Laurentian Bank (LB) announced significant financial adjustments and strategic shifts during its latest earnings call. The bank took a $156 million goodwill and intangible charge in its Personal and Commercial Banking segment, primarily due to the elimination of goodwill and reductions in intangible assets. This decision aligns with efforts to streamline operations and follows the bank's strategic plan.
Additionally, the bank has suspended the AIRB project, resulting in a $23 million write-off of unused assets. These initiatives have led to after-tax charges of $161 million, slightly impacting the bank's regulatory capital. Despite these charges, Laurentian Bank expects to save approximately $20 million annually, which will be partly reinvested to enhance medium-term profitability.
Key Takeaways
- Laurentian Bank recorded a $156 million charge in goodwill and intangible assets to simplify operations.
- Suspension of the AIRB project and other actions resulted in $161 million in after-tax charges.
- Estimated annual savings from these initiatives are around $20 million.
- The bank's regulatory capital was affected by 10 basis points due to these charges.
- Dealers' conservative inventory approach and anticipated rate reductions are influencing the business.
- The bank's loan portfolio is robust, with a healthy commercial real estate pipeline and a strong focus on multi-residential housing.
- Allowances for credit losses increased, with impaired loans rising, mainly in the commercial sector.
- The bank expects a seasonal reduction in inventory financing but an increase in net interest income.
- Dividends are reviewed quarterly, with a focus on increasing profitability to support future increases.
- Laurentian Bank maintains a strong capital and liquidity position, with a CET1 ratio of 10.4%.
Company Outlook
- Anticipated reduction in loan book due to seasonal inventory financing decrease.
- Net interest income is expected to rise due to additional dates.
- Net interest margin projected to stay stable or slightly decrease.
- Efficiency ratio reduction expected in the upcoming quarter.
- Strong capital and liquidity levels to support strategic initiatives.
Bearish Highlights
- The bank is experiencing challenges in the multi-residential housing segment due to current interest rates.
- Decline in fees and securities brokerage commissions expected due to an upcoming transaction closure.
- Seasonal weakness in card services revenue and a slowdown in commercial real estate development.
Bullish Highlights
- The bank's commercial real estate pipeline remains healthy.
- A rebound in loan volumes is expected as interest rates decrease.
- The bank's income from financial instruments, mainly fixed income, is expected to perform well in favorable market conditions.
Misses
- A $20 million yearly reduction in business related to industrial lines will result in a $5 million quarterly reduction starting in Q4.
- Year-over-year decline in revenues from card services, fees and investment accounts, and insurance.
Q&A Highlights
- The decision to pause dividends is to preserve capital for strategic initiatives and is not due to capital adequacy concerns.
- The bank's strong CET1 ratio of 10.4% indicates readiness for organic growth and strategic pursuits.
- Additional charges may occur due to restructuring, but they will be offset by improvements.
Laurentian Bank's earnings call reflected a period of significant restructuring and strategic realignment. With the bank's focus on maintaining a strong capital position and prudent underwriting standards, it aims to navigate the current economic environment and position itself for future growth. Investors and stakeholders can expect further details on these strategies at the upcoming Investor Day, for which a press release and deck will be provided in advance.
Full transcript - None (LRCDF) Q2 2024:
Operator: [Technical Difficulty] Quarterly Financial Results Call. Please note that this call is being recorded. I would now like to turn the meeting over to Raphael Ambeault, Head Investor Relations. Please go ahead, Raphael.
Raphael Ambeault: Bonjour á tous. Good morning and thank you for joining us for the Laurentian Bank 2024 Second Quarter Result Presentation. My name is Raphael Ambeault, and I’m Head Investor Relations. Today's opening remarks will be delivered by Eric Provost, President and CEO, and the review of the second quarter financial results will be presented by Yvan Deschamps, Executive Vice President and CFO, after which we will invite questions from the phone. Also joining us for the question period are Liam Mason, Executive Vice President and CRO. All documents pertaining to the quarter can be found on our website in the Investor Center. I'd like to remind you that during this conference call, forward-looking statements may be made and it is possible that actual results may differ materially from those projected in such statements. For the complete cautionary note regarding forward-looking statements, please refer to our press release or to slide two of the presentation. I would also like to remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Eric and Yvonne will be referring to adjusted results in their remarks unless otherwise noted as reported. I'll now turn the call over to Eric.
Eric Provost: [Foreign Language] Good morning and thank you for joining us. Later today we’ll unveiling our revamp strategic plan, where we will outline our path forward. But first, I want to start by thanking our employees for their ongoing resilience and commitment to serving our customers and shaping the future of the bank. Today's plan will provide a strong direction forward with a focus on all of us relentlessly executing against the new plan. In our new strategy, commercial banking will remain our growth engine, we will reduce complexity in personal banking, and capital markets will support our customers across the bank. I would also like to thank our customers. We are taking steps to build an even stronger bank with a greater focus on the customer experience. Before discussing the second quarter results, I'd like to address two recent announcements. In April, Kelsey Gunderson made the decision to leave the bank to focus on personal interests prior to establishing the next phase in his professional journey. I would like to sincerely thank Kelsey for his contributions to the bank over the last five years, including navigating our capital market business through multiple periods of market volatility. This month, we've announced the forthcoming retirement of Liam Mason, Executive Vice President and Chief Risk Officer. Liam has been an invaluable asset to the bank since 2018, significantly shaping our risk aware culture and driving sustained business success. Under Liam's guidance, the team excelled in credit origination, displaying strong education practices, prudent loss reserving, and effective credit portfolio management. Liam will remain with us until the end of the fiscal year to ensure a seamless transition with his identified successor. I personally extend my heartfelt thanks to Liam for his numerous contributions and unwavering dedication. I wish him all the best as he pursues his personal interests in the future. As for second quarter results, they were aligned with previous quarter on an adjusted basis. Loan volume continued to be impacted by macroeconomic conditions and as a result, we managed deposits accordingly. Commercial loans have decreased slightly, mostly from our commercial real estate portfolio. We remain disciplined, but still enjoy a strong pipeline which will support the expected rebound in growth once rate reductions occur. As for inventory financing, dealers and manufacturers continue to exercise caution given the current macroeconomic environment. This quarter, utilization was 49%, below historical average. Going forward, we expect the utilization to follow standard seasonality and reduce during Q3 before rebounding in the final quarter of the year. However, we do expect it to remain below historical levels. Expenses remain elevated as we continue to enhance our technology and digital capabilities along with other strategic initiatives. Coupled with lower revenue, our adjusted efficiency ratio was 73.8% this quarter. Our revamp strategic plan will address the actions we plan to take and will outline the medium-term targets. NIM remains stable at 1.8% sequentially and our CET1 capital ratio was up 20 bps to 10.4% mostly due to the reduction in loan volumes. Finally, we maintain a prudent and disciplined approach to credit with PCLs materially lower than the big six banks. This quarter, we focused on simplification, and I would like to share some details regarding our adjusting items. After careful consideration, we decided to suspend the AIRB project to prioritize investing in strategic initiatives. This project was not due to be delivered before a few years, but we need to focus and prioritize to deliver on our strategic plan objectives to be outlined later today. The unused assets in development stood at $23 million and were written off. This decision and other factors triggered an impairment test and resulted in an impairment charge of $156 million on the personal and commercial banking segment, including mostly goodwill elimination and intangible reductions. Furthermore, we have decided to right-size our footprint at the 199 Bay Street corporate office. This decision was driven by our hybrid work model and low occupancy rate at less than 20% on average. Our corporate employees in Ontario have the ability to work from home or our Toronto and Burlington (NYSE:BURL) offices. This last October, we have had to make difficult decisions regarding workforce reductions. Considering the actions taken, we have now decreased our workforce by close at 4%. We have also continued to streamline and simplify our capital market business, including the upcoming sale of assets under administration of our full service brokerage business to Industrial Alliance Private Wealth. This transaction supports our strategic focus on simplification and concentrating on areas of business where we can win and be more competitive. In line with this approach, we also announced that we have discontinued our institutional equity research. Altogether, including the Q3 items, these initiatives amount to charges of $161 million after taxes with an impact on the regulatory capital of 10 basis points and are aligned with our goals and strategic roadmap. The estimated annual savings are expected to be about $20 million, a portion of which will be reinvested to improve our profitability on a sustainable basis in the medium term. We will provide more color as part of the unveiling of our plan this afternoon. These actions demonstrate our conviction and ability to execute on our strategic plan. We will concentrate on core strengths, execute with precision, foster accountability, and seek partnerships to expedite our progress. We will provide more comprehensive details later today, and we hope you will all be able to join us. Before I conclude my opening remarks, I would like to congratulate Raphael on his new appointment and take Andrew Chornenky, who is leaving the bank to continue his professional career in the financial service sector. Over the last few years, Andrew has played a key advisory role in all external actions that the bank has taken and ensured a smooth transition. We wish him all the best in his future endeavors. I would now like to turn the call over to Yvan to review our financial performance.
Yvan Deschamps: Merci Bonjour á tous. I would like to begin by turning to slide eight, which highlights the bank's financial performance for the second quarter. Total revenue was $253 million, down 2%, compared to last year and last quarter. On a reported basis, net income and diluted EPS were negative $117.5 million and negative $2.71 respectively. As Eric mentioned, we've recorded adjusting items for the quarter, which totaled $158 million after tax or $3.61 per share and include P&C Banking segment impairment charges of $126 million after tax, restructuring and other impairment charges of $30 million after tax, and amortization of acquisition-related intangible assets of $2 million after tax. Additional details are available on slide 22 and in the second quarter report to shareholders. The remainder of my comments will be on an adjusted basis. Diluted EPS of $0.90 was down year-over-year and quarter-over-quarter by 22% and 1% respectively. Net income of $40.5 million was down 22%, compared to last year and 8%, compared to last quarter. The bank's efficiency ratio increased by 410 basis points, compared to last year and by 80 basis points sequentially. This optic reflects our ongoing investments in strategic priorities and lower loan volumes. Our ROE for the quarters stood at 6.1%. Slide nine shows net interest income down by $4.6 million or 2% year-over-year, mainly due to lower loan volumes. On a sequential basis, net interest income was down by $5.6 million or 3%, mainly reflecting the negative impact of two less days in the quarters. Our net interest margin was stable year-over-year and sequentially at 1.80%. Slide 10, highlight the bank's funding position. Following a period of elevated liquidity, we have been gradually reducing our deposit bases, considering loan volume reductions and our previously stated objective of managing down our strong liquidity position. On sequential basis, total funding was down $300 million. Strategic partnership deposits decreased by $400 million as customers continued to allocate funds back into market activity or term products. This was partly offset by a $300 million increase in cost-efficient long-term debt related to securitization activities. Bank maintain a healthy liquidity coverage ratio through the quarter, which remains materially above the industry average. Slide 11 represents -- presents other income, which was unchanged compared to last year. Higher income from financial instruments was offset by lower lending fees due to tempered commercial real estate activity. On sequential basis, other income also remains stable. Higher income from financial instruments was offset by lower credit service revenues, which had seasonal high first quarter. Slide 12, shows adjusted non-interest expenses up by 4%, compared to last year, mainly due to higher regulatory expenses and other cost rates to various compliance projects, as well as higher expenses to support strategic priorities. On sequential basis, non-interest expenses were down 1%, mainly due to lower salaries and employee benefits from the two less days in the second quarter, partly offset by higher other non-interest expenses, as I just described. Turning to slide 13, our CET1 ratio was up 20 basis points to 10.4%, due to a reduction in risk-weighted assets. The impairment and restructuring charges had an impact of 8 basis points on the bank CET1 ratio in Q2. Slide 14 highlights our commercial loan portfolio, which was down about $1.4 billion, or 8% year-over-year, and down $100 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 49%. This is lower than historical average as dealers take a more conservative approach to inventory due to macroeconomic conditions. We expect utilization rates to follow the usual seasonality, which includes a reduction over the summer months before inventories begin to build in the fall. Our commercial real estate pipeline remains healthy, but we continue to see developers slow down the start of projects awaiting expected rate reductions. As seen on slide 16, the majority of our portfolio is in multi-residential housing, and our exposure to the office segment remained at 3% of our commercial loan portfolio. As we've said over the past few quarters, the majority of the portfolio is in multi-tenanted properties with limited exposure to single-tenanted buildings. Slide 17 presents the bank's residential mortgage portfolio. Residential mortgage loans were up 2% year-over-year and slightly down by 1% on a sequential basis. We maintain prudent underwriting standards and are confident in the quality of our portfolio, as evidenced by the high proportion of insured mortgages at 59% and low LTV of 50% on the uninsured portion. Allowances for credit losses on slide 18 totaled $225 million, up $13.6 million, compared to last year, mainly due to higher provisions on commercial and personal loans due to credit migration partly offset by write-offs. Turning to slide 19, the provision for credit losses was $17.9 million, an increase of $1.8 million from a year ago, reflecting credit migration and commercial loans with higher provisions on impaired loans and a release on performing loans. Eventually, PCLs were up $1 million for the same reasons. As a percentage of average loans and acceptances, PCLs increased by 2 basis points, 20 basis points. Slide 20, provided an overview of impaired loans. On a year-over-year basis, growth-impaired loans increased by $119.5 million and were up $59.1 million sequentially, mostly in the commercial portfolio, which is well collateralized. Continue to manage our risk with a prudent and disciplined approach and remain adequately provisioned. As we look ahead to Q3, I would like to note a few key points focused on the next quarter. Expect our loan book to reduce mostly due to the seasonal reduction in inventory financing in the summer months. This will partly offset some of the increase in NII due to the additional number of dates. NIM is expected to remain relatively stable, potentially slightly down due to the expected inventory financing volume reduction. We are committed to reducing our efficiency ratio and will share more details with you this afternoon as part of our revamped strategic plan. For the third quarter, we expect a slight reduction of our efficiency ratio based on a portion of the cost reductions linked to the impairment and restructuring charges outlined previously. These savings will be partly offset as we reinvest to support our strategic plan. Given the macroeconomic environment, PCLs are expected to remain at the low-20s. Capital and liquidity levels are solid and expected to remain strong for Q3. As a reminder, an LRCN interest payment is due next quarter, which has an impact of $0.06 on our EPS. We'll now turn the call back to the operator.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Meny Grauman with Scotiabank. Your line is now open.
Meny Grauman: Hi, good morning. Thanks for taking my questions. I wanted to start off by just talking about or asking about the goodwill and intangible charge in the P&C banking business. If you could give us a little bit more color in terms of why you decided to take those charges this quarter? What's really driving those charges, which really are the bulk of the charges that you're taking?
Yvan Deschamps: Yes, thank you, Meny. This is Yvan, I'll give a bit more colors. So there is a few items. Every time you have material changes in the business, and currently we have the new strategic plan we're going to discuss this afternoon. We decide to suspend the AIRB and there's a few other elements like having the stock price being about 45% of the book value. So all those elements led to an impairment testing and as part of that there's a general reduction of the value in terms of the bank and then how it works technically from an impairment perspective is that you start first by reducing the goodwill you have left on your balance sheet. So we took $84 million down, so we're pretty much. Now we have eliminated the goodwill and then the rest of the charges are attributed to the intangible mostly and a little bit in premises and equipment. So you should not see that goodwill intangibles being anywhere specific to anything. It's really just the result of the impairment test and that's technically how it's applied in the business.
Meny Grauman: Okay, thanks for that. And then I just wanted to ask about in terms of the fee income, financial income and financial instruments, we're seeing two quarters in a row now of strength there. Just wanted to better understand what's going through that line and is that sustainable at these levels here?
Yvan Deschamps: Yes, thank you for your question. So definitely we have a good quarter in terms of income from financial instruments. So the markets have been better, as you know, for the last two quarters or so. So we had a good performance this quarter. Thank you for the team for making that happen. We do believe that it's sustainable, but obviously this is all related to the markets and the mode and currently, you know, we can sustain that level, but must admit that this quarter was extremely strong.
Meny Grauman: Thank you for that.
Operator: Your next question comes from Gabriel Dechaine with National Bank. Your line is now open.
Gabriel Dechaine: Good morning. First question is on the credit. Just the increase in impaired loans on a substantial basis. Can you -- sorry, I missed it in your disclosures, but was that transportation related? Because everybody's getting into some issues there. Or some other sector.
Liam Mason: Thank you, Gabriel. Good morning, it's Liam. I'm very happy actually with where we are on the on the jills. It is not transportation related. There's no specific sector.
Gabriel Dechaine: Okay.
Liam Mason: It's across our book. I just took a couple of notes, our PCLs are running half the industry and overall, if you look at our jills for the last 12 months, they're in line with the broader industry as a whole. So we're very comfortable with our current portfolio.
Gabriel Dechaine: Yes, you know, fair enough. I'm just asking what industry? So you're saying multiple industries or how many?
Liam Mason: Across the book, but coming from commercial as Yvan outlined.
Gabriel Dechaine: Is it a -- how many files, like…
Liam Mason: It's a few files. I mean, remember Gabriel, 95% of our loans are collateralized, so when you see a notional increase for Laurentian, it's not the same as looking at the other banks.
Gabriel Dechaine: I know, I just want to educate myself here. Then on the expense side of things, I saw the, you know, there's a mention of a $7 million figure, and that's included in your core expenses, if you will, associated with regulatory and compliance costs. I'm wondering if this was something embedded in your run rate before you're just highlighting it, or if it's something new and it's tied to the IT issues maybe last September maybe you can shed some light on that please.
Yvan Deschamps: Yes, thank you Gabriel, this is Yvan. So no this has nothing to do with the outage or the IT issues we had last fall. In fact, there's some of that, that relates to supporting strategic priorities, but as we mentioned, there's increased regulatory expenses and compliance projects right now. You can, just to name a few, you can think about B10, 13, 15, 20, and I can keep going because there's a lot of those, including stuff in Quebec and the federal budget as well. So we just want to make sure that we invest and that we're good on the compliance side. So there's definitely a burden of that. And you should expect that we need to invest for the next few quarters as well related to those elements.
Gabriel Dechaine: Is it like a catch-up or, you know, how would you describe it? Because it doesn't sound normal. Would that have been a smaller number last year and you're just being more proactive and accelerating that type of investment or?
Yvan Deschamps: Yes, in fact, many of the elements I just mentioned were new over the last 12 months. So definitely there's a timing aspect of ramping up those projects. So definitely that's the key driver. There's nothing special in those outside the fact that there's a lot of regulatory changes and we just need to make sure we're on top of it.
Eric Provost: And Gabriel, it's Eric. If I may, this afternoon you're going to hear me repeat and talk about investing into our foundational technology and like this is going to be core for us to make sure that we simplify our technology stack and have better ability to address those changes more efficiently in the future state. So we'll provide more details this afternoon, but all relates back to how we are structured in terms of our technology stack.
Gabriel Dechaine: Well, it's not fun stuff to spend on, but investors don't want under investment in that. So I'm sure it's good. My last question is on the dividend. This is a pretty pivotal quarter for you, a big transformation for the company. Under what conditions would you revisit the dividend to the extent that your capital position is fine, 10% plus on a standardized basis, but the internal capital generation might be weaker, because of investments, because of loan growth declining. So there's perhaps a need for capital build to invest in the future direction of the bank? What conditions would need to be present for you to take another look at the dividend and maybe, you know, alter it?
Eric Provost: In fact, Gabriel, if you take a look, the dividend quarter, the dividend decision is taken every quarter. So we always look at what the payout ratio of the bank. Currently, it's higher than where we'd like it to be, especially in a context where we have an impairment charged in the quarter. But if you look at the capital of the bank, as you mentioned, we’re really well positioned at 10.4%. If you look at standardized, in fact, it's going to be one of the slides this afternoon, so I'm giving you that in advance, but you're going to see that we're well placed there versus the rest of the industry on apples-to-apples basis. But we do expect that as rates go down, we're going to see a catch-up and a rebound in our volumes as well. So overall right now, if you look on adjusted basis, we're at 52% payout ratio. It's slightly higher than where we would like to be. So that's why [Technical Difficulty] decides to stay at 47%. And this afternoon you're going to hear a lot about execution, efficiency ratio that we need to improve. So we have a plan to increase the profitability of this bank and that's going to support the dividend going forward.
Gabriel Dechaine: All right, great, thank you. Have a good, well, I guess we'll talk later today.
Eric Provost: Good to see you, Gabriel.
Operator: Your next question comes from Sohrab Movahedi with BMO Capital Markets. Your line is now open.
Sohrab Movahedi: Thank you. Yvan, can I just follow-up on Gabe's? When do you think you will probably do dividend increases again? Are you moving to some sort of an annual cycle?
Yvan Deschamps: We don't necessarily have a cycle, Sohrab. We really look on a quarterly basis. We've -- over the last few years, increased every six months. Right now, the payout ratio is relatively high in the context of the charges mentioned, we just decided to hold on this. So if there is no specific dates of increasing the dividend, we're going to take it quarter-by-quarter. And as I mentioned, we're looking to increase profitability, but in the short-term, we'll discuss this afternoon. But we have to invest if we want to make sure that there is a sustainable increase of profitability. So we're going to be careful with the dividend for sure.
Sohrab Movahedi: Okay. And if I can just clarify a few other comments that you made. I think you said you expect PCLs to remain in and around I think current levels. I think you said low-20 basis point range. I mean, obviously that is -- that's a ratio and it's unclear I think where utilization rates are going to be. Can you give that PCL guidance more in dollar terms?
Yvan Deschamps: In dollar terms, in fact, if you look at this quarter, we have $17.9 million. It is 20 bps, so it shouldn't be that far from that level. We're just, you know, being careful of not guiding too low for the next quarter, because we see the industry there's been some credit migration. So we believe that the level where we are is probably close to what we should expect next quarter.
Sohrab Movahedi: Okay. Yvan, you had also mentioned some savings and I think you mentioned the $20 million, I think you said $20 million of savings. Was that an annual number or is that per quarter?
Yvan Deschamps: I would like it to be on a quarter, but that's on an annual basis, Sohrab so what we announced in Q2 and what I described, in fact, your $20 million is accurate for the next 12 months. But it does include some restructuring and severances that we have in Q3. So we outline on the, sorry, I don't recall which slide of the presentation, but you're going to see there's $7 million of additional severances in Q3 for what we action in May. But if I include the annual savings of that restructuring, so Q2 and Q3, what we've done to this point, is about $20 million of annual savings. Unfortunately, from a savings perspective, a big portion of the impairment relates to elements that were not depreciated like goodwill or [ARRB] (ph) impairment, the $23 million was just an asset that was sitting and not depreciated. So it's in fact $20 million on about 40% of that impairment charge, because about 55%, 60% of it didn't have any expense like goodwill being, the main one.
Sohrab Movahedi: And so, I mean, Eric talked about taking a hard look at the foundational tech stack. Is $20 million enough, Eric, to kind of -- to get you to the upgrade you need, or will you have to spend more than these savings?
Eric Provost: Well, thank you, Sohrab, for asking. We'll go in better clarification, I believe, this afternoon, but for sure, like, we already have a pace in terms of investing in our technology. So what we're going to be saying is we're going to accelerate this pace, and part of this $20 million is a portion, but also we will keep on simplifying and taking the right decision to simplify even further the organization. So hopefully generating more savings and position us better on a profitability standpoint.
Sohrab Movahedi: Okay, and one last question from me. Yvan, can you just remind me what the goodwill that you wrote off was associated with?
Yvan Deschamps: Yes, I'll start by saying, Sohrab, you should not necessarily see this as an impairment of that specific goodwill. Again, it's applied to the goodwill of the bank overall, no matter what it was coming from. But the goodwill that was left on the balance sheet came from the equipment and inventory financing acquisition that we had done in 2016 and 2017. So it was on the commercial side, but again, this has nothing to do with the value of the commercial strength and the value of the business, which is the biggest strength probably we have at this bank.
Sohrab Movahedi: And I'm sorry, I haven't looked at it, but you're saying that you don't have any more goodwill left on the balance sheet, is that correct?
Yvan Deschamps: Exactly. The first thing you do with an impairment which impacts the whole bank is to eliminate the goodwill first and that's what we've done. So we're left with no goodwill.
Sohrab Movahedi: Okay, thank you very much for taking my questions.
Eric Provost: Thank you, Sohrab.
Yvan Deschamps: Thank you, Sohrab.
Operator: Your next question comes from Paul Holden with CIBC. Your line is now open.
Paul Holden: Thank you. Good morning. First question is with respect to the inventory, finance, business, and not so much from a credit perspective, because I understand the layers, the multiple layers of protection you have from credit. I just want to know the health of those dealers you're dealing with and that's more of a, you know, do you get a full recovery and loan growth when rates actually do come down? You know, reading a number of things that dealers are struggling, because demand is low. So just wondering how you're viewing the health of the sort of the customers you have across that platform?
Eric Provost: Yes, thank you Paul for the question, it’s Eric. Well, we're very comfortable actually with the current behavior of our dealer base. Of course, the market has normalized, and then for sure it's a softer market in terms of consumer demand, but this is why our dealer base have been prudent in terms of restocking their inventory during the fall and the winter season. So -- and right now, line utilization stand at 49% when actually, historically, at the end of Q2, those lines should be higher 50s. So our dealer are behaving as we would expect in terms of being more cautious, not restarting too much. And right now, they are turning some products. So, we'll see during the season, but we expect those levels of assets to act as they did last season and continue to reduce and should expect a bounce back in Q4, but again not back to historical like until we see interest rate easing in the U.S., we believe that the dealer will keep a prudent approach towards rebuilding their inventory.
Paul Holden: Okay, so I think that's clear. When we do see lower rates in the U.S., whenever that's going to be, you would expect a full recovery in those lines because the dealers are going to be, they're healthy enough they're going to last through the sort of this soft patch, if you will.
Eric Provost: Yes, and then we've always kept a prudent approach in terms of how we underwrite risk, how we structure our credit appetite during those, around those dealers, and like we haven't changed our approach. So we keep that prudent pace and we keep growing our dealer base and we'll be ready for the rebound to actually increase those assets level.
Paul Holden: Got it, okay, that's great. And then I got a similar line of questioning on the retail lending portfolio. I mean, some modest upticks in PCLs and impairments there, but wondering what kind of insights you can give us into how you feel about the health of the Canadian consumer, like big topic of discussion, I think for obvious reasons. So any data points and observations you can provide there would be helpful.
Liam Mason: Thank you, Paul. It's Liam. Our client base is, you know, we have seen some uptick in terms of delinquency being on the margin, but for our portfolio we're really well positioned. I think Yvan went through the mortgage portfolio in terms of 59% insured, low loan to value, even our old portfolio, which is near prime, is behaving very well. And on some of our other key assets like investment loans, we're seeing with the uptake in the markets, good performance there. So for us and our customer base, although there are broader pressures in the economy from an interest rate perspective, our portfolio is holding up really well.
Paul Holden: Okay, great. And then last one from me on the multi-residential loans. It seemed to me that there's a good level of support and demand there and seeing some peers put up very healthy growth numbers. Just wonder if there's some difference in the composition of your portfolio there or basically trying to get it to like, why aren't we seeing better growth and multi-residential loans given the broader growth in that category?
Eric Provost: Yes, thank you, Paul, it’s Eric again, for the question. Our commercial real estate portfolio year-over-year has actually decreased by 8%. And then this is explained in larger parts, because we have a specialty that tackles construction in terms of a mix of that real estate portfolio. Actually the mix between our Tier 1 developers that actually are waiting for a need and interest rate to relaunch new projects. And the fact that we've been paid out in terms of construction projects that have completed in that multi-residential housing segment, but usually like in terms of the economics for us to take those stabilized assets into our balance sheet, like don't quite make sense on the economics standpoint. So for us it's just to be still well positioned out there with the team and we believe that once we see that ease in terms of interest rate, we're going to see those housing projects start back again at a better pace and the team is positioned to keep on boarding those at the construction level.
Paul Holden: Okay, again, helpful. Alright, thanks for the time and I will see you later today.
Eric Provost: Thank you, Paul. See you.
Operator: Your next question comes from Doug Young with Desjardins Securities Markets. Your line is now open.
Doug Young: Hi, good morning. Just maybe continuing with that, you know, I think we've heard this from a lot of financial institutions that, you know, there needs to be an ease in interest rates. And so I'm curious when you think of the multi-residential properties or your dealer network and dealer loan book, what level of ease really is going to have an impact on the growth is fit 25 basis points, 50 basis points or does it need to be more drastic?
Eric Provost: It's a great question, Doug. It’s Eric again, you know, we believe that it's going to build momentum as soon as we start seeing some easing, because I believe that's going to send a signal in Canada. I'm talking about in terms of -- to the consumers is going to provide more clarity in terms of the directional of those interest rates. So we believe that with the shortage we're experiencing across Canada in terms of housing supply, this could be the start of a signal for our developers to relaunch projects and again to have a better sense of the economics and the type of profitability they can generate launching those projects. So again, not clear in terms of how quickly the relaunch will occur and how deep of a contradiction we need to get to actually go back to a -- to very sustained level, but for sure like just the knees will provide some positive inflow to that sector.
Doug Young: Okay. And then just a few other ones. Going back to the -- just the -- these hopefully are relatively quick, but the income from financial instruments. What runs through that? Is that just interest income on your liquidity blocks? Like what's actually in that line? Because you talked about the market impacting that, just specifically what market.
Yvan Deschamps: It's in fact composed of two elements, so pretty much the trading aspect to it and also the return you get on that portfolio. It's mostly composed of fixed income elements as is aligned with our capital markets business. So this quarter is really a good quarter from that and we expect that if the market sustained we're going to continue doing good, maybe not at the same level, because again Q2 was exceptional, but we have a great team that is driving those revenues and we would expect under good market conditions to continue.
Doug Young: So is it half and half trading and interest income or is it two-thirds, one-third just trying to get a sense?
Yvan Deschamps: In fact it's going to depend on a quarterly basis, so it depends how is the market if they do more trading versus conditions in the market. So I don't want necessarily pinpoint that percentage, because that may evolve depending on the quarter.
Doug Young: Okay. And then back to credit, I'm just trying to understand the release in performing loan allowances. And it's mostly commercial. This is despite the uptick in impaired impairments in commercial and I think on the commercial book your PCL rate in the quarter is 35 basis points and that was 24 in 2023. So we're definitely seeing an acceleration there. So I'm just trying to understand the release in commercial as it relates to the uptick in the impairments?
Liam Mason: A couple of things. Net, net. Obviously, we've got migrations and positive write-offs and clean-ups of some files in commercial. We've been very pleased with our workout results for that in terms of recovery. But the improvement and release was really within the personal book as we've seen investment loan products and investment markets improve slightly and that's given us a better position with regard to ATL on the investment loans.
Doug Young: And have you made big changes to your FLIs or to your weightings in the different categories or is just a natural evolution of the models going like punching one quarter forward? Any other detail you can provide?
Liam Mason: Yes, no, it's a good question and I just want to remind everyone that we have been very disciplined over the past few years in terms of maintaining and building our reserves. We never, you know, a few years ago, and I've spoken to this in the past, we didn't release, we've maintained it, we have a consistent and prudent reserving standard, we haven't changed those. And I'm really pleased with where we are because over the past year, while our ACLs were up 11%, the industry was up 3 times that. And that reflects that our PCLs run about half the industry and the overall strength in our underwriting and credit standards as Eric alluded to earlier.
Doug Young: Okay, and just last, yes, going back to the write-offs on the balance sheet, I think there's another $186 million of software and other intangibles, there's another almost $87 million in premise and equipment. What do those, you know, relate to? And then obviously you went through a full impairment test, so I don't imagine those get right down next quarter. But is it at risk if things don't unfold as you plan, that there is additional risk to some of these asset classes to be written down, just hoping to get some color.
Yvan Deschamps: The first element, thank you, is a good question for clarification for everybody. So first in impairment testing is usually done to validate the value of goodwill on the balance sheet. So we won't have any goodwill anymore. So then it's going to become, you know, an assessment of each specific element. But what you find in those intangibles on the balance sheet are mostly composed of two elements. IT investments that we've been doing in our systems, which are systems we use. So as long as we use those systems, we're going to keep them on the balance sheet. And there is also customer relationships through the acquisitions that we've done. And those are in solid businesses as well. But overall, it's mostly related to IT development and investments in our system going forward. So again, it should be relative. You should not expect a big variation or impairment charges going forward unless there's a specific project on one of, but I don't have any right now, but there's no big other charges that should be coming.
Doug Young: I appreciate it. Thank you.
Liam Mason: Thank you, Doug.
Operator: Your next question comes from Lemar Persaud with Cormark. Your line is now open.
Lemar Persaud: Yes, thanks for taking my questions. I won't ask about specific details about the restructuring since, I'm sure you'll talk about it at the investor day, but just on that, can you talk about the potential for additional restructuring charges? I did see that you're calling out some additional severance in Q3, but I'm just wondering if this is the first of many or if this is a one and done type of situation? Anything you could do to help me think through that?
Yvan Deschamps: So thanks for the question. So I'll skip the impairment portion or specific charges. So we have some severance charges in Q2. We have some in Q3 as well that comes from a reduction of workforce we've done in May as well, so we outlined that in the presentation. We're going to continue to evolve and transform that business with an intent to make it more efficient overall. That's going to be a big team that we're going to discuss this afternoon. So there may be some others that are going to come, but if they come, they're going to come with improvements overall on a sustainable basis for the bank.
Lemar Persaud: Anything on the potential of magnitude? Like should we expect like, or is this like the initial one that we, you've taken this quarter, so the $40 million is like the big chunk, and then we could go back to more kind of what we've historically seen at Laurentian where they're kind of like, you know, $6 million, I think you had $6 million in Q1. So this is like the primary big one and then smaller charges. Is that a fair way to think about it, if there are more?
Yvan Deschamps: I think it's a fair way of saying that, because as I mentioned, most of it should be related to potential small charges we may incur, but definitely nothing in the quantum that you've seen this quarter.
Lemar Persaud: Okay, great. That's helpful. Thanks. And then my next question, just want to go to your slide 11 here. There's some weakness outside of the income from financial instruments. So just looking at the list here, card services, fees on investment accounts, insurance and other. Can you help me think through about what's driving some of these other kind of broader base weaknesses across these other lines? And, you know, because if we see some normalization in the income from financial instruments, then these ones will start to matter a little bit more as we look forward. So, can you talk to me, like, is there like any reason to expect that some of these line items have kind of run rated lower? Maybe that's the best way to ask it?
Yvan Deschamps: Yes, thanks. And I'm happy you asked the question. I can provide a few details, so if I look quarter-over-quarter, definitely income from financial instruments has been the big gainer versus Q1. On the other side, you mentioned the card services. The card services is in fact seasonal, because as you know, Q1 includes Christmas and all of that, so that's pretty big season. So there's a seasonal impact in those revenues. And lending fees is lower as well, and that goes with what Eric described a few minutes ago with the slowdown of the developers in commercial real estate awaiting rates to come back to slow, sorry, to reduce. So technically, lending fees is a question of timing. The cards is a question of seasonality. So technically, I'm not overly concerned. The key point going forward is that we -- you should expect the $20 million yearly reduction, so $5 million per quarter related to the business that we've been selling to industrial lines. So you're going to see $5 million reduction starting in Q4. We expect that transaction to close in the first days of August.
Lemar Persaud: And where does that reduction go through?
Yvan Deschamps: That one would be in the -- yes, fees and securities brokerage commissions.
Lemar Persaud: Okay, because like the card services revenues, I appreciate the seasonality, but it's still down 11% year-over-year. And then also these fees and investment accounts specifically down 15% and insurance down 13%. So even if I look at the year-over-year, some of these are still weak. Maybe I'll follow up offline on that one.
Yvan Deschamps: Yes, happy to do so.
Lemar Persaud: Okay, and then, you know, final one for me, I think the message is that, you know, when you look at the bank right now, if it's 10.4% CET1 ratio, you're still well positioned from a capital perspective to pursue organic growth. And if we see rate cuts coming, you can capitalize there and still execute on the strategic refresh. Like this 10.4%, I think the message is that that's a sufficiently strong CET1 ratio. So we should look at the pause on dividends to preserve capital, so that you can continue to grow the business. It's more linked to the elevated payout ratio. Is that a fair statement and fair characterization?
Yvan Deschamps: Yes, I think your questions include pretty much all the elements I would have given, so I think it's a fair assessment.
Lemar Persaud: Okay, thanks for the time. I appreciate it.
Yvan Deschamps: Thank you, Lemar.
Operator: [Operator Instructions] Your next question comes from Stephen Boland with Raymond James. Your line is now open.
Stephen Boland: Thanks. You went through a number of the business lines on the commercial side. Maybe just construction and land. That portfolio continues to decline. So I'm just wondering if it's the environment, your appetite or competition?
Eric Provost: Yes, thank you, Stephen. It’s really the environment as a whole, because the pace we're getting repaid in terms of completing projects versus the new one being launched is unequal. So right now our Tier 1 developers are awaiting a need in terms of interest rate level to launch those new projects. And we believe we're very well positioned to capture on that rebound and catch that momentum. So the team is ready for that. So land and construction are definitely core for us to continue and grow into future development. And we're just awaiting a better macroeconomic environment to do so.
Stephen Boland: Okay great. And more just a question on agenda just for the investor day at 1 o'clock should we expect a press release before that, a new deck, or is that all going to be provided at 1 o'clock? I'm just trying to see if there's going to be more disclosure ahead of that.
Liam Mason: Yes. No, no.
Eric Provost: Sorry for that. So it's Eric. Yes, you're going to get a press release and a deck prior to just 1 o'clock before we start our Investor Day.
Stephen Boland: Okay. Thanks very much, guys.
Eric Provost: Thank you.
Operator: Thank you. That's all the time we have for questions. I would now like to turn the meeting over to Eric.
Eric Provost: All right. Thank you for being with us on this call today. We're focused and determined to execute our strategic plan. We're fully aware of our opportunities and the challenges we face only reinforce the determination of our institution. We will continue to build a robust organization, prioritizing simplicity and delivering enhanced value to all stakeholders. We hope you'll be able to join us on our Investor Day presentation via webcast at 1:00 p.m. today. If you aren't already, you can register on our website under the Investor Relations section. Merci beaucoup bonne journee.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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