of our portfolio, as evidenced by the high proportion of insured mortgages at 58% and low LTV of 51% on the uninsured portfolio. That portion, sorry.

There's also worth noting that more than 80% of our residential mortgage portfolio is fixed rate of which more than 75% will mature in 2025 or later.

Allowances for credit losses on slide 23, although $201.6 million, up $14.7 million compared to last year, and up $8.1 million sequentially, mostly under result of higher provisions on commercial loans related to volume growth and the microeconomic.

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Turning to slide 24, the provision for credit losses was $16.2 million, an increase of 3.2 from a year ago, mainly as a result of higher provisions on impaired loans and commercial loan portfolios, partly offset by releases of provisions on performing personal loans. Earth PCLs were slightly higher compared to last quarter, mostly for the same reason.

would provide detailed guidance for the remainder of Stub 23 and I would like to note a few key points. The bank's name is contingent on interest rates stability and improved funding allemspeaking.?? deadly individuals are

Other income from capital markets business is expected to remain soft until unfavorable financial market conditions improve, which will hinge on the macroeconomic environment.

Hence, although I expected to remain elevators due to our ongoing to-pageic investments, including the cost associated with running to credit card platforms as we gradually transition, current visa customers to the new brand platform.

Expect loan growth to remain tempers as macroeconomic conditions impact business and consumer spending.

As mentioned before, Q3 is expected to have a normal inventory financing season reduction as dealer sales are high in the summer season.

Overall, loan growth for the year is expected to be in the low to low digits as previously guidance.

We target to remain above a 9% CT1 capital ratio for the remainder of the year. As a reminder, an NRCN is a respawnment its due next quarter, which has an effect of approximately six cents of our EPS.

I'll now turn the call back to the operator.

Thank you sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by 2. And if using your speakerphone, you will need to please lift the handset before pressing any keys. survivor.

Please go ahead and press star one now if you have a question. And your service question will be from many Gromund at school for bank. Please go ahead.

Hi, good morning. First question is on the OCR averaging around 200%. And I'm just wondering, are you targeting to keep it at that level for the remainder of the year?

Yeah, thank you for your question, many of you. So we mentioned that we're at about 20%. We mentioned that last year we were 60 feet slower, which is a more normal level, as you can see with other banks as well. So we will over time go back to more normal levels, but considering the current environment and what's been happening with regional banks in the US, we just act as prudently.

that management was as well. So I'm wondering.

Is that the case? And so if that's the case, what happened in the quarter that you didn't expect that helped drive the margin higher sequentially?

In fact, if I explain the name this quarter, it really came from a few factors. So the first thing is the business makes help. So we've been growing commercial and commercial that has a better name than the personal asset. So there's essentially an impact from this. We also mentioned that as rates with capitalized, we would get the benefit.

gradual finishes and we start to see some of that despite the fact rates have not fully stabilized yet. And this offset, you know, additional funding costs get spread in the market, especially in Q2 have been impacted by the US turmoil.

So going forward, I would expect to continue seeing a small benefit. It rates fully stabilized, but as you don't currently, we expect a rate increase in Canada and slightly in the US. So it's going to be gradual for the next few waters again. So that's probably what I can provide you at this point.

And then just in terms of business mix, the commercial side, one of your peers definitely took a more cautious stance in terms of their outlook for long growth and highlighting some of the risks out there.

I'm hoping you could speak to that and just your perspective on the commercial loan environment in Canada and do you see risks rising and so what your response to that risk outlook.

Generally, I can start by saying we've been guiding you for the last few quarters that we were seeing a growth in the low single digits for the bank. So I would say we saw the environment and we just acted prudently in the environment.

So that's what we've been doing, but at this point, I'll let Liam have from a critical perspective what we've been seeing. Overall, many, thank you for the question, Liam speaking. Overall, economic growth remains challenging with slower consumer and business spending. Central banking increases are still expected, and depending on the patterns.

construction business. Overall, we can do the monitor the economic environment, but our expectations is unrelated out of our single-digit growth and our disciplined lending practices and approach will serve as well. Thanks for that.

Thank you. Next question will be from

Thank you. Good morning. Just one quick question on clarification for Evon. In terms of that, Ninh guidance of positive one basis points. How do I read that? Is that kind of per quarter to the back half of the year or is that kind of aggregate over both the quarters?

Just to make sure on your questions also, I'll add a few details and you tell me if I answered your point. So what we mentioned is the, what we've done with our funding strategy this quarter is going to be significant to us. So we would expect all other things being equal to get about one beat benefit from this.

So that's going to help NII and NIM. So the advantage this quarter is due to our issuance of long-term debt and having a lot of deposits in Q1 from partnership and retail term deposits allowed us really to manage down the broker deposits more costly.

and shorter term. So the reshuffle of that funding will generate about one beep of benefits, all other things being equal. That's what you were looking for, Paul.

Okay, I understand. So that's the shift in.

and deposit mix that's already taken place. So I guess my real question then would be do you care to offer any kind of NIM guidance through the back half of 023.

That's a big question, Paul, because everybody is looking right now at what BOC is going to do, or what the FESC is going to do in the US. And we mentioned that the benefits we would get in the name would come with the ability of right, so it slowed down or discorded versus what we had seen in 2-1-2-4 before.

So if it continues to stabilize, we may see a small, slight increase in the name. It's going to be probably gradual based on what we hear from BOC or Fed at this point. I would probably expect it to be later in the year than in Q3. So that's one benefit. And also as the rates stabilize, we mentioned also contractually...

you covered off I think the other components of CRE well. But how are you how are you?

viewing the risk in construction lending specifically I see it continues to be an area of growth so my impression would be you don't see elevated risks necessarily but it's become very topical given some recent events so maybe you can walk us through

your comfort level around risk and how you're mitigating risk in that particular portfolio. Sure Paul, it's Liam. You know as Rania indicated in her remarks, the majority of our Cree is multi-residential housing construction. You know, given the lack of supply in Canada, I think it's our recent statistics suggesting...

2% vacancy and demand is way outstripping supply. There is a lot of demand for this. We focus on established tier 1 and tier 2 developers with good track records. There are pressures as you mentioned in the broader commercial real estate market but our construction portfolio remains very strong.

We also approach things from a discipline perspective with regard to LTV, and we've been adjusting our underwriting standards, commensurate with conditions, additional views with regard to contingencies. Very happy with how the portfolio is behaving right now, given the developers we have.

And we're also maintaining a disciplined approach with regard to our reserves. Historic losses have been small. I'll be at forward-looking conditions are worse, but we've got a solid reserve against that portfolio as well. So quite comfortable with how it stands right now.

Okay, and so just to be clear on this development business…

It is also mostly multifamily, not single individual homes.

Okay, that's good. And then one last question, and to get Ronya involved here. When I look at your KPIs on slide 31, I see all green dots apart from ones. Of course, I got a ask on the one that's not green dot. The new bank account openings, that one's running a little bit behind target.

I think obviously that's an important one for the bank and important for all banks currently given the cost of liquidity.

Maybe talk to us a little bit about why it's behind target currently and the plan to get it back on target.

Yeah, good morning, Paul, and thanks for the question. And yes, it's the only one on that slide, so I'll definitely comment on it. So listen, we did say it was all dependent on the speed by which we can launch our digital account opening program and platform.

And what we decided last year was to do kind of a phased rollout to ensure the customer experience is excellent. And so we started with our employee base. And so there was a delay in terms of our digital public launch, which just happened in April . And we're extremely excited about the uptick. And that was with almost no marketing at all. So we're already starting to see.

existing customer relationships. We'd like to expand within Quebec but we also want to expand across the country and so I would say you know early days but we are committed. It's a target that everybody has in their scorecards in the field as well and so as a management team and as an employee base we're all committed to attracting

the lower tax rate over the past couple of quarters and the budget proposal to remove the break for financial institutions on.

certain dividends received. How do you see your tax rate evolving should this receive I guess royal assent?

Thank you, Lamar, for your background. The first, the tax rate is 16.3% this quarter, which is in line with the guidance we have provided. At this point for Q3, I would keep the same guidance in the same range. And your question is good because there's been a lot of noise about new legislation, including sales tax on card services....

changes on the dividends we don't have that much dividend income instruments at the banks of the impact should be immaterial for us.

Okay, thank you. And then apologies, Alexa was trying to answer your question.

Just moving on to the capital markets here. Can you talk about how we should think about this restructuring? I know at an investor day you guys have talked about looking for better alignment with the commercial bank and a more focused kind of product operate. Should we think about this as a one and done restructuring or could there be more to come?

Yes, Lamar, I'll take your question. It's Rania. So all along in line with our objective that we outlined at our investor day, it was really to always, our commitment was to operate a focused and aligned offering in our key businesses with really a focus on our specializations and where we can win. And so fixed income and FX have been great businesses for us.

where we had significant alignment and cross-sell opportunities along with some other sectors as well. And so, you know, given the market conditions, and they've been unfavorable for quite some time, right? So we made the decision to kind of right size. And so it's very much in line with our strategic objectives. And so we're going to continue to kind of grow that business, but in alignment and with opportunities pulled out into a friendly society. And so it really is an important area where we start thinking about200 years above a market Tess, where we start thinking younger triple separate Energy implementation is more of a more efficient WHR and the same is really important in your angles, in your Barbie grid, you know, on little

So not in any one sector and you're constantly reevaluating. And listen, if markets turn and we need to add additional resources in our capital markets businesses and where we can win, we will be looking to reassess that. But we're constantly kind of reviewing how to optimize our operations and making sure that we operate in the businesses where we can win.

Okay, I appreciate that. And then, you know, this is going to be a tough one, but how should we think about maybe the way to phrase this is, how should we think about the earnings power of the capital markets business? Now I appreciate Yvonne, there's a lot of headwinds in capital markets right now. So maybe that's the way I'm going to kind of phrase it.

Does this reduce the earnings power of the capital markets franchise or are some of the you know benefits going to come through to kind of fill the gaps here? I don't know if I'm asking the right way but hopefully you kind of understand where I'm going at with this. Just to add a bit of color there, our business is more...

stable there could be more activities. We should see some of that coming back in our favor in the upcoming quarters. The next one is a summer quarter, so we should not expect too much activities during the summer, but technically the market is going to recover. And that should be an improvement of other income when it happens. And Lamar and Serania just to add, just to put it in perspective, is the reduction.

in that line item and other income is there? Like maybe talk to me about that Yvonne. Is there some element of seasonality we should be thinking about in that line and kind of what drove the decline in card services revenue this quarter? Thanks.

In fact, it's a good question. Current services revenues, you would see a seasonal impact, right? What's leading to Christmas, including Christmas, will add more transaction volume. So this quarter is probably one of the lowest you would see seasonally in the year. So most of it hasn't really. Okay, appreciate that. Thanks again for the time, guys. Apologies for Alexa interjecting there.

asking for a different way. But, you know, we're at a time where we're seeing some of your peers and people in the industry leaning away from growth there, whereas you guys are still putting up growth. So going forward, are you guys seeing this as a maybe an opportunity to try to take some market share, given the risk or trade off? Is that something in view is attractive right now? Or what's sort of the outlook going forward from here?

Yeah, I'm Marcel Serick. I'm going to take this one. Thank you for the question. Right now, the market has definitely slowed down. So there's still some good projects out there being started, mostly in the multi-res sector, just in terms of the demand out there. But like.

We're not changing our approach. We're keeping the same discipline underwriting processes we have in place, and we'll still be looking out for opportunity with our Tier 1s and Tier 2 developers out there. But don't expect us to...

to go outside of our current practices. So we will keep the current pace and make sure that the projects we onboard fit our current credit appetite. Okay, thanks. And then just two quick ones on CRE. Is all the exposure convenient, or if not, do you have the split of US and Canada?

of the book that is retail, so about 600 million. And again, small retail, suburb type, that we feel good about with good key anchors and low LTV. So we're comfortable with the low metrics we have out there for those loans.

I'm not sure if you can see it. My other question was on expenses. You know, they were elevated but really in the context of what we're seeing across the industry, they weren't that high and the largest difference I noticed was on comp expense. Just wondering if you could comment on that. Head count is up slightly over year.

but comp has barely moved. Just wondering what's driving that, if that's something that's sustainable or we might see an acceleration there as people compete for talent. Yeah, so maybe I'll kick off this question. It's Rania. And so, listen, at the end of the day, bottom line is we remain committed to our medium-term target of managing our efficiency ratio to less than 65%.

conditions, if you take your NIM and hold it steady as well as our other income, our efficiency ratio would actually sit at 66% and that's despite us putting significant investments in our strategic investments whether it's digital onboarding or a digital visa. So you know we've said all along in the last couple years cost discipline is definitely

on target of less than 65%.

Okay, I appreciate that. And then on that 65%, 65%, you highlighted the running to visa platforms as one of the additional costs that will come out. Just wondering when that condition is expected to be completed and how much of an impact that that really has on the overall number.

Yes, we publicly launched the Visa platform for new customers and we're in the process of migrating our existing customers over to the new platform. So at this point, you know, we're targeting that that's going to be delivered in the latter part of the year and so once that happens then those costs will come out.

Okay, thank you. That's all for me. Thank you. Next question will be from Sarad Movetti at BMO Capital Markets. Please go ahead.

Thank you. That's all for me. Thank you. Next question will be from Sarad Novetti at BMO Capital Markets. Please go ahead.

Okay, thank you. Ronnie, I just wanted to maybe come back to both in the context of the expense ratio and the medium term targets. And I mean, some of the performance indicators you've given are 2024. Obviously, we're only partly through 2023. You know, in early turnover.

If you reduce that, does that actually, which is one of your targets, does that create a headwind vis-a-vis the 65% expense to revenue ratio? Do you need more employee turnover to be able to reprice the...

the cost base which would be contrary you know I guess kind of running contrary to your target of reducing turnover.

Yeah, so song rock, what I would say is that we're, we've been prudently managing our expense line, not just this quarter, but throughout the year and the prior years. And so we're constantly looking at, you know, what's needed to deliver on our strategic investments, what percentage are full-time employees versus contract employees, right? So making sure we're managing our employee base.

that medium-term target of 65% by the end of next year.

Okay, so maybe just to put a finer point on it, to achieve that 65% obviously depends on the revenue environment as well. Thankfully, FlexibleWolf() has a spec gold.com orincludes auteush space

Will that include right sizing the complement of FTE still? Is it primarily through decommissioning of platforms and getting synergies on the FTE?

outsourcing and operating efficiency improvements and such and such alike. I mean obviously you're right-sized through capital markets. Is there an opportunity to right-size elsewhere as well?

Yeah, so again, we're gonna continue to maintain our discipline on all discretionary spend, as well as continuously identifying efficiency plays. I mean, right-sizing the capital markets was one example of this quarter, but that's again, in line with our strategy of making sure that we kind of concentrate on specializations where we can win, and in sectors where things have slowed down.

So when you walk into our branches, you've got all these teller spaces and cash vaults that are not necessary. So as leases are coming up, we're reducing that branch space. And so one example is a lease came up that we just moved into a smaller footprint and we were able to reduce our lease by $250,000 a year or $225,000 a year. So we're going to be there.

Okay, thank you for taking my questions.

Thanks, O'Hara. Next question will be from Nigel DeSouza at Veritas Investment Research. Please go ahead. You're welcome.

Thank you. Good morning. I had a couple of questions for you. The first on deposits, when I look at strategic and retail deposits, quarter over quarter, looks like that's down sequentially. I might correct in understanding that the outflows in both categories

Thank you. Good morning. I had a couple questions for you. The first on deposits, when I look at strategic and retail deposits quarter over quarter, looks like that's down sequentially. And I might correct in understanding that the outflows in those categories this quarter exceeded...

I was wondering if you could speak to the characteristics of the deposits that are leaving the bank and the deposits that are coming in in terms of newer existing client relationships and in terms of whether you're winning deposits on pricing and offering higher rates.

Thank you Nigel. Maybe what I can do is do a step back and explain a bit what's our funding strategy. That will probably help with what we've been doing. The first one, as I mentioned previously, we want to grow deposits in line with the loan growth on a relative basis. That's what we've done over the last 12 months and we grew deposits meaningfully. Including in Q1, we gathered $1.4 billion of retail through deposits and partnerships.

pretty much the positives as well and there's great characteristics here because it's long term, it's aligned with the assets, it's cost-efficient, it's in fact, a couple more cost-efficient than going and getting broker deposits or ins flow deposits that we discussed. And the third one is really optimizing our cost-efficient fund and that's what we're doing by doing this.

This should improve, as I mentioned before, by about one name model to 10 being equal. All doing that with great LCR level and very prudent LCR in the context. And we also have retail deposits that have been growing in the last six months by 5% and also growing in Q2. So what we've done this quarter is really using the high level of liquidity we have.

doing. So we reduced rates where we could and we have such a great liquidity position that that helps us you know in the context of what's happening in the US we have a big liquidity war chest. Okay I guess I appreciate that but I guess what I'm getting at is could you speak to what proportion of your deposits you consider core versus non-core and how does that relate to liquidity coverage ratio?

go back and say what we've done is we did exactly the inverse of what we mentioned. We stabilized and secured the deposit base further versus where we were. We have more secured funding, longer term funding, but we did that also at the cost-efficient basis.

And what's really interesting is that we mentioned also our last two quarters that we were taking liquidity's up, considering what was that in the environment. And that's what we've done. I mentioned in my script that we were 60 basis points higher than where we were a year ago. So we gradually increased the level of liquidity and it turns out that we were in a very safe, secured position with all the turmoil that we have this quarter.

So overall, very happy with what we have. And as mentioned before to another analyst, of course, at one point we'll take it down, but we just want to make sure that we do it in a prudent way, considering what's happening in the environment out there. But there is no way you should read into the LCR that it's because of instability. It's in fact the reason why we're doing this.

why we're seeing kind of favorable reversals there given the macroeconomic uncertainty.

Thank you, Nigel. It's Liam for your question. Overall, we saw a decrease in investment loans from a volume perspective and given that volume drop, we proportionally reduced the reserves against that book.

We remain very well provisioned against our retail book and comfortable with the levels we have at this time. Okay, and the last quick question just on your inventory financing portfolio. Any comments on what the expected loss rate might be through a cycle just to get a sense of sizing it and...

you know what what proportion of the book does have that credit protection or credit protection versus proportion that doesn't have some of that credit enhancement any color that would be appreciated. Well we have we have multiple layers of protection on on this book Nigel we have the collateral itself we have

the manufacturer support, we have the dealer equity, we have personal guarantees backing those dealers, and we also have a disciplined process of curtailments if we're not seeing the turnover. We're happy with the portfolio, it's returning to pre-pandemic levels, and quite frankly, the level of losses have not been material.

and were well reserved. So I think we've indicated in the past a return to pre-pandemic levels of utilization. We expect to see some seasonal behavior, but the portfolio is holding up very well.

So, I think we've indicated in the past a return to pre-pandemic levels of utilization. We expect to see some seasonal behavior, but the portfolio is holding up very well. That's it for me. Thank you.

Thank you. Next question will be from Joo-Ho Kim. Please go ahead. Hi, thanks. Good morning. Just wanted to go back to that discussion on the capital markets restructuring in Q3 and I do see the savings on the cost side but are there any lost revenues that we should think about with the restructuring?

sectors that we can compete to win, we'll be reassessing that, but at this point the impact has really been on the sectors that have seen significant slowdown and so I would say no impact from a revenue

Okay, got it. Thank you. And just on your gross impaired loans, it's up sequentially and I do see some new formations there that picked up higher this quarter. So just wondering, can you comment on what you know, the more detail, can you I guess give us some more detail on just you know, whether it came from a certain geography.

and in certain sectors and also on the repayment side for that matter also looked high as well. This quarter just wanted to get a sense if this was just more regular course recovery or if there was anything specific there as well. Thanks.

Thank you for the question. It's Liam, I'll walk through it. Overall, the Jill migration was in a few commercial files, no specific geography or sectors. It's really to be expected in this environment that you would see an uptick and I think you've seen it in the industry as a whole.

Overall, very comfortable with our provisioning against these files. Indeed, the files that migrated into impaired were already fully reserved, consistent with our prudent and disciplined reserving approach. I'd note that we've been very disciplined in terms of building reserves.

as the macroeconomic conditions have evolved. And that discipline and approach has served us well. And we have a customer-focused way of working these files out and usually see good results as a result of that discipline. Thank you. That's it for me.

Thank you. Next question will be from Pranoy Kurim at National Bank Financial. Please go ahead. Good morning. Just a question on expenses. You had highlighted last quarter that expense would be elevated in the first half. I'm just wondering about the technology premises cost. I think that's around 49 million.

Do you see that staying at the same level or does that sort of fade as the year goes on? Thank you for your question and nice to hear you for the first time I believe. So the technology caused the increase that you see there in relation to our strategic projects and as we are improving the technology of the bank we've been investing in the

For example, for the digital solution that we're going to be putting in place is a great example of that. So the increase there is definitely adding talent to make sure that we have what we need to support, the strategic projects that we have. But also as we invest in those projects, there is some depreciation coming from those as well that do show up on the technology line.

trending up again or?

again or should it stay flat?

The other way, in fact as mentioned, Rania mentioned a few minutes ago, we've been managing very prudently our cost base and that includes the people and the employees as well. So we did absorb the salary increases in the environment by managing efficiently the employee base.

So we're just going to continue doing the same thing. And the best metric to use is really that we intend to improve the efficiency ratio to below 65% in the medium term. So that's something that we should be focused on. You mentioned that in Q3 we'll have still elevated expenses related to visa, migration,

So we should probably expect an efficiency ratio on this involvement. And lastly, on the name you mentioned that you expect inventory utilization levels to trend down in Q3.

Now I'm guessing that that boosted your name in this quarter. So what's the negative impact that that would have if you were to go down and say 45% utilization? How would that impact your name outlook?

The key point to remember is that when the volume goes down in a quarter, it goes down gradually. When it goes up in a quarter, it goes up gradually. So when you take a look at Q2 versus Q3, there may be some impact depending on the exact volume, but it should not vary that much Q2 versus Q3.

on our strategic plan and delivering against our three core priorities for this year.

Customer experience is top of mind and I am pleased with the results of our reimagined visa experience including the number of customers signing up for our new suite of cards from across Canada.

Deposits and an optimized funding structure remain a priority. Our digital account opening solution is supporting this objective by gathering cost-efficient deposits from customers across the country.

We will continue to take the necessary actions to simplify and automate processes to reduce our efficiency ratio. We take a prudent approach to credit and will manage capital to support growth.

We are confident in our ability to execute on our plan and deliver meaningful value for our shareholders. Thank you again for joining the call and I hope everyone has a nice summer.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.