Q3 2019 Earnings Call

Good day.

And welcome to the Laurentian Bank Financial group third quarter results 29, Tina Laurentian Bank Financial Group Conference call.

Today's conference is being recorded and at this time I would like to turn the conference over to Ms., Susan Cohen Director Investor Relations. Please go ahead ma'am.

Good morning, and thank you for joining us.

Today's review of the third quarter of 2019 results will be presented by Tom Flynn, President and CEO I'm confident executive Vice President and CFO , all documents pertaining to this quarter, including Laurentian Bank financial groups report to shareholders Investor presentation and financial supplement can be found on our website in the Investor Center. Following our formal comments the senior management team will be available to answer questions. After which is why they shut down will offer some closing remarks.

Before we begin let me remind you that during the conference call forward looking statements may be made and it's possible that actual results may differ materially from those projected in such statements.

With a complete cautionary note regarding forward looking statements. Please refer to our press release for to slide two of the presentation. It is now my pleasure to turn the call over to Francois Dietsch Altaf. Thank you Susan and good morning, everyone.

Today, So we're actually bank financial group reported improving financial results. Adjusted net income you P.S. and return on equity increased this quarter compared to the prior quarter.

We reduced the level of liquidity, which led to higher net interest income as well as higher margins. This was partially offset by lower other income, reflecting challenging capital market conditions and finally, we prudently managed expenses as a result, the adjusted efficiency ratio improved operating leverage was positive.

Real estate financing, along with equipment and inventory financing, our niches, where we have built expertise and strong relationships.

Translating into profitable growth.

Moving towards higher margin commercial loans is one of our key strategic objectives on that front, we increased loans to business customers and their proportion within the loan mix.

We have yet to see a return to net growth of mortgages and personal loans.

The underlying credit quality of our portfolio remains good and our capital position remains strong providing a solid financial foundation to grow our balance sheet.

The main focus of the last quarterly call, what's the new Labor relations environment, which now has a redefined bargaining unit limited to specific existing positions and the signature of the collective agreement.

From a strategic standpoint, there should be no doubt that this is a long awaited hard fought significant gain for this organization as its fundamentally resets how talent is managed going forward and eliminates costly and unproductive processes.

The percentage of employees represented by a union is now less than 25% compared to more than 50% at the end of 2015.

But more than anything this great strategic achievement is allowing retail branch operations turned their complete attention to customer's financial needs translating into more revenue generating activities and the entire organization to resume efforts on transformation related strategic objectives.

Today My remarks will highlight the progress we are making on three initiatives that aim at fixing and building our retail distribution networks.

First I'm pleased to say that we have completed the cutback branch network transition from a traditional offer to 100% advice, yes, 100% of Bucks.

From this point on when customers visit our retail locations they will benefit from a different experience where the conversation will be all about improving their financial health, whether financial health assessment or a full financial plan and RSP contribution a personal loan a mortgage or mutual funds customers have access to whenever and wherever it suits them to the 450 advisors, who now have the flexibility to meet their customers at home or in their office.

What it also means for customers is no longer having to pay for in branch services. They do not use such as basic transactions that they can easily complete on the wrong by using our electronic services, including ATM.

No more walking around Velvet ropes and waiting in line no more different opening hours for services and no more passbooks. This is no longer an old Sleepy bank anymore.

We are the first Canadian bank to successfully transition our retail branch network from a traditional offered to 100% advice a business model that we believe better fits the lifestyle and needs of modern customers.

To reflect this change going forward, our branches will be called financial clinics. The team is really excited about this transition for them, 100% advice means that they can now maximize value added customer advisor relationships see more customers get more referrals and how more people.

Second we have begun to roll out our digital offerings.

Every bank is going to market with high demand products, starting with digital bank accounts and deposit products. Indeed for not want me to be backs current and new customers will benefit from using the new platform for these products and we'll have access through mobile devices.

Clients have independent advisors and brokers across Canada are the first to benefit from a brand new digital offerings initial feedback from advisors is that the signup process as easy and intuitive and they love. The fact that this organization continues to support independent advisors and brokers and helps them build their businesses.

Sir we also plan to launch a digital offering under Laurentian Bank branch openings before the end of the fall, even though Laurentian bank has not been present outside cutback in retail distribution since 2003, our brand recognition across the country is hot and we expect to attract new customers the young and the young at heart and develop new markets, where clients are seeking hassle free deposit products.

Going forward, we are planning to use this mobile platform to strategically lots more digital products and gradually gain new customers and deepen relationships.

Fixing our retail distribution is important to the success of our strategic plan.

With these initiatives and more to come we are doing just that.

We are refocusing our team's efforts on revenue generating activities, which also means prioritizing growth and efficiency.

It should be no surprise that from a growth perspective, all our retail teams at RBC financial clinics I'd be bank advisors and brokers and that obviously digital are now focused on growing mortgages personal loans credit cards deposits unusual Fox.

On the efficiency front, we are eliminating non core administrative activities and duplicate operations as well as automating and outsourcing back office activities. We're looking forward to a more efficient cost structure, a simplified less expensive operation.

We're also reducing obsolete rash back office and administrative work indeed, moving to a 100% advised reduces the cost of managing traditional banking activities, specifically expenses associated with handling cash and other obsolete processes.

So far this has allowed us to regroup were outsourced all our retail credit adjudication collections.

And administrative responsibilities.

We believe the savings from lower headcount and associated costs will be between 15, and 20 million annually, which we expect to gradually impact results through the first half of 2020.

Since the beginning of our plan I have been keeping you informed of our progress on key elements I understand the eagerness to see the few strategic wins and investments translate to financial results because I myself I'm eager to report improved performance.

I have said before that to achieve our goal of this transformation needs to be and it wouldnt be profound.

What we have accomplished in the last three and half years is tremendous work that has to be done to allow for a real change in the way we do business.

We haven't proven many aspects of our organization that are not yet visible to the naked eye systems processes governance leadership and culture. We are at a pivotal moment in our evolution. These are indeed exciting times.

Therefore, I want to thank our teams for their continued support and passion and our shareholders for their confidence it will be rewarded.

Lastly, I want to welcome our New Board members, Miss Andrea Bolger and Mr., David Miller, The board of Directors My executive team and I are looking forward to working with that at this turning point in the history of our organization.

I will now ask cross what I'm going to provide a more in depth review of our third quarter financial results.

Good luck.

Thank you Patrick good morning, everyone I would like to begin by turning to slide 13, which highlights the bank's financial performance.

Adjusted net income of $51.9 million EPS of $1.15 an hour, we have 8.5% in the third quarter of 2019 improve sequentially and were lower year over year.

Reported earnings for the third quarter as outlined on slide 14 were affected by adjusting items totaling $4.1 million after taxes or 10 cents per share and our related to restructuring charges and business combinations.

The drivers of our performance beginning on slide 15.

Total revenue in the third quarter of 2019 stood at $244.7 million up 2% from the previous quarter and down 6% from a year earlier.

Net interest income in the third quarter compared to last year was marginally lower as the impact of lower loan volume, which was partially offset by an improving product mix.

Compared to last quarter net interest income improved by 7% due to the positive impact of three additional days seasonally higher penalties on mortgage prepayments and a lower level of liquidity.

Net interest margin shown on slide 16 was 1.85% the main factors contributing to the eight basis points year over year increase was a lower level of liquidity the change in the portfolio loan portfolio mix and the favorable prime be spread as we mentioned last quarter, the new labor relations environment allowed us to reduce liquidity.

The eight basis points quarter over quarter increase was due to lower liquidity and seasonally higher prepayment penalties and the favorable prime be spread.

In the fourth quarter of 2019, we expect that margins will may be relatively stable, excluding the impact of this seasonality of prepayment penalties.

Over the medium term margin should modestly expand as volume and volumes increase and the business mix continues to improve.

Commercial loans now account for 38% of the portfolio compared to 35% a year ago, and residential mortgages and personal allowance accounts for 48% and 14% respectively.

Other income as presented on slide 17 totaled $68.6 million.

Capital market sensitive revenues explain most of the year over year and quarter over quarter decline.

Gains on inventory held for brokerage activities gains on the other trading activities and fees and commissions from brokerage activities were all lower than in previous periods, mostly stemming from higher volatility and lower liquidity in the capital markets.

Slide 18 highlights the adjusted non interest expenses declined by 5% from last year and by 2% from last quarter as we prudently manage expenses.

Compared to last year, lower salary expense from lower at town lower pension costs as well as lower professional fees on labor relations Skus explain most of the improvement.

Compared to the last quarter, lower premises and equipment expense as well as lower other expenses accounted for the decline.

The annual reduction of an expense has a $15 million to $20 million related to streamlining operations outsourcing and eliminating duplicate operations is expected to gradually impact results through the first half of 2020 once we have completed the transition.

The adjusted efficiency ratio of 70.6% was 290 basis points lower than in the previous quarter.

As discussed on previous conference call as we continue to invest in the banks transformation over the next few quarters the ratio mid may fluctuate.

However, we're making clear progress on our strategic initiatives, which is expected to lead to sustainable improvement.

Slide 19 highlights our well diversified sources of funds in the third quarter of 2019 deposits stood at $26.6 billion and sales by 2% sequentially.

This is the result of a planned reduction in liquidity given the new labor relations environment and is in line with loan portfolio.

We continue to make use of efficient securitization conduit and in the third quarter securitize $582 million.

Of residential mortgages through the CMHC and third party purchaser and $200 million of investment though.

These were partially offset by maturities and normal prepaid repayment.

With that launch of our digital offering we expect to further diversify our deposit gathering channels. Our liquidity position continues to be strong and our liquidity portfolio consists mainly of highly rated government securities.

Slide 20 presents the Cetone ratio under the standardized approach of 9% at July 31, 2019, our capital ratios are strong and support the bank's strategic investments and growth.

Our diversified loan portfolio is highlighted on slide 22, total loans stood at $33.9 billion at quarter end.

Commercial loans increased by 8% compared to a year ago and stood at $12.9 billion net of the sale of foreign and $33 million of noncore assets.

Sequential growth of 1% was driven by an increase in real estate financing activity.

Offset by seasonality of the inventory financing portfolio as well as foreign exchange.

There was a slight decline in the investment loan portfolio as consumers continue to de leverage as well as in the residential mortgage portfolio with lower mortgage originations as we focus on higher yielding loans in 2020, we continue to expect double digit growth in loans to business customers and the gradual resumption of growth in residential mortgages.

Slide 23 provides a deep dive into our residential mortgage portfolio.

We are maintaining our strategy to seek profitable niches such as the high end about the business.

At July 31st 2019, our Alt a portfolio represents 7% of the total mortgage book and 3% of the total loan portfolio.

This portfolio remains well diversified with mortgages loans and the GT GTH, representing about 21% of the portfolio ended gvhd about 4% and is high quality as evidenced by low loss ratios.

Slide 24 highlights our commercial loan portfolio, which is pan Canadian with a us presence.

And is well diversified has a track record of strong credit.

Quality and is positioned for sustainable profitable growth.

Turning to slide 25 credit quality remained good.

The provision for credit losses was $12.1 million, this compared with $4.9 million, a year ago and $9.2 million last quarter.

A year ago, the provision that benefited from favorable improvements to underlying assets.

The provisions in the third quarter of 2019 were impacted in part by higher collective allowances, resulting from changes to that probably does have an economic downturn.

Looking at the individual portfolios credit losses on personal loans decreased by $670000 sequentially.

Mainly as a result of lower loan volumes.

Credit losses on residential mortgages increased by $1.6 million sequentially, mainly as a result of higher collective allowances on impaired loans credit losses on commercial loans increased by $2 million sequentially. The loss ratio of 14 basis points reflects the underlying good credit quality of our portfolio.

Turning to slide 26.

The net impaired loan ratio at 45 basis points and debt gross impaired loan ratio is at 59 basis points are within historical Chuck durations, we remain adequately provisioned.

We continue to expect that over medium term the loss ratio could increase towards the high teens to reflect our changing business mix and macroeconomic conditions.

However, with our current portfolio mix conservative provisioning and a portfolio that is 97% collateralized, we expect that the loan ratio will remain bellwether Canadian banks.

To conclude we are confident that the good progress were making on our strategic initiatives will lead to sustainable growth and profitability. Thank you for your attention and I will now turn the call back to Susan.

Thank you at this point I'd like to turn the call over to the conference call operator for the question and answer session agile.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipments again press star one to ask a question and we will pause for just a moment to allow everyone opportunity to signal for questions. One moment. Please.

[noise].

Our first question will come from Mr., Scott China of Canaccord Genuity. Please go ahead.

Oh, good morning, I just had a question on the tax rate it looks like it was a bit low.

Similar to last quarter, and I think you did guide a lower tax rate, but it did come in much lower again, you know, perhaps you could maybe kind of talk about that and perhaps an outlook into fiscal 2020.

I'll ask my sort of Entercom sure Scott the Q3, nine did Q3 tax rate.

The effective tax rate of 12.1 versus 19% basically last year, mainly resulted from disproportionately lower domestic income and it also includes a 1.5 million favorable adjustment related to the insurance business, which is about 290 basis points of the rate. So if you put that back its more of the mostly like 15%.

No that does benefit.

The next quarter again, but will not recur in 2020, so as for a run rate going in 2020 would be high teens closer to 20%.

At that point.

Okay.

That's helpful. Thank you very much.

You're welcome.

You mentioned your next question will come from Mr. Meny Grauman of Cormark Securities. Please go ahead.

Hi, Good morning, a question about the retail transformation and just as you track. The success of your decision to move to a device only branch model I'm wondering what indicators are you tracking to to basically gauge. The success of this initiative and over what timeframe do you need to wait before you can reasonably say mission accomplished here.

I'll ask us to concluding comment.

Thank you for the question as you mentioned during the first half of our transformation plan a lot of our time was dedicated and simplifying our offering.

Preferring our customer to our new model and also in dealing with preparation activities in light of a potential work conflict. Although this is now behind us and yes, we successfully transitioned our branches 200 person advice. We are now in a growth mode. We are getting back to basics, our new financial clinics are now full of customer meeting their dedicated advisor to improve their financial health.

We recently launched a financial health assessment tool, helping us to develop a full financial plan with our customer over 10000 clients already use this tool with our advisors. We are confident that we can now when more going forward with our new model similar to business services. We have a dedicated sales force effectiveness team, helping our sales force to improve its performance by providing the right tools, improving the process and providing sales and technical training.

Finally, as mentioned previously by fast whether new labor relation environment from a strategy standpoint resets. Our talent can now be managed going forward, helping us create a culture of performance. So in terms of timing as soon as possible. The good news is that we're now back into growth mode.

And then in terms of specific indicators are there specific numbers that you're tracking for instance, if we look towards the end of next year is is deposit growth is going to be an important indicator telling you whether whether your customers are really accepting this is change I'm just wondering if there's.

He may have on that.

One highlight.

Well for sure as were now focusing on advice deposit growth or mutual funds growth mortgage gross a visa growth are the key indicator that we would be looking going forward.

And.

I mean, it sounds you are very confident in this but there's always the chance that it doesn't stick with customers and this and this change doesn't doesn't work on it. The question is what's what's plan B is it relatively simple to go back and into to adjust the model or is is this is this change much harder to ER to fix.

Curious about you know it just says has not been done the overnight. We've been obviously are discussing with our customer preparing them for to change, but but frankly the customer behavior is already change a few years ago. So this bottle is in line with the new needs of our customers are we we felt very good about the new model and feel even better right now.

Okay. Thank you.

Your next question comes from the line of Michael Galileo Sabby see please go ahead.

Hi, good morning.

My first question is is with respect to the the loss ratio. We've seen a we've seen basically 7 million of reserve releases in stage one into a year to date.

And parents have been trending higher so I'm just wondering if you could speak to the reserve releases is that a function of.

Of the personal the personal loan book shrinking and then on the impaired side could you could you give some color on where you're seeing a credit migration.

I'll ask a mason to comment.

Thanks.

Thank you and good morning I. Appreciate your question so first off with regard to the stage migration.

We are seeing at that degree of that there are puts and takes within that.

We have an uptick at some really since you highlighted stage, one and two and that's as a result of some shrinkage in a in the personal portfolio, but in stage three small variations slight uptick in personal an uptick in mortgages, that's due to slightly higher repairs and commercial generally from a a stage three pretty flat. So we are seeing some shifts in migration, but I would say its normal variation and then in terms of your question on on overall Pcls are pcls remained very stable for us and consistent with our previous direction.

Alright and <unk>.

If the if the contraction in the personal book continues as is or would it be fair to continue to expect releases throughout.

Throughout the coming quarters.

Well, that's just a that's a functional.

With respect to the margins just curious how much how much of the increase this quarter was was related to a prepayment penalties.

Hello.

The biggest the biggest portion was the debt liquidity.

Over half of the basically half of it and the other aspects when did the idea is there a reason where their prepayment its part of it and they are trying to be as well.

So a few bips.

Okay and going forward Oh, we've we've also seen a material falloff in brokered g. I see rates year to date, just curious if you anticipate this providing a tailwind for the for the margin.

In terms of margin in Q4, we expect that they'd be relative in the same range.

Considering the benefit of this seasonally higher and we need to consider the season the seasonality of the iron mortgage prepayment in Q3 offset by the continued improvement in their long mix. So we we see this as a.

Just to remain in the same they.

Neighborhood of margin for Q4 as folks you have for next year.

We believe that we should be relatively stable.

The only caveat would be whether lower rates, the lower rates coming in that might be a slight headwind.

Okay. Thank you. Thank you very much.

Welcome.

If you find that your question has been answered you may remove yourself from the queue by pressing star to you and we'll now take our next question from Kevin Yeah that does sign at National Bank Financial. Please go ahead.

Just a follow up on the on the credit question. The I just looked at the stage three provisions or commercial had an uptick versus the you know what we saw in Q1 and Q2, you tell me where geographically those provisions occurred.

Are those impairments there.

Yes I.

Couldn't comment give real at this point on a on the geographic we don't tend to.

I think this is well it's just normal variation I don't.

But there is.

You can't tell me, what the kind of are the euro.

Oh I see.

Yeah, It's absolutely Canada.

Okay, how about the sector.

Industrial sector.

Hi, its oh I have to come back to you on the on the breakdown of that I don't I don't think there's a there's any clear delineation across the key sectors.

Okay, and just so I understand the messaging there you stated but.

Ah you added through collective provisions I used stage, one stage two you've taken a more conservative economic outlook and Uh huh.

That is correct.

That is correct, we as part of a regular hcl and loan provisioning process.

Look at our macroeconomic scenarios every quarter I'm consistent I think with a number of other industry players, we put an uptick on the downturn scenario this quarter and that kind of marginal impact of about $2 million.

Okay. So that's if not for that the releases from stage, one and stage two would have been 2 million higher.

But if not for that we would have had we would have had a a run rate more around had nine yes.

Got you.

Then the.

The branch actually let's talk about the strategy here and I just want to make sure I understood that correctly part of the new.

The structure of the bank and and the manner in which you are expect to gain efficiencies involves outsourcing did I hear you correctly, but you about source or some of your credit adjudication and collection function.

What you heard is that.

Either outsourced or combined or eliminated.

Duplicate operations for collections credit adjudication, and ER and ER administration.

Of course. This is you know just occurred so obviously on day, one you're not getting the benefits from a head count reductions or cost, but as these things are being combined over the next few quarters. What we're expecting is to see a gradual ah efficiency pool as we sold it all of our retail operations activities back office activities together.

Right I I I'm looking at it more from a strategic yeah officially is obviously important but when youre a you know a moving in this direction.

Credit adjudication, how you're underwriting and collections or are core parts of a core function of of what a bank does I know I'm just mix or make sure we're not.

You know I'm not I'm hearing that your your outsourcing those functions entirely are you.

No what you're hearing is that some functions were outsourced which are non strategic okay, but for a credit adjudication per se, it's still within the or ex Im Bank financial group.

Okay. All right Cool then lastly on the you know the the mortgage book and the I guess the bank service revenues.

Mortgage book, you've indicated that you expect the growth to turn positive in the latter part of the 2020, if I understand that correctly any a indication of when we could see you know this oh poised for growth a mantra started turning into positive revenue growth in the the services mine or any other and quite frankly, it can't happen soon enough Gabriel you know after a.

They really hard hard Fox year, and a half of preparing ER and hoping for the fast and preparing for the worst on the labor front. You know we have to make some really strategic moves there for the for the long term betterment of the organization as a whole and I think that that's really what the executives of this company have delivered.

Yeah short term, we have to pull back from from some of the growth activities, but but you know we proved in proven in the past that weekend.

Successfully grow businesses, we did that in the first two years of my tenure as these.

And that's what we're really doing now so you know what I'm happy about is that it's all hands on deck. We are seeing some you know initial upticks, but it's not fast enough for me.

But it's not going to be done overnight either right, it's going to take.

You know the efforts required to shake hands.

And I go out and get some brokers clients.

In the door and are happy to do business with us as we have in the past.

Thank you.

You're very welcome.

Well now take our next question that from a Richard Roth of TD Securities. Please go ahead.

I think just looking at other income for a second.

Is the decline in I guess your brokerage other income lines sort of a similar explanation to what you gave us in Q1, namely sort of just weak market conditions. The ventures down small cap stocks are down.

Exactly Richard the volatility that we suffered a well suffered as a participant in the month of May.

And and hampered their results for Q3.

And we've seen some volatility in a subsequent to the quarter end. So in August how is that looking for you guys from a Q4 perspective.

I I guess, it's still the <unk> I guess as you point out rightly pointed out yeah, right I guess, it's still a challenging month from a volatility perspective and the liquidity in the market.

So we have a strong pipeline of.

In D.C.M.S.G.M. markets.

What we need to yeah capital market to stabilize and be more positive to see.

A positive outcomes on that front.

And what sectors are you guys generally focused on is it sort of mining and like commodity guys or sort of.

Yeah.

We have a few verticals in terms of equity, but our biggest sector is a debt debt debt. They quit debt capital market within equity, we have mining and nephew industrial sectors like a bit of transportation and specialized services.

Among others, but we we cover a few verticals.

Finally, I guess as you move into sort of your fully advice now only in terms of branches should we expect to see lines like your commissions on mutual fund sales and other lines like that to start to move up or are those still just going to be really tied to.

Your you know small cap or focus.

Now you're referring to the retail side of it.

Yes, clearly on the retail side of it so there from the broker side clearly that's part of the revenues that stream that is there.

Generate didnt, but most of it at this point is within that potentially in the retail sector.

The financial clinics part of it.

Okay. Thank you from a mutual fund perspective.

Your next question will come from Darko Mihelic of RBC capital markets. Please go ahead.

Hi, Thank you. Good morning, guys. Just a question just a question on on the mortgage.

Impaired loss it seems like a lot it's up three times.

What you had is isn't it.

Provision for credit losses stage, three of last quarter and last year.

And just curious as to what's causing that and secondarily as we think about you.

Sort of the build of allowances and release.

It's really the sort of competing factors. The released this quarter was bigger than the build.

You know as I as I go forward and the kind of economic environment that we're in and as we think about you growing balances.

Maybe you can give us an idea of where we would go from here I'm envisioning, a situation, where you're building allowances for both portfolio growth and possibly for weaker economic statistics, because it's pretty hard to see that the economy can get better from here. So just your thoughts on on both those elements would be great.

Yes, yes, Darko. Thanks for your question, we do see an uptick in the in the mortgage impaired losses as I said earlier some of that is affected to shrinking in the portfolio.

Some some offset on that as we grow.

We have I just if you are looking though at our doubtful accounts overall on mortgages is one of the indicators you've looked at that in that vein I would note, though that in terms of total bank down cycles in the mortgage space that we did have a methodology change over the past year that drove up the doubtful numbers in the mortgage space. So that some of that explains that uptick in doubtful.

In terms of the building release.

Naturally as as we grow the book.

I would expect absolute.

Absolutely a growth in pcls commensurate with that but our our believes that this will be fully offset by higher Eni as we build the business and then back to the weaker economic kids, it's really a function of good credit management adjusting your reserves commensurate with market conditions and it would go up or down commensurate with those conditions. So thats just normal course.

Okay. Thank you and just the so you're saying that there was a there was a.

A change in your methodology that resulted in the large stage three loss this quarter in mortgages now I'm, saying in terms of I just want to make sure I tie the picture together I'm talking in terms of doubtful.

Okay in terms of dose levels and the absolute dollar amount of Downfalls.

We had a change in methodology, where.

We shifted insureds greater than 90 days into the Devils.

So again, bringing the whole credit picture together you have to look at apples and you have to look at the shift in terms of the stages. So that explains the doubtful and as I said earlier that shifted increased this quarter in stage three is due to slightly higher repairs.

Hi, higher impaired, but that's a big number to go to point to.

Million versus 700 last quarter.

Was there maybe some fraud in the in the residential mortgage portfolio or something.

No, but I mean year on year.

Darko, it's flat so yes, there is some ebbs and flows with within within the book.

Okay, all right fair enough. Thanks.

And our next question will come from the summit Molotovs Scotiabank. Please go ahead.

And maybe Liam just to just to stay with you for a minute. So youve you roll to.

Roto for US nine provisioning to start this year and I think it's that's come up a few times now that.

In every quarter, we've we've seen your.

Performing portfolio has had releases in provisions and at least to some degree a there's a.

Assumptions parameters for for your view on the economic outlook, especially when it relates to your let's call. It your business lending portfolio.

Can you give us some indication as to what parameter updates you youve enacted that have resulted in this this quarter again, we see a small but still a release there. That's the part of the book you are growing the fastest and certainly that's what's been indicated to US what are you changing in your model. That's really that's resulting in releases for commercial in the performing portfolio.

Oh. Thank you asked about for your question overall on on our side. So we implemented I have first nine and we put in place.

Model framework.

We've had basically a shake out on that model framework over the past couple of months.

And some marginal enhancements on the methodology.

And some of this.

Enhancement comes as you do your annual renewals on the various because the book, but overall from econ.

I look right now.

We have.

Have adjusted the scenario too to a higher expectation of downtown so that drives a an uptick but overall, we have marshall adjustments based on the annual credit renewal.

And in terms of enhancing our methodology on the margin. It it's not it's not big big changes due to the methodology.

And if I stay with what I'll just call your commercial loan book.

For for a minute.

Obviously, there's been a significant shift in the interest rate backdrop in the last few months I'm just curious as far as this portfolio is concerned.

Yeah. The bank has talked about margin improving as a result of mix shift, which I think essentially means a commercial is going to be a larger portion going forward. How much of this book resets with market rates say, what percentage is based off BA rates LIBOR or that a year that would see a more immediate repricing.

With that with the shift that we've seen can you give us any numbers around that.

I'll ask Oh, that's the kind of getting to a to answer that question.

[noise].

I think we should come back to you on this one in terms of the percentage that would be affected by the prime <unk>.

A portion of the book is prime based and is affected and driven by the Prime BA has an impact on margin from prime BA spread that is that the widest.

Yes.

I would expect some degree of.

Shifting that but a good part of the book is floating.

And just lastly on other merger no you you folks had indicated last quarter that where the union negotiations complete we would see.

Liquidity, but but back to work and that certainly seems to have benefited NIM. This quarter or is it fair to say that is that liquidity now where you want it to be is that no longer a.

A catalyst for NIM, one direction or another as a result of a the changes you've been acted post the negotiations completed.

Yes in the third quarter, we reduced the excess liquidity, which contributed to the improvement in net interest income and the NIM.

The full impact of that is now behind us and realized in Q.

We also realized the cost related to labor relations, which contributed to lower non interest expenses that was also in our Q3 results.

Through the first half of 2020 from now until then we expect to see the rest are meeting the positive impact from outsourcing and eliminating duplicate operations that had no impact on Q3 and is still in the future.

So that and I'll stop there obviously expenses were one of the bright spot Oh, yes, yes, I just want to come back to your interesting questions. There. There are two components just to try and answer it we have a structural interest rate risk position that deals with the interest rate risk. The bank overall, we're close to our benchmark were not taking undue risk relative to our benchmark on that and that drove that.

Drives the aggregate structural interest rate component of your now.

The other component really is driven by basis, yes, like Prime BA and we come back to you on that but you need to always come back in terms of the aggregate bank to how we manage our structural rate position.

Got it.

And you know what I'm a believer there we can we can pick some of those up afterwards, thanks for your time.

Okay. Thank you.

Your next question comes from the line of Sohrab Movahedi of BMO capital markets. Please go ahead.

Hey, Thanks, I was a little bit late getting on so I apologize if some of these were covered off in your commentary earlier questions but.

Just with respect to the balance sheet growth that youre right, you're expecting now to come.

If I kind of look at that the you know the slides on pages 23, and 24, you've got there.

Ted geography kind of listed out and if you start with commercial 17% from the U.S.

The rest in Canada. As you think ahead I don't know 12 18 months, how is that how are those percentages going to shift.

Oh. Thank you for the question I'll give a comment on growth overall and maybe just to set the stage here I think the first part of your question really has to do with you know that the percentage of of our loans to business customers in the total mix.

We expect to have continued good growth in this portfolio. You know this portfolio has been growing in the last several years and we expect that that will continue to have a double digit growth as a as we continue and that will continue to increase the loan mix, we haven't disclosed the target for the total percentage of loans to business customers within the whole portfolio, but needless to say that we have not risk reached the potential of this business and also were were still a far ways from from where we want to be.

On volume growth overall, though and for the rest of the businesses now that the new Labor relations environment is a is it has stabilized I were back in growth mode. So so of course that has had an impact in the first in the last quarter to reduce liquidity and that you see that in the a and the deposit growth are retracting, but what we're looking for really is growth in a in mortgages personal loans visa cards, a mutual funds as well last quarter. We said that we would stabilize and then grow the residential mortgage portfolio. You saw this quarter. The decline was limited to 1% Ah. We recently launched a new advertising campaign targeting mortgage brokers across Canada, we're introducing out they mortgages back into the mix business for Soffe products. So we expect to generate volume growth from those products.

So we're still continuing to expect a mid single digit growth for 2020, we're just not there yet right. It's taking US a time to go and get that pipeline of a business in the door personal loans are also part of the growth plan, specifically RSP lending investment lending, which we want to put back on track.

And have initiatives to to stabilize that portfolio as we.

Excellent 2020.

Well it is the mix going up stay kind of that as it is right now geographically or in other words do you have or do you think the U.S. he's going to represent a bigger proportion overall.

Let's say in the commercial loan portfolio.

I'll ask the fund to answer it the good news is that the north point is performing.

According if not better than plan. So we're really happy about that business and since day, one when we acquired the business. We said that the there could be synergies with equipment finance as well in the state so that percentage could grow Scott slightly grow in the next few years.

Internally and when you talk about their credit considerations and the Pcls, you're taking into into consideration that you may have higher growth in the U.S.

We we take into account obviously, you don't have a provision for future growth, but yes in terms of our plans and our risk tolerance, we do take that into account.

So just one last question on that Liam how much room do you have in your current.

Reserve levels to accommodate.

For their growth and you know and your call or call. It performing so fat without having to add.

Today reserves.

Well I I talked about a couple of things so I I talk about capital capacity and we have as it has described we have a very strong capital position that gives us part of your question last quarter and ability to grow our WMS and from a provision perspective, our our views are that if provisions work to grow they'd be more than offset by net interest income.

Okay, but my question was a little bit more specific as to within your stage, one and two how much more growth can you accommodate without having to add more to it.

Well I think the normal process Rvs as you add you they will factor into stage, one or two and come into there I think it's a question really of capital capacity and what income are you seeing that offsets that increase.

Okay. Thank you very much.

And we'll take our final question from Doug Young of this Arctic Securities. Please go ahead.

Hi, Good morning, I think maybe just going back to what I think there's been a number of questions on is just the stage, one and stage two pcls and I guess, what we're struggling with is that.

There is a higher probability of an economic downturn built into your assumption, but were seen releases in stage, one and two and and I'm still a little confused as to why that wouldnt necessarily be so I don't know if there's more you can kind of flesh out or not but I think that's where a lot of confusion lies right now.

So let's talk about the obviously an uptick as we said on the macro factors, but I mean, the book has not been growing ER and we're turning that around so as your book shrinks, depending on what stage the underlying assets are in youre going to see a reduction in it so its that dynamic.

So its just simple I mean, you're growing the commercial though and the imperatives up materially in commercial.

Yeah, you've got releases on that side and so that so that's kind of I guess, maybe there's a little confusion around that as well.

Well I think you also see migration across the stage is ER as as we see at normal ebbs and flows with individual credits.

Okay.

B, well well well try going forward is to provide a a little bit.

And I think we provided our disclosure how things are moving but I'll try to make sure I will provide additional commentary on this going forward.

It is very different than what we've seen from the other banks that I know I have first nine is relatively new and we're all getting adjusted to this and whatnot adjusted two opposing.

Things that is confusing and tough to make sense. So that yeah. So yeah, I would I wouldn't know that for us I have first nine as recent as last October so it's a little tough somebody other banks have had to shake out and where we've got some tweaks to somebody earlier questions like that and then just maybe I'll just finish off with just the next ratio and I think France. Why you mentioned you would expect in Q4 that can fluctuate and I understand what your target is for fiscal 21 might fluctuate I would assume you mean, you would expect higher expenses and so a higher nix ratio in Q4, and as you look out as you move towards your fiscal 21 target are we should we expect a gradual decline in that ratio and through fiscal 20.

Doug obviously their target is to improve over time.

We had said 2019 was years of investment.

And we have we expect to see some benefits of outsourcing and elimination of duplicate operations as far as I mentioned earlier by the end of Q2 2020.

But at this point.

We're working to bringing those savings and obviously they should bring.

Operational leverage positive leverage going forward, but its hard to commit to a number at this point for 2020.

That's fair Thank you very much.

Thank you.

And ladies and gentlemen that is all the time, we have for questions today I'd like to turn the conference back over to Mr. <unk> for any additional or closing remarks.

Thanks to everyone for joining us today and I'll be see of GE were building, a difference and better financial institution.

We're talking about today transitioning our branch network to a traditional offer 200% advice. This is a business model that we believe better fits the lifestyle of modern customers. We're rolling out digital offerings are receiving positive feedback from advisors and brokers that are easier to open accounts and were eager to roll that out to all Canadians were addressing the efficiency ratio by reorganizing outsourcing simplifying teams processes and product lines. This is something that we're working towards a better efficiency ratio in the coming years.

We are moving towards higher margin commercial loans and have increased the proportion within the loan mix and finally.

We're working towards improving the financial half our current and future clients. Our teams have accomplished tremendous work and are now all hands on deck working on revenue focused activities efficiencies and transformation related strategic objectives. These R&D at an exciting time I will now turn it back to Susan. Thank you Francois should you have any further questions. Our contact information is included.

And patient and our fourth quarter of 2019 conference call will be held on December 4th four rigs speaking with you then have a great day.

And this concludes today's call. We thank you for your participation you may now disconnect your lines and have a wonderful day everyone.