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Earnings call: Laurentian Bank’s mixed results amid strategic revamp


Laurentian Bank (LB.TO) reported mixed financial results in its latest earnings call, with a focus on customer experience, simplification, and technology investments.

Despite a slight revenue increase sequentially, the bank faced a year-over-year decline in net income and earnings per share (EPS), attributed to high expenses from a mainframe outage. The bank’s loan growth was hindered by macroeconomic conditions, but an increase in net interest margin was a positive sign.

The bank also announced new executive appointments and is in the process of revamping its strategic plan, with a review of its products and processes underway. The bank’s credit performance remained strong, and it is confident in its portfolio’s resilience.

Key Takeaways

  • Net income and EPS decreased both year over year and quarter over quarter.
  • Revenues grew by 4% sequentially but declined compared to the previous year.
  • High expenses, including those from a mainframe outage, contributed to the decline in earnings.
  • The bank’s capital position strengthened, with the CET1 ratio increasing to 10.2%.
  • Loan growth was negatively affected by economic conditions, but net interest margin improved.
  • The bank is engaged in a strategic review, expected to be released in late spring.
  • New executive and board appointments were announced.
  • The bank is focusing on customer experience improvements and technology infrastructure investments.

Company Outlook

  • The bank expects a reduction in its loan book and a slight increase in the efficiency ratio for the next quarter.
  • Seasonal patterns are anticipated to increase utilization rates in the fall.
  • A strategic review is underway, with potential further restructuring charges.

Bearish Highlights

  • Loan growth faced headwinds from the broader economic environment.
  • Non-interest expenses increased due to higher technology costs and fees related to the mainframe outage.
  • The commercial loan portfolio and commercial real estate activity decreased.

Bullish Highlights

  • The residential mortgage portfolio showed growth with prudent underwriting standards.
  • The bank’s capital and liquidity levels remain solid.
  • The trading desk performed well, contributing to higher revenues.


  • Total revenue, net income, and EPS all decreased compared to the previous year and last quarter.
  • Efficiency ratio worsened due to ongoing investments and outage-related expenses.

Q&A Highlights

  • The bank maintains a disciplined approach across industries for securing guarantees and credit protection.
  • There has been no resistance from OEMs or dealers regarding covenants.
  • The bank expects a slight reduction in the loan book in the next quarter due to cautious consumer behavior and commercial real estate project delays.
  • Details on the strategic plan and investor events will be provided later in the year.

In conclusion, Laurentian Bank’s latest earnings call painted a picture of a financial institution at a crossroads, dealing with immediate challenges while laying the groundwork for future growth. The bank’s emphasis on customer service, simplification, and strategic technology investments signals a commitment to adapting to an evolving financial landscape. Investors and stakeholders are advised to look forward to the strategic review’s outcomes expected in the coming months for a clearer picture of the bank’s direction.

Full transcript – None (LRCDF) Q1 2024:

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

Andrew Chornenky: Bonjour á tous. Good morning and thank you for joining us. Today’s opening remarks will be delivered by Éric Provost, President and CEO, and the review of the first quarter financial results will be presented by Yvan Deschamps, Executive Vice President and Chief Financial Officer, after which we will invite questions from the phone. Also joining us for the question period are Liam Mason, Chief Risk Officer, 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. With the complete cautionary note regarding forward-looking statements, please refer to our press release or to slide 2 of the presentation. I would also like to remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Éric and Yvonne will be referring to adjusted results in their remarks unless otherwise noted as reported. I’ll now turn the call over to Éric.

Eric Provost: Yes, Andrew. Good morning and thank you for joining us today. Over the past few months, I have had the opportunity to meet with many Laurentian Bank team members, and I consistently hear the same things. They are committed to this institution. They are driven to improving our operations and simplifying our structure. And they are dedicated to serving our customers. Throughout the quarter, we have remained focused on three priorities, customer focus, simplification and strategic investments to improve our technology infrastructure. I would like to thank every Laurentian Bank employee for their efforts while also supporting the organization in our strategic planning exercise. While Yvan will provide further details during his remarks, I wanted to offer some high-level thoughts and their overall performance. I am pleased to report that the bank strengthened its capital position in a time of continued macroeconomic uncertainty. We have managed our funding to our book of business. And given the reduction in loans due to the current environment, we executed on our planned deposit reduction activities while maintaining a strong level of liquidity materially above the industry average. We are comfortable with our commercial portfolio and are well positioned for a rebound later this year. As business conditions improve this quarter, revenues were slightly down compared to last year and grew by 4% on a sequential basis. Net income and EPS were both down year over year and quarter over quarter as expenses remained high. This increase included costs related to the mainframe outage last year, which impacted EPS by $0.04 this quarter. We know there is more work to do to reduce our expenses, and that is why simplification is a key part of our plan going forward. While overall loan growth was negatively impacted by macroeconomic conditions, including business and consumer sentiment, our NIM was up 4 bps to 1.8%. This quarter also saw a small rebound in capital markets related businesses with stronger trading results and fixed income. The business’s results also benefited from recent rightsizing actions. Our credit performance remained strong with a small increase in PCLs compared to Q1 last year and stable versus last quarter. We remain confident in the portfolio and are adequately provisioned dealers and manufacturers in our inventory financing business remain cautious. Inventory levels are not rising to the levels seen in previous years, and as a result, utilization was at 50%. This is lower than the mid 50s utilization rate we would typically see at this time of year, given macroeconomic conditions, dealers and manufacturers are working together on floor planning programs. This shows strong partnership and provides us with significant confidence. As we look forward to the remainder of the year, we expect an increase in utilization starting in the fall. If interest rates adjust according to projections. Turning now to commercial real estate activities. We have seen a slowdown in construction start, which remains in line with our expectations as developers continue to adjust to the current cost environment. We have seen no cancellation of projects and our portfolio is in line with our credit appetite. The majority of our portfolio is in multi-residential housing, which continues to show resiliency as demand remains stronger than supply. As a reminder, we deal with Tier 1 and Tier 2 developers with significant experience through the cycles. We’re pleased with how both commercial portfolios are performing. Our specialized approach gives us confidence as we continue to face uncertainty in the macroeconomic environment. As I mentioned earlier, this quarter also saw a plan year over year and sequential decline in deposits, and there are a few points I’d like to make. First, we manage deposit and loan activity on a relative basis. That’s why we have executed on plan deposit reduction activities. This includes actions such as more conservative pricing in our broker deposit channel to maintain our focus on profitability, contributing to our NIM expansion. Second strategic partnership deposits function like conventional demand deposit products. Recent quarters have witnessed these deposits behaving like typical demand deposits, with funds being redirected towards market activities and other term deposits products consistent with our expectations. Third, personal deposits source through our retail channel are stable quarter over quarter. And personal deposits overall represent 86% of our total deposits contributing to the bank’s sound liquidity position. In fact, this quarter we enhanced our action GIC and equity-linked product with a competitive minimum rate guarantee which are good pickup. We also held a very successful Black Friday campaign where total GIC sales exceeded last year’s performance in the same period, further solidifying our funding sources. Operationally, we have a number of developments to share from this quarter. Beginning with our people, I’m pleased to announce three new appointments to my executive team. First, we have promoted Macha Pohu to the position of Chief Human Resources Officer as she’ll succeed Sébastien Bélair who held this position for the past three years, allowing him to better focus on his role running retail and corporate operations. Macha joined the bank in 2022 and has more than 25 years of experience in the financial services sectors and distribution, information technology, and human resources. Second, I’m pleased to announce that has joined the bank as our new Chief Information Officer this month. Benoit is an accomplished technology and digital transformation leader with almost 30 years of experience. He has a history of managing large and complex IT programs as well as architecting and delivering innovative solutions. His mandate will be to align the bank’s IT strategy with our overall business strategy, ensuring that our technology initiatives directly support our organizational objectives. Third is the creation of our strategy and transformation office, which will be led by Marie-Christine Custeau, who has almost 20 years of experience in financial services, including sales effectiveness, change management, and business process optimization. This new office will oversee the development, implementation, and evolution of the strategic plan, identify organizational priorities and ensure a steady pace of decisions that enable us to deliver value for our customers quickly. The office will work closely with finance to monitor the budget and maximize transformation goals. The bank also announced three new appointments to our Board of Directors, Mr. Johanne Brunet, Mr. Jamey Hubbs, and Mr. Paul Stinis. These appointments are part of the Board’s commitment to ongoing renewal to enhance overall effectiveness and ensures an appropriate balance between skills and experience and a diversity of perspectives. Their backgrounds are varied and include marketing, risk management, capital markets and business development. Looking forward, we are fully engaged on the revamp of our strategic plan. This plan will refine our focus on the areas where we can win to increase our competitiveness while always maintaining our objective of improving the customer experience. As part of this refresh, we have launched an end-to-end review of all our products, projects, and processes to help inform our decision making as we look to simplify our operating model. This work is ongoing and we will make appropriate decisions about products and projects as we progress through this exercise. I will now like to turn the call over to Yvan to review our financial performance.

Yvan Deschamps: I would like to begin by turning to slide 8 to highlights the bank’s financial performance for the first quarter. Total revenue was $258 million, down 1% compared to last year and up 4% quarter over quarter. On a reported basis, net income and EPS were $37.3 million and $0.75, respectively. Adjusting items for the quarter amounted to $6.9 million after tax or $0.16 per share and include amortization of acquisition related intangible assets and restructuring charges of $6.1 million or $4.5 million after tax, resulting from the previously announced simplification of the bank’s organizational structure and headcount reduction. Details on these items are shown on slide 22. This quarter, an LRCN biannual interest payments had a $0.06 impact on our EPS. The remainder of my comments will be on an adjusted basis. EPS of $0.91 was down year over year and quarter over quarter by 21% and 9% respectively. Net income of $44.2 million was down by 19% compared to last year and 1% compared to last quarter. The bank’s efficiency ratio increased by 360 basis points compared to last year and by 100 basis points sequentially. This uptick reflects our ongoing investments in strategic priorities and the remaining expenses related to the mainframe outage in September 2023, which totaled $0.04 this quarter on an EPS basis. Additionally, and as previously guided, there was a seasonal increase in salary and employee benefits. Our ROE for the quarter stood at 6%. Slide 9 shows net interest income down by $1.9 million or 1% year over year, mainly due to lower interest income from lower loan volume. On a sequential basis, net interest income was up by $2.4 million or 1%, mainly due to lower liquidity levels and lower funding costs, partly offset by lower loan volume. Our net interest margin was up 4 basis points sequentially to 1.8%, mainly for the same reasons. Slide 10 highlights the bank’s funding position. Following a period of elevated liquidity, we gradually reduce our deposit bases considering the loan volume reductions and our previously stated objective of reducing our liquidity position. On a sequential basis, total funding was down $1 billion. Strategic partnership deposits decreased by $500 million as customers allocated funds back into market activity or term products. Deposits from advisers and brokers were also down by $300 million, mostly due to the natural runoff in our intentionally less competitive market rates. Despite the reduction in liquidity, the bank maintained a healthy liquidity coverage ratio through the quarter, which remains materially above the industry average. Slide 11 presents other income, which was relatively unchanged compared to last year. Higher income from financial instruments was mostly offset by lower lending fees due to tempered commercial real estate activity and lower income from mutual funds. On a sequential basis, other income increased by 8.5 million or 13% as a result of higher income from financial instruments due to more favorable market conditions and higher service charges as two months of fees were waived during Q4 2023. This was partly offset by lower lending fees. Slide 12 shows non-interest expenses up by 4% compared to last year, mainly due to higher technology costs, as the bank is investing in its infrastructure as well as higher professional and advisory service fees related to mainframe outage that occurred last quarter. This was partly offset by reduced headcount and lower performance-based compensation. On a sequential basis, non-interest expenses were up 6%, mainly due to seasonally higher vacation accruals, employee benefits, and performance-based compensation, partly offset by lower advertising fees. This quarter, the remaining remaining expenses related to the mainframe outage in the fourth quarter totaled $0.04 on an EPS base. Turning to slide 13, our CET1 ratio was up 30 basis points to 10.2 due to a reduction in risk weighted assets. Slide 14 highlights our commercial loan portfolio, which was down about $1 billion or 6% year over year and was down $500 million on a sequential basis, mostly due to slowing real estate market activity and our inventory financing dealer base being prudent in the current macroeconomic environment. Slide 15 provides details of our inventory financing portfolio. This quarter, utilization rates were 50% and are lower than historical levels as dealers have been taking a more conservative approach to inventory. We expect utilization rates to follow the usual seasonality, which includes a reduction in the spring and summer periods before starting to increase in the fall. Commercial real estate, our unfunded pipeline, has been impacted by market trends but remains healthy. We have seen some developers slow down the starts of projects given the current macroeconomic environment as they navigate through this period of high inflation and interest rates. However, demand in the region residential real estate continues to exceed supply. As seen on slide 16, the majority of our portfolio is in multi-residential housing, and only around 3% of our commercial loan portfolio is in office. Our office portfolio consists of Class C or B assets in financial recourse to strong and experienced sponsors. As we have said over the past few quarters, the majority of the portfolio is in multi-tenanted properties with limited exposures to single tenanted buildings. Slide 17 presents the bank’s residential mortgage portfolio. Residential mortgage loans were up 5% year over year and 2% on a sequential basis. We maintained prudent underwriting standards and are confident in the quality of our portfolio as it is evidenced by the high proportion of insured mortgages at 58% and low LTV of 51% on the uninsured portion. It’s also worth noting that more than 80% of our residential mortgage portfolio is fixed rate, of which more than 80% will mature in 2025 or later. The allowances for credit losses on slide 18 totaled $218.5 million, up $15 million compared to last year, mostly as a result of higher allowances in the commercial portfolio. Allowances for credit losses increased by $3.7 million sequentially, mostly as a result of higher allowances on commercial loans due to credit migration, partially offset by write-offs in the commercial and personal loan portfolios. Turning to slide 19. Provision for credit losses was $16.9 million, an increase of $1.5 million from a year ago, reflecting higher provisions on performing loans. PCLs were essentially in line with last quarter. As a percentage of average loan and acceptances, PCLs were unchanged at 18 bps. Slide 20 provides an overview of the impaired loans. On a year-over-year basis, gross impaired loans increased by $73.9 million and were up $16.5 million sequentially, mostly in the commercial portfolio, which is well collateralized. We continued to manage our risk with a prudent and disciplined approach and remain adequately provisioned. As we look ahead to Q2, I would like to note a few key points focused on the next quarter. We expect our loan book to continue to be impacted by macroeconomic conditions as dealers continued to be prudent in restocking inventory and due to lower level of activity on the real estate projects. Adding the impact of the lower number of days, we expect a low single digit and IR reduction for Q2. Same is expected to remain relatively stable. We are committed to reducing our efficiency ratio, and we’ll share more details with you later this year as part of our revamped strategic plan. For the second quarter, we expect a slight increase of our efficiency ratio due to the pressure on revenues I just mentioned and as we incur expenses to support the review of our strategic plan. Given the macroeconomic environment, PCLs are expected to be in the high 10s or low 20s. Capital and liquidity levels are solid and expect to remain strong for Q2. I will now turn the call back to the operator.

Operator: [Operator Instructions]. Your first question will be from Meny Grauman at Scotiabank.

Meny Grauman: Hi, good morning. Just a question on the strategic review. Any more you can provide us in terms of a timeline for when we should expect to hear a more fulsome plan from you? Eric Provost, Laurentian Bank of Canada – President and Chief Executive Officer Good morning, Meny. It’s Éric. In terms of timeline, we indicated that we’re aiming spring, and I would clarify later spring. So our team is working real hard to make this happen and more to come there.

Meny Grauman: Okay. I appreciate you highlighted at the end here that term there would be more on expenses at that time. But I’m just wondering more conceptually, it feels like given the step down in expenses that’s required, it seems hard to believe that this can be accomplished without further restructuring charges. So I’m wondering if you could comment on that, like how our organic can this expense management process be? You talked a lot about simplification. It sounded like the things you’re looking to do will require restructuring charges. They sound more dramatic. So I just wanted to get your thoughts on that.

Eric Provost: Well, Meny, as you noticed, like we already started last quarter with a reduction of 2% of workforce. And part of our analysis and then trying actually to simplify this organization, I would say, yes, there will be need for further restructuring charges. Now the debt does it, it still need to be worked and addressed when we come back with the strategic plan.

Meny Grauman: Okay. And then maybe just related, I mean, I think the good news is obviously your capital position is quite strong and stepped up again this quarter, CET1 at 10.2%. You took a less defensive posture in terms of liquidity. I’m wondering how that translates into your outlook for capital and your view of excess capital and where your CET1 ratio should be. So any thoughts there in terms of how much flexibility you have there? Are you looking at your capital ratio differently now that it is at 10.2%.

Eric Provost: Meny, great question there. And we’ve indicated in the last quarter, we’d be managing 10% and above. And then right now, where we stand at 10.2%, we feel pretty good versus the overall macroeconomic situation. And we’re still monitoring the evolution both at inflation and behavior of interest rates going forward. So we feel good where we are right now.

Operator: Your next question will be from Sohrab Movahedi at BMO Capital Markets.

Sohrab Movahedi: Okay. I’m just going to follow up on Meny quickly for a second. I assume part of the reason why the capital ratio has because loan growth is lower. RWA consumption is a little bit lower, and you anticipate that’s going to rebound. Is that the right way to think about it?

Yvan Deschamps: Sohrab, this is Yvan. So I’ll take this one. So you’re correct. So the increase of the capital essentially came from a reduction of the RWA.

Sohrab Movahedi: And the reduction of the RWA is because the utilization rates are lower.

Yvan Deschamps: Exact. So as you see, there has been a reduction of commercial. There’s a big consumer of capital from an RWA perspective. So that’s essentially coming from that impact. Yes.

Sohrab Movahedi: Okay. I mean, I think, Yvan, I’ll just — I think I’ll reiterate Meny’s point here, I mean — or Éric, sorry. I think over the last five quarters — I mean, the earnings, even if you adjust of some one-timers, are ranging anywhere from $40 million to $50 million. That’s a wide swing or a wide range. And we need this strategic review to have an understanding of what an organization Laurentian Bank is going to be so that what an earnings potential it’s going to have going forward. So I guess the sooner you could give us some of that, the better. It’s not a question, it’s a statement. But I just — I feel like it’s hard to make an investment case, not knowing exactly what works in . Thank you.

Eric Provost: Thank you for that, Sohrab. And like I said, we are working hard to come to market in the right manner so that we have all the analysis in play. And the big thing will be about making sure that this organization has a very, very strong focus on this customer base, understanding where we can win, simplifying our structure and product shelf, maintaining our investments in our foundational technology to run the bank, but also to make sure that we generate additional revenue for the various platforms.

Operator: Your next question will be from Gabriel Dechaine of National Bank.

Gabriel Dechaine: Good morning. Just want to talk quickly about the other income. One, it looks like the service fees and — well, particularly, yeah, service fees, you had maybe cut or refunded last quarter because of the IT issues, like that’s stabilized or through the worst of it? I suppose that’s gone completely.

Yvan Deschamps: Yeah, exactly, Gabriel. So there was two months waived in Q4 for about $2 million bucks, and that’s the difference and the improvement this quarter. So it’s relatively stable, excluding the waive of the fees that we’ve seen in Q4.

Gabriel Dechaine: Okay. And then the investment income or investment instruments, whatever it’s called, the big $12 million, what was behind that spike?

Kelsey Gunderson: Hey, Gabriel. It’s Kelsey Gunderson here, capital markets. I think we typically guide to between $6 million and $9 million in that line and clearly had a good result this quarter. I think that’s reflective of obviously much more constructive markets for us traders. We’re in a good position for it, and we’re able to participate in what were better markets. So I wouldn’t read that into any change in strategy. I was sort of read that into a good quarter on the trading desk.

Gabriel Dechaine: Okay. Liquidity has been — reducing liquidity. We don’t have a LCR ratio we can look at that kind of track that. And I know we talked about this last quarter. That is internal measure that you have access to. But I guess what I can see is the loan and deposits ratio was nearly 150% now. Are you comfortable with that level and can we see even going higher? There’s a bit of an expectation that loans to deposit ratios go down, not up in the current market context and probably into the future as well.

Yvan Deschamps: Thanks, Gabriel. So the way we manage the funding of the bank is we look at the deposits plus securitizations, which are long term, very cost-efficient funding as well. So if you take those two compared to the loans, we tried to maintain them relatively in line. If you look at that based on this quarter, we’re at 1.03. So that’s the way we manage it. It’s not only a question of deposits versus loans. It’s really a question of securitization plus deposits versus the loans. And we’re currently, I would say, in a positive territory because we intend to manage that around one.

Gabriel Dechaine: Okay. And then while speaking of deposits, and this is another NIM question I guess, you did talk about lower funding costs. And as the loans going down, it’s not like I’m clapping and cheering, but the silver lining to it is that you can be more selective in your funding, and at some of the higher cost, the sources going to shrink. Just wondering — when I look at your funding chart, I forget which slide it is, but which one of those would you point to as being the most beneficial to NIM this quarter? And then just to drill down a bit into the strategic partnerships — I know predates the current management team, the responsibility or however you want to put that, it was part of the funding structure that was announced with a bit of fanfare previously. And now it’s off about $1.5 billion, I’m wondering what the shift is there, if any, in that strategy?

Yvan Deschamps: Thanks, Gabriel, I’ll take that one too. So on the NIM side, as you mentioned, it came — the improvement of 4 basis points came from the reduction of liquidity we have this quarter that we action and we have guided you last quarter. But it also comes from probably, I would say, still some a little bit of catch-up of the stabilization of rate that we had to incur. And that’s what’s been happening. I would say most of it is now in the bag. But as you mentioned, we’ve been prudent in terms of loan outstandings. So definitely, it’s good on the margins while you’re prudent in terms of development as well. So that explains, I would say, most of that. And definitely, the fact that we’ve been less aggressive on the deposits, that plays on the margins of the products for sure. If I discuss about the strategic deposits or partnership deposits, those we have to keep in mind are demand deposits. So the idle money technically that are waiting for better markets, and that’s what we’ve experienced recently. Definitely, the same trend of that money going back to market investments and high-return GICs or other kinds of investments. So this was expected, and you should expect that this line is going to continue to go down unless there’s a big swing in the market. But as we see the market getting better, this line should be a slight other demand deposits and the rest of the industry.

Gabriel Dechaine: Got it. That makes sense. And you say demand deposit, but they’re not zero-cost I would assume, [indiscernible]?

Kelsey Gunderson: Yeah, exactly. And the difference — and we could simply just reclarify that normal demand deposits. Happy to do that if we want. But the key element here is that we sign some multi-year agreements with some customers. And we’re managing on their behalf there, the demand deposits of the idle money of their customers.

Gabriel Dechaine: Okay. Last one and sorry if I missed this in your comment, I probably did miss it. But just to get a bit more clarity on the equipment inventory finance, the balance trend, and the outlook, A, with the seasonality impact this quarter. And B, the end user demand probably going down, so that means less growth or negative growth for that category, how would you put it?

Eric Provost: Yeah, Gabriel. Éric, and I’m going to answer this. It’s a good question, and we definitely saw our dealer base being more cautious in the restocking season. So you mentioned seasonality. Usually, at this point in the year, we are more mid 50s in terms of line utilization. When we closed the quarter, we were showing 50%. So lines are utilized below normal trends in the particular time of the year because dealers see a market where there’s still some uncertainties, both in terms of the interest rate and the inflation rate. I actually was at the Boat Show last few weeks ago in Miami, and you can see and feel, like the dealers are seeing customers. Consumers are out there for the products, but the products will be slower to turn. And we like the approach of the dealer base being more cautious in terms of restocking. So we would hope, if interest rates go down later on this year, to see an increase of that utilization of credit lines later this fall.

Operator: Your next question will be from Nigel D’Souza at Veritas.

Nigel D’Souza: Thank you. Good morning. Apologies if you already covered this, but do you have a breakout of the categories within your commercial portfolio that drove the higher provisioning for commercial loans this quarter?

William Mason: Good morning, Nigel. It’s Liam Mason, the CRO. It was broad general migration across the portfolio. Obviously, as Éric articulated, we’re seeing a slower environment in commercial real estate, and we are seeing pressures in that space. But for our portfolio, broad just general migration across the commercial portfolio. And we’ve been disciplined around our reserving, Nigel, across all those categories, and that’s reflected in our PCLs this quarter.

Nigel D’Souza: Any comments on the contribution from inventory financing to provisions this quarter?

William Mason: It would be just — it’s part of the portfolio. And we’re pleased that our dealers are being prudent with regard to the restocking as Éric remarked, but a degree of migration as you’d expect at this point in the economic cycle.

Nigel D’Souza: Okay. And if I could switch gears, I just want to make sure I understand the deposit dynamics and the liquidity comments as well. So my understanding would be that if there’s a decline in deposits, that would reduce your stressed cash outflows, so that should improve your liquidity coverage ratio. Or are you implying that you’re also taking down your high-quality liquid assets in conjunction with lower deposit levels? Just trying to understand the interplay between deposits and your LCR.

Yvan Deschamps: Nigel, totally — first, the LCR includes deposits, includes the general funding of the bank, and definitely, as you mentioned, the other liquidity baskets that we have. So it’s a general trend. I think I just tried to make it easy by talking about deposits, which is probably the simplest element to the equation. So when we take all that into account, we are still managing a pretty high level of LCR. We are materially above the industry average or the big six. So we were elevated. We had built a war chest in terms of liquidity seeing the macro economy change as well as based on the recent events that happen. So we’re still very well positioned and very safe from a liquidity perspective. When I mentioned the deposit decrease this quarter, I just reaffirm that we manage securitization and deposits depending on how the loans are going. The difference this quarter is, as stated, we had an objective to reduce that. We’ve been less aggressive on the deposits, on the rates of the deposits, and that’s exactly what it created. The biggest impact of that, as you can see, is broker GIC. That’s reduced by $200 million because we’ve been less aggressive on rates.

Nigel D’Souza: And just one point of clarification. To put simply, if your deposit balances continue to decline, is that going to increase your LCR ratio, or is it going to remain stable? And it certainly cost to keeping an elevated LCR ratio because it doesn’t seem you needed in order to meet this deposit outflows.

Yvan Deschamps: As you increase the deposits, your LCR increase; as you decrease the deposit, your LCR decrease. But it’s not only a question of deposits or liquidity, LCR is also a question of the flows that you need for the next three months as well. So it does depend the volumes, it does depend the commitments we have. So there’s many aspects impacting the LCR, and you have to put all that in the pudding and just remain cautious, and that’s what we’ve been doing in terms of the LCR.

Operator: [Operator Instructions]. Your next question will be from Darko Mihelic at RBC.

Darko Mihelic: Hi, thank you. And I just have a couple of simple straightforward questions, so bear with me. The first question is this quarter had fees from the mainframe outage that was professional fees and other expenses. Can you provide some color around that? Is that part of your view into next quarter and beyond? Essentially, what I’m trying to gather here is whether or not more consultants or more work needs to be done simply on that and if that’s part of the pressure on expenses going forward, or is the expense pressure really tied to other things?

Yvan Deschamps: Yes. Thanks for the question, Darko. Well, allow me to clarify that item. So as you know, the outage happened in the last few days of September for two days of October. So the remediation work has been done pretty much in October and early November. So what we see right now is the remaining expenses related to that outage remediations. So this will not slow our continue in Q2. In Q2, level of expenses is expected to remain roughly in the same ballpark because of other elements, including some spending related to the strategic plan that were ongoing. But definitely, what we incurred to remediate the outage was something that we’ve done in October and November that impacted in expenses, impacted Q4 by $3 million bucks, impacted Q1 by 2 million bucks, but should not impact Q2 anymore.

Darko Mihelic: Okay. But I understood that — and maybe I — I have to go back to my notes and check. But I thought previously, it was — the waiving of fees, but this is different. Or am I thinking of this incorrectly?

Yvan Deschamps: I’ll take it and open to my colleagues if they want to come clean. But last quarter, we had two months of waived fees for $2 million. But in addition to that, we had about $3 million of expenses to remedy and correct what we have to correct last quarter. So in total, what I mean, if you take both quarters together, we had $2 million of fees waived, and that was only in Q4, not impacting Q1. We had $5 million of spending to the professional fees and expenses, $3 million of that was in Q4, and $2 million of that was in Q1. So technically, total of $7 million bucks, and that’s now passed.

Darko Mihelic: Okay. Thank you very much for that clarity. And I apologize, I just didn’t have my notes at my fingertips. And so now, after the fact, has there been any work on the customer experience given the outage and further remedial steps that are necessary?

Eric Provost: Yeah, Darko, Éric. Good morning. Well, pleased to announce this morning that we have a new CIO joining in, Benoit Bertrand. And in terms of customer experience on our side, like it’s a continuous improvement. So we’re continuing to make some foundational investments in our technology to improve. And after that, it’s going to be a matter of simplifying how we actually address customer needs. And this will be all blend together within our strategic review, our strategic plan. So some more to come in the spring there.

Darko Mihelic: Okay. And then lastly, I just wanted to also get back to the guidance for the PCL, specifically for next quarter, high 10s to low 20s. Is it something that we see in the watch list? Or is this related more to a performing reserve build in Q2? Just any color on that would be helpful.

William Mason: Sure, Darko. It’s Liam, Liam Mason on that. Let me take you back a little bit and talk about the history we’ve done with regard to ACLs. If you recall post COVID, we’ve been systematically building our reserves based on the forward expectation on our performing portfolio. We have continued to systematically build against performing to position ourselves for the macroeconomic conditions. So I would say in both in the performing as well as within the watch list portfolio. And we’re very disciplined in terms of how we set individual reserves on the watch list and the workouts. The broader industry has seen some pressures within real estate as we’ve articulated as other players have. But we’re very disciplined within our reserves, both with regard to performing and specific watch list files.

Operator: Your next question will be from Doug Young at Desjardins.

Doug Young: Hi, good morning. Just hopefully a few quicker clarifications. Just back to the dealer inventory finding, you see utilization of 50%, probably goes down the next few quarters before coming back up in the fall. I guess what I’m trying to understand is where does that 50% go in Q2, Q3? And then sequentially, what does that do to your loan book in terms of total dollar loans? So I’m just trying to understand how much more contraction in the next few quarters we could see.

Eric Provost: Yeah, Doug, Éric there. Just in terms of utilization, what we expect this summer is consumer will still be a prudent in their approach in the market. So as you know, the various products that we serve in various industries are quite seasonal. So we should expect a small reduction still in the utilization, but to what extent will really depend on the macroeconomic in terms of inflation and the behaviors of the policy in terms of interest rates. So we have a prudent consumer out there. So we would expect a small reduction. But to which extent, it’s too early in the season right now to guide towards that.

Doug Young: And in terms of the impact in terms of dollar amount on the loan book, are you also adding deals? Like is there offsets here so the utilization on your existing goes down? Are you adding new portfolios or new dealers in here that would potentially be a bit of an offset? Or is this a status quo like you’re not doing that type of expansion right now?

Eric Provost: Yeah, Doug, it’s an excellent question. Actually, we’ve been indicating that we are in a pursuit of diversifying the overall portfolio in terms of industry mix. So the team has made efforts to grow in the ag, construction, technology, which are less seasonal and can also provide great diversification. But to say that the team with these efforts was able to grow dealer base just over 400 dealers, about 8% year over year. So yes, we continue to see organic growth in our dealer base and that will definitely create more momentum in organic growth, diversified dealer for the future.

Doug Young: Okay. And then just maybe just back to credit, I apologize again if I missed this. But on the performing loan bill, that was all credit migration. In the commercial book, was there model updates? Was there anything else that’s underneath the hood there?

William Mason: Thank you, Doug. It’s Liam again. No model updates. I know some of our competitors did mention that. We are very disciplined in terms of how we set our macroeconomic conditions. And for the forecast, we benchmark those to the industry and also to the Bank of Canada. So what’s really driving it is migration and the forward view on the macroeconomic conditions.

Doug Young: Okay. And then just on expenses lastly. Did I hear it right — you know, essentially excluding restructuring charges and so adjusted the expected expense base, the anticipation is that it will be relatively flat in Q2 versus Q1. Did I get that messaging correct?

Yvan Deschamps: You did, Doug.

Operator: Your next question will be from Stephen Boland at Raymond James.

Stephen Boland: Thanks. Just the first question actually was just on — you had talked before moving into different verticals in the inventory finance, and you’ve added these dealers in those different verticals. I’m wondering if you’ve gotten the same type of protection or covenants that you have in the traditional silo that you bid in. In terms of guarantees, in terms of your actual credit protection, just wondering if there’s any changes in that?

Eric Provost: Yeah, Stephen, it’s a great question there. And the approach is always the same in our operating model. So we always start with the OEM and trying to secure. And we have 95% of OEM repurchase in place whatever the industry we’re chasing. And after that, it goes down to financing the asset at the wholesale price, getting PG and dealer guarantees for the overall line utilization and all linked, of course, to that repurchase to DOEM. So yes, we maintain the same discipline approach whatever type of industry we’re chasing.

Stephen Boland: There hasn’t been any pushback from the OEMs or at the dealer level in terms of some of these covenants? Or is it just that’s the way it is if they want to get access to your financing?

Eric Provost: Well, for us, the is the disciplined approach we gave ourselves and we remain true to it. And that’s what we believe allows the good companies to go through cycles. So we are quite consistent in our approach. So that’s [indiscernible]

Stephen Boland: Okay. And my second question, I apologize if this is obvious, I’m not sure Yvan if you mentioned this. But just in terms of — you’ve given some guidance. I think last quarter you talked about the loan book being stable throughout 2024, meaning year over year. First of all, is that correct and has that changed now? Obviously, a big reduction in Q1, but is it still expected to be stable throughout at the end of 2024 or 2023?

Yvan Deschamps: Stephen, I don’t recall having said that it would be stable ’24 versus ’23. I think I usually guide to a quarter at a time. What we expect for the next quarter is probably a slight reduction of the loan book due to the fact that we remain prudent, and our customers remain impacted by the current economic environment. And we mentioned on the inventory side, they are being prudent with restocking inventory. And on the ground, the commercial real estate side, we see promoters are delaying some projects, waiting or expecting reduction of rates. So that is expected to impact slightly the next quarter, not in a material way, but just a slight reduction.

Operator: Thank you. That’s all the time we have for questions. I would now like to turn the meeting over to Éric.

Eric Provost: Thank you for joining the call today. As we head into Q2, our focus remains on our three strategic priority, customer focus, simplification, and strategic investments to improve our technology infrastructure. We continue to work to revamp our strategic plan and look forward to having more to say later this year, including further details about our upcoming investor events. Thank you.

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


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