Laurentian Bank (LB.TO) has made significant progress in its strategic plan, as discussed by CEO Eric Provost during its quarterly financial results call. The bank has divested its full-service brokerage to iA Private Wealth and announced the sale of its discount brokerage to CI Investment Services.
Despite a decrease in loan volumes and the expectation of a slight decrease in the loan book for the next quarter, the bank anticipates loan growth to resume in 2025. Adjusted earnings remained consistent with the previous quarter, and the bank has maintained a strong capital position with a common equity Tier 1 ratio of 10.9%.
Key Takeaways
- Laurentian Bank has divested its full-service brokerage and discount brokerage, impacting future brokerage fee revenues.
- A new Head of Customer Experience has been appointed to enhance customer service and decision-making.
- The bank’s commercial real estate pipeline remains healthy despite low levels of new project launches.
- Loan volumes decreased by $1.2 billion, but the bank managed deposits effectively.
- The bank expects a stable net interest margin (NIM) and a slight increase in the efficiency ratio for the next quarter.
- Provisions for credit losses are anticipated to stay in the high teens to low 20s basis points.
Company Outlook
- Loan growth is projected to pick up again in 2025, influenced by potential rate reductions.
- Other income will decrease due to the sale of brokerage activities, with a short-term impact of $0.01 on the next quarter’s earnings.
- The bank is focusing on collateralized loans to mitigate potential recovery rate surprises.
Bearish Highlights
- The divestiture of brokerage services will negatively affect brokerage fee revenues by approximately $4-5 million.
- The bank is not considering a share buyback, opting instead to support organic growth in commercial loans.
Bullish Highlights
- The bank’s capital deployment strategy focuses on specialty businesses with healthy margins and returns.
- Income from financial instruments reached a record high in Q3, driven by strong trading activities.
Misses
- Loan volumes have decreased, and the bank anticipates further pressure on net interest income (NII) in the next quarter.
- Increased impairments in the loan portfolio have raised concerns, although the company maintains confidence in the portfolio’s quality.
Q&A Highlights
- The bank expects retail deposits to inflect and customer focus to increase, with impacts likely visible in 2026.
- Elevated impairments are attributed to broader headwinds in the commercial sector rather than weaknesses in collateral or borrower ability to pay.
Laurentian Bank continues to execute its strategic plan, focusing on building a more digital and efficient organization. The bank’s leadership is confident in its credit book and remains committed to providing value to its shareholders through specialized niche businesses and prudent capital management.
Full transcript – None (LRCDF) Q3 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 Raphael Ambeault, Head, Investor Relations. Please go ahead, Raphael.
Raphael Ambeault: [Foreign Language] Good morning and thank you for joining us for the Laurentian Bank 2024 Third 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 third quarter financial results will be presented by Yvan Deschamps, Executive Vice President and CFO, after which we’ll invite questions from the phone. Also joining us for the question period is Christian De Broux, Executive Vice President and CRO. All documents pertaining to the quarter can be found on our website in the Investors 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 2 of the presentation. I would also like to remind listeners that the Bank assesses its performance on a reported and adjusted basis and considered both to be useful in assessing underlying business performance. Eric and Yvan will be referring to adjusted results in their remarks unless otherwise noted as reported. I will now turn the call over to Eric.
Eric Provost: [Foreign Language] Good morning and thank you for joining us. Since the introduction of our strategic plan in May, we have remained focused on implementation and execution in order to achieve the results and targets we’ve set for ourselves. To that effect, I want to extend my thanks to all our team members for their commitment towards the plan. Let me walk you through what we’ve accomplished so far. In capital markets, we successfully completed the divestiture of LBS Retail full-service brokerage to iA Private Wealth that we announced in April. In addition, earlier this month we announced the sale of LBS discount brokerage to CI Investment Services. We are focusing on where we have expertise, scale and where we can win and both of these transactions are directly aligned with these objectives. In Personnel Banking, we created a new position, Head of Customer Experience. This role will improve and enhance the customer experience and brings our employees and decision-making closer to the customer. In commercial banking, the seasonality impact in inventory financing was strong, bringing the utilization ratio to 43%, about 10% below historical levels. The lower utilization rate are proof of our dealers’ ability to turn their inventory as well as their prudence in restocking. Furthermore, our sales team kept their momentum in increasing our footprint, reaching 440 new onboarded dealers year-over-year, representing an increase of 7%. As for commercial real estate, we’re still observing low levels of new projects being launched. Our pipeline remains healthy with insured multi-residential projects particularly strong. Our teams are well positioned for the rebound, which remains dependent on the pace and level of interest rate reductions in Canada and United States. Concerning the leadership team, following the announcement of Liam Mason’s upcoming retirement at the end of the fiscal year, we’re thrilled to welcome back Christian De Broux to Laurentian Bank as our new Chief Risk Officer. Christian, who used to be Laurentian Bank’s Chief Credit Officer returns to us after having spent over four years at a global specialty finance company.
He brings with him over 30 years of experience in various risk oversight, management, and banking roles. We are excited to welcome him to our team and are eager to utilize his extensive credit knowledge and expertise in risk management. In terms of financial performance, our third quarter results were consistent with the previous quarter on an adjusted basis. However, we continue to face challenges with decreasing loan volumes. Despite this, our portfolio remains strong due to our conservative underwriting standards and quality collateral. As a result, provision for credit losses decreased quarter-over-quarter. Expenses remain high as we invest in technology and strategic priorities, but our adjusted efficiency ratio improved. Our common equity Tier 1 ratio also increased, positioning us well to redeploy capital in the future. Now, I will pass the call over to Yvan to review our financial performance. We maintain strict underwriting standards and have confidence in the quality of our loan portfolio, as evidenced by our 58% proportion of insured mortgages and a low loan-to-value ratio of 48% on the uninsured portion. Credit loss allowances on slide 17 increased to $224 million, mainly due to higher allowances on impaired commercial loans. On slide 18, credit loss provisions were $16.3 million, impacted by a credit migration on commercial loans. Impaired loans on slide 19 increased due to credit migration in commercial loans. Despite this, our disciplined underwriting practices and high level of collateralization on our loan book at about 93% allow us to withstand macroeconomic conditions and credit migration without significant impacts on our results. Looking ahead to Q4, we expect a slight decrease in our loan book, putting pressure on net interest income. Other income will decrease due to the sale of our retail brokerage activities and normalization of income from financial instruments. Net interest margin is expected to remain stable, and the efficiency ratio may increase slightly due to revenue pressure and ongoing investments. We anticipate credit losses to remain in the high teens to low 20s, and our capital and liquidity levels are expected to remain strong.
Sohrab Movahedi: Can you provide some reassurance that we won’t see similar issues at Laurentian? And could you give us more insight into the outlook for formations and whether negative migration in the portfolio will continue? Thank you.
Yvan Deschamps: Thank you, Sohrab. To address your concerns, the increase in CET1 this quarter was largely due to a reduction in loan volume, positioning us well for potential inventory financing in the future. Our capital position is strong, and our credit guidance remains consistent in the low 20s to high teens range. We do not anticipate any significant deviations from this guidance in the near future. Christian, would you like to add anything?
Christian De Broux: Thank you, Yvan. Our impaired loans are well-collateralized in commercial markets, leading to some volatility in GILs. However, our disciplined underwriting practices have kept ACL and PCL stable. We are confident in our guidance for PCLs going forward. Despite short-term uncertainties, we expect impaired loans to normalize with forecasted interest rate reductions.
Sohrab Movahedi: So, are you saying I shouldn’t worry about potential surprises in recovery rates on impaired loans in the next quarter?
Christian De Broux: Given our focus on collateralized loans, we do not anticipate surprises in recovery rates. Our loans are backed by high collateral levels, primarily in real estate and equipment.
Sohrab Movahedi: Could you provide more details on the collateral behind the new formations in the portfolio?
Christian De Broux: The collateral behind our loans is well-diversified, including real estate and equipment. Our new formations span various industries and geographies, reducing concentration risks.
Sohrab Movahedi: Thank you for the clarification.
Operator: Your next question comes from Gabriel Dechaine with National Bank Financial. Your line is now open.
Gabriel Dechaine: Hi. Can you provide more information on the income from financial instruments this quarter?
Eric Provost: Our strong performance in financial markets reflects positive trading activities and favorable market conditions, resulting in record earnings this quarter.
Gabriel Dechaine: What would be a more normalized figure for this line item?
Eric Provost: Historically, we have seen earnings around the $15 million mark, with this quarter being an outlier at $19 million. A more normalized figure would likely be closer to $15 million.
Gabriel Dechaine: And what can we expect in terms of credit performance in the upcoming quarter?
Eric Provost: Our guidance remains consistent with high-teens to low 20s for PCLs, similar to the previous quarters. We anticipate a quarter in line with Q2 and Q3.
Gabriel Dechaine: Understood. Just to clarify, the revenue from the mortgage servicing business that was sold was $4 million to $5 million annually?
Eric Provost: Yes, that revenue was generated on an annual basis. “Yep, yep.” Yvan will be taking that one. We will start with the deposit side of things. There was a noticeable decrease in deposits this quarter, which is in line with our loan activity. However, our focus on retail deposits has remained stable this year, showing growth over the past few years. On the loan side, market conditions, especially in mortgages, have been slow, but we are concentrating on retail deposits and have been successful in maintaining and growing them over the last several quarters.
Regarding the expected increase in retail deposits due to our digital initiatives, Eric mentioned during our Investor Day that we are looking at 2026 as a realistic timeline for that to happen. We are investing in our foundation to ensure a successful launch and impact. Additionally, we have created a Head of Customer Experience in retail to strengthen our relationships with our retail customers.
Lastly, in response to the question about issuing shares versus buying back shares, Yvan explained that we are strategically focusing on growing in commercial loans, which has a high return potential. We believe that deploying capital in these specialized niche businesses will bring strong returns for our shareholders. Therefore, we are comfortable with our current position and do not see a need to change our approach. Over the past year, our higher professional fees have been a significant factor in our expenses, with about half of it related to strategic projects and regulatory compliance projects. This pressure is not unique to us, as the entire industry is facing regulatory challenges such as B10, 13, 15, 20, federal budget changes, and Quebec language requirements. We are committed to being compliant and meeting our regulatory obligations. In terms of our construction and land portfolio, developers are cautiously waiting for rate cuts before moving on new projects, with low rise multi-res projects showing momentum. While we have incurred impairment charges related to headcount reductions and business sales, we are constantly evaluating areas of improvement and may undergo additional restructuring if necessary. Our credit quality remains a focus, with our watchlist trending down and confirming the quality of our portfolio despite some migration to impaired loans. Our larger commercial files have an average ticket of $15 million, so a few files can impact our results each quarter. During the call, it was mentioned that the bank has been operating at half the PCL level of other banks, with no indication of this changing in the future. Darko questioned if this lower level of impairments could be a sign of weakness in the underwriting process, but Christian clarified that headwinds affecting commercial lending are the main cause of impairments. Despite these challenges, the bank remains confident in its credit book and is sticking to its PCL guidance. The call concluded with Eric reaffirming the bank’s commitment to its strategic plan and the importance of investing in a digital and efficient organization for long-term success.