Laurentian Bank of Canada

Thank you. Good morning, and thank you for joining us.

Today's opening remarks will be delivered by Rania Llewellyn, President and CEO; and the review of our first quarter 2021 financial results will be presented by Francois Laurin, 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, Executive Vice President and Chief Risk Officer; Kelsey Gunderson, Executive Vice President, Capital Markets; and for the first time, Eric Provost, Executive Vice President, Commercial Banking.

Thank you, Susan, and good morning, everyone. Thank you for joining us today.

We hope you and your loved ones are keeping safe and well. Our main focus continues to be ensuring the health and safety of our employees while supporting our customers and communities during these challenging times.

The first quarter of 2021 marked my first full quarter as CEO of Laurentian Bank, and I am pleased to report that we had a good start to the year, delivering adjusted net income of $47.6 million, which represents an increase of 12% quarter-over-quarter and 29% year-over-year with adjusted earnings per share of $1.03. Our results were driven by a strong performance in capital markets, the resumption of growth in commercial banking, lower provision for credit losses and strong cost discipline.

We continue to take a cautious approach towards PCL, considering the high level of uncertainty in the economy. While there is optimism related to vaccines, there is also concern surrounding new variants.

To mitigate this uncertainty, the bank continues to maintain healthy liquidity levels and strong capital position with a CET1 ratio of 9.8%. While I am pleased with our overall performance for the quarter, we do not expect this year of transition and strategic refocus to be a straight-line for success.

There is much work to be done to position Laurentian Bank for sustained growth and profitability. You will recall last quarter, we established 3 strategic pillars that are guiding our efforts and actions.

They are: number one, cultivating a customer-first culture. Number two, creating a more agile organization with an innovative mindset; and number three, engaging and empowering our employees to work collaboratively as one team.

As we work towards establishing a renewed strategic direction, we set out a number of goals last quarter that I want to update you on. The first goal was the renewal of our senior leadership team, in our effort to put the customer at the center of everything we do.

I am pleased with our progress on this front as we have recently added 3 new external hires and an internal promotion. Sebastien Belair, Chief Human Resources Officer, will drive the bank's strategy of engaging and empowering employees to work collaboratively as one team.

His focus will be on building high-performing teams in a diversified and inclusive workplace. Sebastien joined the bank on February 2.

Thank you, Rania, for your kind words. Good morning, everyone, and Bonjour a tous.

I would like to begin by turning to Slide 7, which highlights the bank's financial performance. Total revenue increased by 4% and adjusted noninterest expenses declined by 7%, driving positive operating leverage from last year.

Adjusted net income was $47.6 million in the first quarter of 2021, 29% higher than a year ago and 12% higher than last quarter. Adjusted pretax pre-provision income was 38% higher than a year ago and 5% higher than last quarter.

Francois. At this point, I would like to turn the call over to the conference call operator for the question-and-answer session.

Lunish?

I was intrigued by the commentary on the mortgage business. Rania, I understand the fixed will take a while, but I'm just trying to understand better sort of your assessment of the reasons for the lag in volumes.

You talked about reviewing end-to-end processing and also connecting it to prepayments. And I'm just curious if you could go into that in a little more detail.

Thanks, Meny. What I would say is, as you've seen, many of the other institutions have really benefited from a robust mortgage asset growth, and we haven't benefited from that.

So as we're undergoing the detailed review of our operations, this was one opportunity that came to light very quickly. And so we are currently mapping out the entire end-to-end process just to see -- reduce the number of touch points and understand what those touch points are, identify opportunities, where we can introduce automation across the process.

And really ultimately get a faster time to yes as well. And so that should drive both growth as well as improve the customer experiences -- customer experience and reduce cost efficiencies as well.

So that work is currently under review. And as I said in my remarks, we're hoping to report back our progress in the next couple of quarters.

Okay. And just to dig into that.

I mean when you talk about end-to-end process, is the thinking that it's just -- it takes too long to get to yes, and that is impacting some of the performance that we're seeing. Am I getting that correctly?

And the connection to -- I think Francois talked about elevated prepayments. And so just trying to understand how that end-to-end process is impacting the prepayment specifically?

Yes. So what I would say, Meny, and Francois, welcome to hop in, is, ultimately, yes, consumer demand has changed.

Everything is a move to faster time to yes. And so there's definitely an opportunity where we're lagging behind, which is why we're doing a deep dive on mortgages.

And as you know, there's a couple of components, but that's definitely what we're aiming to do is to elevate our end-to-end processes, improve our customer experience and get a faster time to yes. Francois, did you have anything else to add?

No. No, I have nothing else to add on that point, Rania.

Okay. And then if I could just ask another question.

Just in terms of cost optimization, sounds like definitely a priority. And I'm wondering, again, as you look across the organization, what are the key areas where you think there is opportunity here to optimize?

Yes. So it's part of the comprehensive strategic review that we're currently undergoing, and cost optimization, Meny, as we mentioned, is definitely one that's important to us.

I would say in terms of early observations, procurement and vendor management is definitely an area of opportunity that we're going to do a deeper dive on. The other one I would say is the work-from-home environment and the pandemic has really proven that there's an opportunity for us to build hybrid working arrangements, which will also create cost optimization opportunities in terms of looking at our real estate footprint.

So I'd say those are kind of the two early observations, but we'll be reporting back once the comprehensive review is completed.

I won't ask that many questions because we got you coming to our conference at the end of the month. So -- but I'll stick with the mortgage topic here.

And good to hear you're highlighting some of the changes that you're putting into place. And -- but just on the quarter, what we saw can you quantify the prepayment penalty benefit?

And can I connect the dots in such a way that you have prepayment, but your mortgage balance sheet went down? So that's people that are leaving the bank, is that they're going to somewhere else to get the loan?

Is that kind of the phenomena?

Yes. So Gabriel, thank you for the question, and I'm really looking forward to the conference at the end of the month.

And hopefully, we'll be working -- meeting soon. I'll pass it on to Francois, and then I'll add a little bit more color as to what we're doing moving forward.

Francois?

Thank you, Rania. We have the impact year-over-year of the prepayment in the NIM is basically half of the difference in NIM.

So we went from 1.81% last year to 1.84%. So basically half of it is due to the prepayment.

Okay. And then like a trend...

I will refer to Rania to complete the answer in the year...

Yes. So what I would say, Gabriel, the reason why we're doing a thorough view.

So obviously, it's a trend we're trying to reverse. We're doing a thorough analysis to understand retention versus piles of cash where people are paying off their mortgages, what their reasons are.

But what we do know is that this is an area of focus, and it's an area of priority and opportunity for us. We've got multiple channels by which we deliver mortgage services to our B2B bank as well as through our retail network.

And so it's a high priority for me and for the institution. And that's why we're embarking on this end-to-end process, because we know we're lagging, and we know we need to reverse the trend.

Okay. Great.

And just the -- switching over to the commercial side of the business saw some growth there. In floor plan -- or I guess, equipment finance or inventory finance, sorry, is that an indication of some of the supply constraints diminishing and your dealers are close to the normal.

And what the outlook would be for the rest of the year in that business? And then I guess, CRE, in particular, multifamily project lending has been growing for the last few quarters.

Can you tell me is that condo development or what?

So I'll start off, Gabriel, and then I'll hand it off to Eric Provost, who is our new EVP of Commercial Banking. So what I would say is, as you know, our consumers have been building up quite a bit of liquidity.

And what we're seeing is that consumer demand for recreational boats and vehicles remains high in the current environment, which is resulting in the nice resumption of growth in our inventory financing that you see on slide -- I believe it was Slide 13. The supply chain challenges, though, are still here.

And so there is an expected delay in terms of the full recovery in inventory financing. And so I would say that the seasonality will start kicking in, in Q3, Q4, but in terms of our forecast, the pipelines are quite strong.

And so we're feeling relatively comfortable with the next quarter, but the supply chain challenges continue. But I'll hand it over to Eric to provide a little bit more color both on the inventory financing as well as the multi-res portfolio.

Thank you, Rania. Yes, Gabriel, on the inventory finance side, for sure, we do expect lower credit line utilization throughout the spring and summer season.

As Rania mentioned, there's a very high demand on those products, and the OEMs are still catching up with that situation. So expect lower usage for Q3 and Q4.

In terms of the question regarding multi-res, like it's been a strong Q1 in terms of growing that portfolio on the insured side. Pipeline is still strong, but this is really multifamily type units and not condo related.

Okay. Low rise of 4 units or 5 units or something like that, just trying to -- just trying to measure.

Just wanted to go back to the expenses. And just so I understand how to think about this over the next year.

Because I think in the opening comments, it was mentioned, it's not going to be a straight line. This quarter was obviously much better than what we saw from a trend perspective last year, but there's a lot of projects still.

It feels like ongoing and the review is still ongoing. So how do we think about -- because the expense line has bounced around quite a bit.

And there was a material decline in the unusual items this quarter, which is great to see. Just trying to get a sense, is that indicative of what to expect?

And if you can provide any thoughts in terms of mix ratio or direction on adjusted mix that would be much helpful?

Yes. So what I would say -- Doug, thanks for the question.

And as I mentioned in my opening remarks, given like you said, we're undergoing the strategic review in the organization. And so it's hard to predict at this point.

In terms of what it's going to look like. We do know it's likely not going to be a straight line, but I think the key thing is the cost discipline is here to stay.

So the heightened focus around discretionary spend is definitely here to stay. But in order to ensure sustainable growth and profitability, we'll be pivoting very quickly to activating some of the cost optimization opportunities that we'll be identifying.

And so that would be what I would say in terms of a forecasting perspective, and we'll continue to report back on what these cost optimization opportunities are. And sorry, Doug, what was the second part of the question?

I apologize.

Well just -- no -- sorry, I kind of droned on, it's my fault. No, it's just around the expense side.

And so there was a big decline in the material unusual items this quarter. And so is there anything that you foresee over the next few quarters in terms of charges from decommissioning systems or you're looking at the mortgage end-to-end process?

Is there going to be any large chunky items that you would consider unusual that you foresee over the next few quarters?

Yes. So again, Doug, it's really hard to forecast at this point.

We're still undergoing that thorough review, and we'll report back when things get clearer, for sure.

Okay. And then just on the PCL side or allowance side, there was a small release in the performing ACLs.

It looks like it was more personal than commercial. Your remarks suggest that there's obviously an improvement in the economic outlook, but also you've probably reined in the level of release that otherwise would have occurred.

And Francois, I apologize. I think you mentioned maybe there was an increase in the weighting to the downside scenario.

I'm just trying to understand what the offsets were that would have reined in the amount. And then if you can just talk a bit about what you're seeing in the personal and commercial from the ACL side on the performing loan side?

Sure. So I'll start off and then pass it over to Liam.

I think just a couple of key messages is, number one, we're adequately reserved. We've always taken a consistent and conservative approach and very disciplined in terms of our underwriting as well as we have a very diversified portfolio that highly collateralized.

I think what's really important to note is that we were very gradual in our ramp-up in 2020, which is consistent with our conservative approach. And in terms of a forecast, we'll be doing a gradual ramp down in 2021 as things unfold from an economic outlook perspective.

So I'll pass it over to Liam to kind of add a little bit more color, particularly around ACL.

Thank you, Rania. Gross impaired loans were very stable versus last quarter, stable watch list, and we're not seeing a lot of new formations.

Doug, you will see in terms of the stages, the drop in -- and I think Francois highlighted this in his comments. The drop in stage 2 mortgages, that's due to a decrease in clients with active payment deferral.

That's somewhat offset by -- as Francois articulated, by a higher unemployment situation. And then on the personal loan side, we're seeing a decrease in sort of stage 2 as we see the equity markets and some of our investment loan product improved.

We are overall very appropriately reserved, consistent with the current economic scenario expectations, and we're taking a prudent, measured approach to how we manage reserves, and we'll continue to do so.

Just to clarify, you alluded to the weighting. We kept the same weightings as in the previous quarter for the economic scenarios, which are high skewed towards base case and downside risk cases scenarios.

So you have something...

Okay. Okay.

And then if I can just sneak another one in. The AIRB conversion process, can you just update us where you stand with that?

Yes. So again, as part of the comprehensive strategic review underway, we're looking at all of our key projects.

So AIRB is definitely one of them. And so once we complete that thorough review, we will be coming back with some comments on that.

And so there's no update on timing related to that project at this point?

Yes. So as I've kind of stated publicly that our comprehensive strategic review, we will be coming back at the end of the year.

However, if there are decisions that are made between now and then or any priorities that surface, we will be updating you in due course.

First question I want to ask is regarding how you're broadly thinking about potential uses of that excess capital you highlighted in your prepared remarks, that $300 million. And appreciate that some of it is going to be based on the completion of your strategic review.

But OSFIs, likely -- at least, in my opinion, OSFI is likely to move those capital handcuffs before that your stock is still trading at a significant discount to book value. So how do you think about that sort of return to -- potential return of capital to shareholders versus holding on to that capital to execute on your strategic priorities?

Yes. So I'll kick it off, Paul.

What I would say is there's -- our #1 priority will be organic growth opportunities that we will identify as part of that comprehensive strategic review. And so that will be our #1 priority that we're going to be focused on going forward.

If there's any tuck-in opportunities for acquisition opportunities that are in line with our strategic direction of the organization, we'll have to be opportunistic. But it really gives us the flexibility to make the right decisions, but it has to be fully aligned to our -- the strategic review and the strategic direction that we're going to be taking Laurentian Bank towards.

Okay. That's helpful.

And then just looking at some of the details behind the fee income, surprised with the result on fees on investment accounts. It's a small number, but given generally rising AUA levels across the industry, I would have expected that to be a positive number, not a sequential decline.

So maybe just some comments on what's happening there.

Francois?

Paul, I don't have the details of this. If I may take it offline after, if you don't mind.

Sure. That'd be interesting to know.

And then sort of a follow-up question then. As I think about Laurentian's strategic shift to more advice-based branches or at least best to shift today.

Where does that -- like where would that show up in the fee income line? Because that's one of the lines that would have expected to show up on mutual fund commissions, obviously, would be the other, and that has trended positively.

But what are the key sort of income statement items I should be looking at to identify success in that part of the strategy?

Yes. So I can talk generically about the strategy and where we're at.

I strongly believe that the advice model is the right strategy. But there's still a lot of work that needs to be done on personal side.

We -- it needs to be repositioned. We need to really be clear on what our value proposition.

We have too many brands that face the market on the personal side. So we need to simplify that.

There's an opportunity for us to rationalize our products and then ultimately, similar to the mortgage book, is really to simplify and streamline our end-to-end processes. And one key element as well is doubling down on our digital solutions, which will then further cement and support our advice model strategy.

Francois, I don't know if you have anything else to add on that front.

Not at this point, no.

Okay. And last question for me is just regarding the changing funding mix, you benefit of higher securitizations this quarter.

Just wondering, will that be an increasingly greater proportion of the funding mix or as you sort of start getting the strategy, right, those branch-based deposits might start growing faster again, and that will become an increasingly higher proportion of the funding mix? Just I guess, to make the question more clear, how are you balancing the priority between branch-based versus securitization?

Yes. So I'll start off and if Francois has something to add, he can jump in.

What I would say is if you were to actually look at our personal demand deposits, those increased 19% year-over-year and 5% quarter-over-quarter. We made a conscious decision of reducing our third-party deposits, which are lower margin and replaced it with securitization.

And we're constantly proactively managing our deposits to really optimize margin and sources and make sure it's also matched up with our asset growth. Commercial deposits has also increased with the asset growth, so that will continue to be a focus.

And then last but not least, the digital strategy to drive deposits is going to actually be core to our success going forward. So those would be my comments in terms of where we're going on the deposit side.

Deposits will continue to be a core. And we'll continue to proactively manage it to optimize our margins as well as sources.

I understand it's very early days in your mortgage review, but just wondering if broad strokes, you can help us understand when we could see the narrowing of the performance gap in residential mortgages versus peers. Like what I mean, very broadly, is this a 2022 thing or beyond?

Yes. So Lemar, it is early days.

And so what I would say is as we're mapping out the process, we'll be highlighting some quick wins that will probably impact it in a positive way. But it really depends on what the review uncovers in terms of how much investment and the time line in order for us to actually set it up for success going forward.

But if there's any quick wins that will be identified, we'll be moving quickly in executing them. So really hard to give you a time line at this point, but stay tuned.

All right. And then, Francois, I think you mentioned the PCL ratio could improve for the balance of the year.

I just want to be clear here. Are you talking about improvements from Q1 21 levels?

Or are you talking about year-over-year, so relative to the elevated ratio we saw in 2020?

No. I'm going -- from where we are, we foresee the gross impaired loans peaking at the end of Q2, midyear.

And then throughout the year, we see -- we're cautiously optimistic about seeing improvement in the PCL quarter over -- clearly over last year because 2020 was higher, but sequentially cautiously optimistic.

Okay. Okay.

And then if I may just flip over to the subpack here and your noninterest expenses. And I'm looking at the other, so the footnote here suggests that increased amortization of acquisition-related intangibles.

So when I think about that, I think more of stability, but clearly, that number has bounced around from quarter-to-quarter. And this quarter looks quite low.

Is there anything -- maybe could you talk about what goes into the -- under other? And what could be driving some of that volatility?

Typically, year-over-year, there's been a reduction, but it's across all sectors, across many activities, across all departments of the bank, Lemar. So there's no one specific in terms of reduction in other others versus last year.

It's the cost discipline and measures that we started to implement last year because the -- obviously, the decrease is not -- is great compared to last quarter, but it's much higher compared to last year. So you see a progression in our cost discipline at the end of last year, and it continues this year.

So what type of expenses go in there, if I just may?

Sorry. I missed that.

What are you talking -- what expenses?

Yes. What type of expenses go into other others?

Well, you've got travel, corporate development, professional services, advisory, insurance costs and all other administrative expenses.

I wanted to revisit, Rania, your answer on the deposit side because I see it a little bit differently. When I look at the deposits, I mean, you mentioned strong growth in the personal slide.

And then there's runoff in fixed term, which we've actually been seeing that in other banks. And so when I combine all personal deposits together, I get your personal deposit growth to be rather weak relative to peers, and commercially worse.

So whenever the commercial deposits, the peers are up 15% year-over-year, you're down 13%. So I'm surprised that -- I mean, we're highlighting mortgages as being an area of strategic importance.

But I'm surprised that deposits haven't made that list as well. So can you talk a little bit more about the deposit or the lack of deposit growth at Laurentian?

Yes. So what I would say -- thanks, Darko.

I would say on the commercial deposits that we currently, for example, don't have cash management solutions. And so that's where the digital strategy becomes key, which is why Adam is not only looking at personal, but he's also looking at personal and commercial.

And so in order for us to drive more significant deposits in the commercial bank, we need to have a cash management solution for our clients. So you're absolutely right in terms of our performance on that front.

In terms of the personal demand deposits, again, as we said, we need to reposition our Personal Banking division in its entirety in terms of looking at rationalizing our products and making sure digital solutions are there. We have seen the growth, though, in terms of quarter-over-quarter and year-over-year, but it's an area that we are focused on leading with the digital strategy.

Does that answer your question, Darko?

Yes. I guess it does.

I mean we can -- I can dive deep in. I'm going to do a little more deep-dive analysis into deposits as well.

It's just -- that's my first brush look at it. It just looks like deposit growth, even though we're seeing the same trends with respect to the fixed term, it still doesn't seem as though your personal is growing as fast as peers.

And I'm wondering if it leads back to the same conclusion that you may be losing customers.

Yes. So what I would say, we have -- oh, sorry, go ahead, Darko.

No, no, go ahead, please. I was going to move onto another question, but if you have more to say on deposits, I'd love to hear it.

No, no. We're good, Darko.

Okay. And then with respect to the expenses, I mean the -- I'm looking at your Slide 10.

Premises of technology and other significant area of improvement. We're seeing that trend everywhere, also at the other banks as well.

But I'm starting to get a different story from some banks with respect to expenses going forward, and this is where I wanted to ask a little bit more about strategic spend. So in other words, most banks, and I myself included, are expecting a much stronger robust economy when we open up in the back half of the year.

And some banks are saying, look, we need to spend in that kind of an environment, right? We need to come out with new products.

We need to -- some banks are going to give you what an iPad for opening an account. We need to hire staff.

We need to train staff. We need to be back in the offices and so many of them are pointing to higher expenses in the back half of the year to really capture the resurgence of spending and to really go out and try and get customers back.

So I understand where you're coming from with a high-efficiency ratio relative to peers, but I just wanted to understand if tactically, you're also thinking about potentially defending and growing your customer base when we get a very strong economic recovery in the back half of the year. So can you provide any thoughts on whether or not there's a potential for a significant ramp-up in costs in the back half of the year rather than continued focus on sort of being stingy on costs?

So there's a lot in there. So I'll leave it to you to answer as you wish.

Yes. I think those are fair comments, Darko.

What I would say is a strong focus on cost discipline, but we did say it's not going to be a straight line. I think what needs to happen here, which is what we're doing, is to very quickly move from cost discipline to pivoting to cost optimization, which will require structural changes and that will give us the room to then reinvest in our strategic areas that we need to grow, right?

So these are all of the things that we'll be reviewing as part of our comprehensive strategic review, but we need to move quickly to pivoting a cost optimization, so we can take these costs structurally out of the bank, but growth is definitely our end game. That's what we need to do, but we need to make sure we're repositioned and refocused on the right priorities to set us up for growth.

And so do you think that you'd need to maybe hire some frontline staff? Or as you said, I think you have to rationalize your product lineup, but I'm wondering about if in that rationalization, you also have to come up with some pretty juicy offers.

So is there any possibility here that we see salary and employee benefits actually rise as you add frontline and as variable costs go up?

Yes. What I would say is we actually need to make sure our end-to-end processes are simplified and that we're actually actioning what we already have in the pipeline faster, so similar to what I said on the mortgage side, and that will generate growth.

So in the near term, I would say we will be very strategic in terms of where we add frontline staff. So in the commercial bank, where we see opportunities or in certain growth areas where there are well-oiled machines, we will definitely be very strategic in terms of where we add additional staff.

Thank you. In closing, I would like to leave you with a few key takeaways.

The bank's capital and liquidity positions are strong and its credit quality is sound. We are hard at work with a renewed leadership team to identify areas of focus and priorities.

Over the next few quarters, I plan on updating you on a review of our end-to-end mortgage process as well as some of the initial learnings that arise from our efforts on the strategic review. We will maintain our cost discipline while identifying more structural cost optimization opportunities, and we will advance our comprehensive strategic review to chart a new path forward.

Thank you, everybody.

Thank you for joining us today. Should you have any further questions, our contact information is included at the end of the investor presentation.

Our second quarter of 2021 earnings call will be held on June 2, and we look forward to speaking with you then. Have a pleasant day.