Laurentian Bank of Canada

TSX:LB

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Laurentian Bank Quarterly Financial Results Call. Please note that this call is being recorded.

I would now like to turn the meeting over to Andrew Chornenky, Vice President, Investor Relations. Please go ahead, Andrew.

[Andrew Chornenky, VP, IR]

[Foreign Language] 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 the first quarter financial results will be presented by Yvan Deschamps, Executive Vice President and Chief Financial Officer. After which, we will invite questions from the phone.

Also joining us for the question period are several members of the bank's executive leadership team; Liam Mason, Chief Risk Officer; Eric Provost, Head of Commercial Banking; Karine Abgrall-Teslyk, Head of Personal Banking; and Kelsey Gunderson, Head of Capital Markets.

All documents pertaining to the quarter can be found on our website in the Investor Center. I would 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 Slide 2 of the presentation.

I would also like to remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Rania and Yvan will be referring to adjusted results in their remarks unless otherwise noted as reported. I would now like to turn the call over to Rania.

[Rania Llewellyn, President and CEO]

Thank you, Andrew. [Foreign Language] Good morning, and thank you for joining us on what I know is a very busy morning. This quarter kicks off the second year of our 3-year strategy, and I am pleased to report that we have continued to make progress -- good progress including the exciting public launch of our reimagined VISA experience, a game changer for Laurentian Bank and its customers. On behalf of the management team, we would like to thank everyone on our one winning team for their efforts over the quarter.

The macroeconomic environment remains uncertain. Central banks are trying to dampen inflation in the face of mixed economic indicators causing significant market volatility. Notwithstanding, our results speak to the strength of our underlying business, our disciplined approach to credit and capital management and the progress we are making on executing against our plan.

This quarter, total revenue for the bank grew by 1% year-over-year to $260 million. Net income was $54.3 million and earnings per share were $1.15. Net interest income was up 3% year-over-year, driven by commercial loan growth. In line with our expectations that we mentioned last quarter, our NIM was stable at 1.77%, despite material rate hikes in Canada and the U.S. since October.

As we have previously said, we expect our NIM to gradually rebound once interest rates stabilize all other things being equal.

Our efficiency ratio was 69.4% due to the temporary pressures on our NIM and investments in our key strategic priorities including the launch of our reimagined VISA experience as well as seasonal elements impacting salaries and benefits. In line with our prudent and disciplined approach to managing risk, PCLs were 16 basis points, a year-over-year increase of 5 basis points. By dynamically managing our capital, we maintained our CET1 ratio at 9.1%, offsetting the small negative impact from the phaseout of the ECL transitional arrangements.

I will now turn to our strategic highlights for the quarter. Last year, we identified 3 priority areas for 2023 to stimulate growth. First, deliver excellent customer service; second, grow deposits; and third, drive efficiencies through simplification.

I will begin with customer service. We are focusing on delivering excellent customer service and removing pain points by leveraging data from our Net Promoter Score or NPS program. This concentrated effort will help us to gain a deeper understanding of what drives customer satisfaction and dissatisfaction, allowing us to implement targeted actions.

To that end, I'm pleased to share that in addition to inventory financing, our equipment financing specialization is now also rated as world class. Moving up from excellence with a significant improvement in its NPS. This achievement is the result of proactively putting our customers at the center of all our organizational decisions as well as having the right expertise right products and right solutions for our customers.

We are now taking these best practices and applying them across the organization, including the rollout of NPS in all retail channels and our contact center. This will provide us with deeper insights into areas we need to address, giving us the ability to quickly adjust and implement actions to improve the customer experience.

I'm also excited to announce that in February, we launched our newly reimagined VISA experience to the public. The progress in our Personal Banking segment is significant. One year after introducing a mobile app and closing the top 5 digital pain points for our customers, we have shown that we can truly make size our advantage by thinking customer first and leveraging partnerships to deliver to market faster.

Through our strategic partnership with Brim Financial, customers from across Canada can now sign up for one of our new VISA cards online, be approved within minutes and start transacting with their virtual card immediately from their digital wallets.

In addition to the quick online approval, customers will benefit from one of the most flexible rewards programs on the market, a best-in-class digital platform and tools to help budget and manage spending. This is a significant achievement on our digital transformation journey.

Furthermore, in order to continue improving the customer experience, we launched a new mortgage financing center to handle all mortgage acquisition and refinancing solutions for our retail branches. Using existing resources with strong backgrounds in home financing, we are now delivering more targeted solutions for our customers.

Turning now to deposits. Coming off a record year in deposit growth, we have continued our focus on maintaining a strong balance sheet and supporting loan growth. Having now closed our customers' top 5 digital gaps we are well positioned to further grow deposits by deepening our relationships with existing customers and targeting new ones.

To that end, I am pleased to report significant year-over-year growth in deposits of 14% and which outpaced loan growth of 10%. I would like to highlight 2 key drivers, in particular. First, over the last few years, we have been focused on growing strategic partnership deposits which are a cost-effective funding source and backed by multiyear commitments. This quarter saw a $1 billion increase sequentially and more than $2.6 billion since last year.

Second, as part of repositioning our personal bank, which includes new digital capabilities and a simpler product offering, we are now seeing a positive trend with term deposit growth of almost $400 million quarter-over-quarter and $700 million since last year.

This positions us well as we prepare to launch our digital onboarding solution to market in the next few months. To drive accountability, we have also included deposit growth on our leaders scorecards across the organization, whether they are customer-facing or noncustomer-facing.

In addition, by leveraging the new mortgage financing centers that I previously mentioned, we are removing many of the day-to-day mortgage activities out of the branch. This creates additional capacity for our financial advisers to focus on deposit growth and deepening our relationships with existing customers.

Our third priority is to drive efficiencies through simplification. We remain committed to reducing our efficiency ratio below 65% over the medium term by further streamlining our internal processes and operations. But, as we stated in the fourth quarter, this will not be a straight line as we continue to invest in strategic priorities.

A few examples of process simplification underway include: First, the launch of an e-statement campaign for retail banking customers focused on VISA statements as part of our digital-first approach which is expected to save the bank $500,000 this year and up to $750,000 in annual run rate savings beginning next year.

Second, the introduction of robotics process automation into 3 processes with another 17 to follow. Once implemented across all 20 processes, we expect this to generate $2 million in annual run rate savings over time. Third, the introduction of process automation in our deposit fulfillment process, reducing turnaround time by 50%. Culture and ESG also remain a significant priority, and I would like to share some highlights from this quarter.

First, we launched our newly refreshed corporate donation strategy called Giving Beyond numbers, which is focused on supporting organizations dedicated to the economic inclusion of newcomers, refugees and other underrepresented groups. Second, we established a 35% reduction target in our Scope 1 and 2 greenhouse gas emissions by 2030. And third, to support Quebec school bus operators in their transition to electric vehicles. We participated in the financing of zero-emission buses.

The bank also signed the parental lead pledge introduced by women in capital markets, which includes commitments to provide paid leave to all parents, including fathers, same-sex partners and parents adopting a child, as well as fostering a supportive work culture that normalizes and embraces parental leave across all ranks and positions.

I am pleased with our progress this quarter and I'm confident that we are on the right path with our strategic plan. As we continue to deliver on our 3 priorities for the year, we expect to launch our digital onboarding experience to the market over the next few months, beginning with a focus on day-to-day accounts. This will allow us to continue to deepen customer relationships, acquire new customers and expand our presence across Canada. The entire bank is focused on working together as one winning team to drive growth. I will now turn the call over to Yvan.

[Yvan Deschamps, EVP and CFO]

Thanks, Rania. [Foreign Language] I would like to begin by turning to Slide 13, which highlights the bank's financial performance for the first quarter. Total revenue was $260 million, an increase of 1% compared to last year despite the lower contribution from financial markets-related activities, which were impacted by volatile market conditions. On reported basis, net income and EPS were $51.9 million and $1.09, respectively. Adjusting items for the quarter amounted to $2.4 million or $0.06 per share and are related to the amortization of acquisition-related intangible assets.

Details of these items are shown on Slide 29. The remainder of my comments will be on an adjusted basis. Net income and EPS were down quarter-over-quarter by 6% and 12%, respectively, to $54.3 million and $1.15. This was mainly as a result of a onetime $2.9 million employee subsidy in our U.S. operations recorded last quarter as well as seasonal impacts in salaries and benefits.

This quarter also included an [ LRCN ] interest payments negatively impacting EPS by $0.06. Slide 14 shows net interest income, up by 3% year-over-year and 2% on a sequential basis, mainly due to the positive impact of higher interest income stemming from commercial loans.

Since October, the Bank of Canada and U.S. Federal Reserve both continued to raise interest rates for a total of 125 basis points in Canada and 150 basis points in the U.S. As guided last quarter, the rate increases continued to impact NIM, which was stable at 1.77% this quarter. We expect the bank's NIM to gradually rebound once interest rates stabilize, all other things being equal.

Slide 15 presents other income, which decreased by 5% compared to last year, mainly because of volatile conditions unfavorably impacting financial markets related to the revenues, including fees and securities brokerage commissions and income from mutual funds.

On a sequential basis, other income was stable. As shown on Slide 16, noninterest expenses increased by 5% compared to last year and last quarter. This is in line with our guidance that expenses would be higher due to investments in strategic projects, including the launch of our reimagined Visa experience and digital onboarding. On a sequential basis, in addition to the onetime subsidy recorded last quarter, there were also seasonal impacts in salaries and benefits, such as higher vacation accruals, employee benefits and performance-based compensation, partly offset by lower professional fees.

Slide 17 outlines our diversified sources of funding. Total deposits grew by 14% year-over-year, driven by our strategic partnership deposits. These are backed by multiyear commitments and our cost-effective funding source for the bank.

Deposit growth was greater than loan growth on a year-over-year basis and exceeded our objective of deposit and loan growth being in line. Sequentially, deposits were up 2%, including good growth in retail term deposits of almost $400 million.

As you can see on Slide 18, we maintain our CET1 capital ratio at 9.1% as internal capital generation in the quarter offsets the 6 basis points negative impact from the phaseout of the ECL transitional arrangements, in response to COVID-19. We continue to dynamically manage our capital to support business growth and remain committed to our stated objectives of managing our CET1 capital ratio at around 9% for the year.

Slide 19 highlights our commercial loan portfolio, which was up by $3 billion or 19% year-over-year, and $200 million quarter-over-quarter, with contributions from our commercial real estate and inventory financing, specializations.

Slide 20 provides a greater level of detail on our commercial real estate portfolio. We deal with established Tier 1 and Tier 2 real estate developers in Canada with good track records. Significant portion of our portfolio is in multi-residential housing construction, where demand remains resilient due to high immigration levels in Canada. The LTV on the term loan portfolio stood at 61% and the LTV on the uninsured multi-residential mortgage portfolio stood at 54%.

Considering these LTVs and our good track record of credit quality with a low level of historical write-offs, we remain confident in this portfolio.

Slide 21 highlights our inventory financing specialization. We are a leading platform across Canada and the United States with more than 5,400 dealers. Majority of our lending activity focuses on RV, marine equipment and trailers. The average amount of credit outstanding by dealer is approximately $800,000.

As a reminder, we lend in this portfolio on a product-by-product basis. This is also an operating business where key performance indicators, such as the age of inventories and turnover rates are monitored closely. Portfolio has generated nominal write-downs. PPIs are currently healthy and in line with historical levels.

Slide 22 presents the bank's residential mortgage portfolio. [Residential] loans were up 5% year-over-year and 1% on a sequential basis. We maintained prudent underwriting standards and are confident in the quality of our portfolio, as evidenced by the high proportion of insured mortgages at 57% and low LTVs of 51% on the uninsured portion.

It's also worth noting that more than 80% of our residential mortgage portfolio is fixed rate, of which more than 75% will mature in 2025 or later. Allowances for credit losses on Slide 23 totaled $203.5 million and were relatively in line with last quarter.

Turning to Slide 24, the provision for credit losses was $15.4 million, an increase of $6 million from a year ago, mainly as a result of write-offs in personal loans and the uncertain macroeconomic outlook. The sales were down by $2.4 million sequentially, mainly as a result of lower provision on impaired commercial loans.

Slide 25 provides an overview of impaired loans. On a year-over-year basis, gross impaired loans decreased by $43.6 million, driven by commercial loan write-offs of previously provisioned accounts. Sequentially, there was a $12.9 million increase due to commercial impaired loans. We continue to manage our risks with a prudent and disciplined approach and remain adequately provisioned.

Last quarter, we provided detailed guidance for 2023. I would like to note a few key points, given the ongoing macroeconomic uncertainty. Continue to expect that the bank's NIM will gradually rebound in the second half of the year once interest rates stabilized, all other things being equal. Financial markets remain extremely volatile, which is expected to continue tempering other income results.

Our efficiency ratio will remain elevated in the second quarter as a result of continued pressure on revenues and investments in our key strategic projects.

We dynamically manage our capital and resources to grow our business and support our customers and as a result, are targeting to remain around the 9% CET1 capital ratio throughout the year.

Timing and impacts on the economy of inflation reduction measures by central banks are still difficult to predict and so are PCLs. We maintain our previous guidance of high-teens and low-20s for the year. We expect loan growth to remain tempered as macroeconomic conditions continue to impact business and consumer spending. Overall loan growth for the year is expected to be in the low single digits.

I will now turn the call back to the operator.

[Operator]

[Operator Instructions] Your first question comes from Meny Grauman with Scotiabank.

[Meny Grauman, Scotiabank]

Yvan, thanks for reiterating the guidance on the margin, but I just want to understand the granularity a little more in terms of what to expect for Q2, in particular. And it's based off of Q1 where, as you highlighted, we continue to see rate hikes. And so that continues to extend into Q2 as well. So the fact that you were able to achieve flat margins in Q1, is that sort of -- are we now at the low watermark in terms of margins as you see it? Or could we still expect to see some variability before before that guidance kicks in, in terms of being in a world where we are stable in terms of the Bank of Canada target rate.

[Yvan Deschamps, EVP and CFO]

Yes. Thank you, Meny, for the question. I think your question, in fact, outlined many elements to the answer I'm going to give. So first, it's been still pretty volatile from a rate perspective. Bank of Canada increased in October by 125 basis points and the U.S. 150 basis points. So for sure, the speed and magnitude of the rate does impact the equation because we said we do expect that it will gradually recover as the rates stabilize. We're being prudent with Q2.

There is still a lot of pressure on the economy side. So I'm not sure exactly where the central banks will move. So we remain cautious for Q2, but we're pretty positive that it will gradually recover mostly in the second half.

[Meny Grauman, Scotiabank]

Got it. And then I was curious to see RWA growth essentially flat sequentially. And just wanted to understand what led to that result. I mean, loan growth is slowing but still remains positive, but even on a sequential basis. So just wondering if you could help us understand what's driving that flat RWA growth sequentially?

[Yvan Deschamps, EVP and CFO]

Yes, for sure, Meny. So the first thing is, I would say, we're happy right now with the capital level that we have. Something to keep in mind is 2022 was pretty exceptional in terms of growth. And we use that to redeploy capital that we had accumulated during the pandemic. I think we outlined that pretty well in the past. But considering the uncertainty out there, we currently project a GDP that's going to be close to nil or something that can be very limited. And in that context, we do project to remain in the low single digits. So this quarter is a bit of a reflection of the same thing. We've been managing, of course, capital and loan volumes, but it's a reflection of what's happening in the economy in terms of the growth. So the RWA this quarter, as you mentioned, was pretty much flat from the last quarter.

[Operator]

Your next question comes from Paul Holden with CIBC.

[Paul Holden, CIBC]

So first question is related to the deposit growth coming from those strategic partners and appreciate the numbers you gave us in terms of the Q-over-Q and year-over-year growth. And just wondering if you can give us a better understanding on potential future growth from those same partners? Is there any way to quantify sort of what potential might look like?

[Yvan Deschamps, EVP and CFO]

Yes. Thank you for the question. So the first thing is, as you probably noticed or may not as soon as we did isolate in the supplementary information, those deposits now. So you can see the level of those going forward. We've been increasing those by 200% since 2020, including $2 billion in 2022 and $1 billion in the last quarter.

So I would not assume that the $1 billion that we've just seen is going to be the trend because it's been pretty exceptional in terms of building the relationship with those guys. We need to continue expanding and create new relationships. So the speed of the growth is definitely going to be related to that. I think we had an exceptional growth over the last 15 months. So I would not necessarily use that trend, but compensate that, we have to know that we got pretty great growth from retail term deposits this quarter.

So we have been turning that around great efforts from [indiscernible] and our team. And we are also, in the next few months, going to start the digital onboarding. So that will allow us to grow outside Quebec by opening accounts and we're looking forward to getting new checking accounts and great core deposits from those customers. So I would say there's probably a transition at one point that is compensated by the internal growth of the core deposits which is overall pretty positive and give us diversification and good deposit base.

[Paul Holden, CIBC]

And given the growth you've experienced there, I think it would be helpful to understand to what extent that's impacted the net interest margin and maybe to make it a little bit more granular, I think you previously said an expectation of declining margins in Q1, but you're able to get flat. Like what big -- how significant a role did this growth in deposits play in that better outcome for this current quarter?

[Yvan Deschamps, EVP and CFO]

And so if I can go back. I would say that we mentioned in the last quarter that we had pressure from a few things, right, due to the loan repricing, but definitely, the deposits have been offsetting some of that because we mentioned partnership deposits is cost effective. And also the term deposits. And what you can notice this quarter is that the growth we had in those 2 categories allowed us to reduce the broker deposit GIC by about $700 million. So there's definitely an impact there. I don't want to go too granular. But I would say, definitely, it's bit a positive impact potentially be [indiscernible] to protect the NIM this quarter.

[Paul Holden, CIBC]

Okay. Okay. And last question for me is just with respect to credit experience and obviously, I see the PCL result and then looks pretty benign. But there is some uptick in gross impaired loans and new formations. So wondering if there's anything in there to call out in terms of perhaps emerging trends that might result in higher losses through the remainder of the year?

[Unidentified Company Representative]

Thank you for your question, Paul. As you rightly point out, our gross impaired did tick up slightly up $13 million compared to last quarter. Given the macroeconomic conditions, we are seeing some early signs of migration. You see that in the disclosure we've had, and that's to be expected in these economic circumstances. That said, overall, the portfolio is performing very well our strong underwriting standards and our consistent disciplined reserving process are serving us well. And I'd remind you that over 90% of our portfolio is collateralized. We stress test our exposures, there are pressures, but net of those, they are performing really quite well.

[Operator]

Your next question comes from Gabriel Dechaine with National Bank.

[Gabriel Dechaine, National Bank]

My first question is on your capital guidance, the -- keeping the core Tier 1 ratio stable from here. a, have you quantified the impact of the updates to CAR guidelines that are coming next quarter. and b, that your guidance incorporates that potential deviation?

[Yvan Deschamps, EVP and CFO]

Yes. Thank you for the question. I think it's good that you clarify where we stand in terms of the Basel III revised report. So last quarter, we had mentioned that we would see a slight reduction in terms of capital. With the additional work that we've done and the quarterly asset variations, we now expect it's going to be not material.

If it -- but it should be nonmaterial. And yes, it is definitely in the guidance of staying around 9% plus or minus throughout 2023, including [indiscernible].

[Gabriel Dechaine, National Bank]

Got it. And then on the deposit, the disclosure change there showing strategic partners now just -- I guess the answer must be yes here, but you're seeing the strategic partner and deposit balances go up and broker deposits go down. That would tell me that those are cheaper deposits? If so, could you kind of give me a sense of the cost savings there?

[Yvan Deschamps, EVP and CFO]

The answer is definitely, yes. But I don't want to go too granular in terms of the margins, just for competitive and competition in general, Gabriel. But definitely I would say, the benefit to have those versus the broker yet.

[Gabriel Dechaine, National Bank]

And were the promotion big this past quarter because of the growth? Is that why you had so much come in? .

[Rania Llewellyn, President and CEO]

You rephrase that, Gabriel, the promotion?

[Gabriel Dechaine, National Bank]

Were there any promotion promotional rates, sorry, that -- I mean, $1 billion of deposits is pretty big in one quarter.

[Rania Llewellyn, President and CEO]

So the promotion is known in regards to the strategic deposits, but in regards to deposits. So that's where we saw the growth in the GIC and as you were explaining with the new digital onboarding, we'll now be able to get to new customers and other products like the [ HSA ] product that we launched in Quebec, for instance, in fiscal '22, that's not available to the rest of the country. So still a lot of upside possible.

[Yvan Deschamps, EVP and CFO]

And just to come back to the tragic deposits, just to make sure we understand this is a multiyear commitment that we're putting in place with our partners. So it's not deposits that go up and down depending on promotions that we do with them. It's really longer-term agreements and commitments that we have in place where we manage their client money. So it's really, I would say, much more stable than other kinds of demand deposits we could.

[Gabriel Dechaine, National Bank]

Okay. And last question here is on the inventory finance business. Can you remind me of the seasonal trends we expect? I thought Q1 was maybe a bit more of a seasonal tailwinds and growth is positive, but flatter than some of the quarters we've seen recently. And if you could talk more broadly about what's going on with end user demand and if that could actually boost balances because of end user demand for discretionary vehicle is going down, then that would force the dealers to carry higher inventories and that benefits you, ultimately.

[Eric Provost, Head, Commercial Banking]

Gabriel, thank you. It's Eric. Yes, you have the right sense. Like in terms of inventory financing, we saw normalization throughout the last few quarters versus what was pre-pandemic level. So this is where we are right now.

In terms of the activity, what the dealers are telling us and what we're seeing is there's still good floor activities out there. So consumers are more cautious about their spending for sure. But we feel it's more like towards pre-pandemic level, which is expected in this season. So yes, probably helping us to carry more inventory in the line utilization than during the pandemic, which was the lowest historical we've experienced. So, yes.

[Gabriel Dechaine, National Bank]

So what does that mean in terms of what kind of growth I should expect if inventory levels are going up.

[Eric Provost, Head, Commercial Banking]

Yes, Gabriel, walking into the season, we should see a decrease actually of the assets towards, right now, we're at 59% of utilization. And during the summer season in the pre-pandemic levels, we would see 45% around that in terms of utilization. So for sure, a decrease in terms of level of assets during the summer time.

[Operator]

Your next question comes from Doug Young with Desjardins.

[Doug Young, Desjardins]

First, just I think dynamically managing capital was mentioned a few times in the discussions. Just wanted to understand what that means, what you're doing to maintain the CET1 ratio around 9%? Is that -- is it just the normal puts and takes? Or is there some additional activity that you're taking?

[Yvan Deschamps, EVP and CFO]

I think we like and it's dynamic because we do it on a constant basis, right? So every quarter, we do manage capital. We've been managing capital to remain at about 9.1% now for 3 quarters in line. So that includes a lot of various elements. So there is nothing in particular, Doug. It's just a question of making sure that we constantly manage it.

[Doug Young, Desjardins]

Yes. I just wanted to confirm. Okay, then income from financial instruments and other income was up, I think, 69%. I apologize if you asked or answered what that was. But if not, can you dive into -- it was a substantial increase.

[Yvan Deschamps, EVP and CFO]

Yes. I mean we -- obviously, the capital markets have recovered in Q1, certainly over the volatility we saw last year. So I'd point out that's not a particularly large number for our organization, but we try to run from a trading perspective between -- somewhere between $6 million and $7 million a quarter. We did that again this quarter. And so again, I think it's just more reflective of the recovery in the markets that you saw in Q1 versus last year.

[Doug Young, Desjardins]

So that's all trading related. Is that right?

[Yvan Deschamps, EVP and CFO]

Large part of it is trading, yes.

[Doug Young, Desjardins]

Okay. And then back to the -- I think you talked about low single-digit loan growth for this year. Can you break that down between the different components like your inventory finance versus commercial mortgages versus consumer, unsecured lending or whatever. Can you provide a little more granularity? I mean, loan growth was obviously much higher than that this quarter. And I get your answer around being cautious and from an economic perspective, but just trying to get a little bit more details of where you think more of the slowdown is coming from?

[Yvan Deschamps, EVP and CFO]

A, I don't want to get too granular, Doug. But if you look at this quarter, the growth was, in fact, pretty much 0 overall for the loans. It was really close to being the same as last quarter, as we've discussed previously with RWA. So we've seen the smaller increase in commercial, and I explained previously that GDP and everything happening is tempering that growth. So we do project a tempered growth in commercial.

And we all know that mortgages is currently a market that is impacted by interest rates as well. So I would say it's a bit more general I don't think there is anything specific where we have a big swing on 1 side or the other ones in the portfolio. We're just being prudent overall with the portfolios and margin towards low single digits.

[Operator]

Your next question comes from Sohrab Movahedi with BMO.

[Sohrab Movahedi, BMO]

I just wanted to go back to the deposit discussion. And reference back, I think it was during the Investor Day that Karen may have mentioned some customer losses that were obviously weighing on also deposit balances. So aside from the strategic kind of relationships, is there any update as to whether or not you've been able to recapture those customers that had been leaving up until about a year or so go.

[Rania Llewellyn, President and CEO]

So thank you, Sohrab, for the question. So what I can say is that our net new year-to-date account growth is actually higher than expected. And the majority of the customers that are opening new accounts are new clients. As you'll recall, about half of our only have one product with us. So really the new onboarding capabilities will really allow us to access new geographies and increase client acquisition.

[Sohrab Movahedi, BMO]

I mean, I think the number you had mentioned before and I'm ballparking it was maybe in the 600,000, 700,000 that had been leaving. Have you added so much back? Or where are you relative to that 600,000, 700,000 that ads?

[Rania Llewellyn, President and CEO]

No, we have a total base of 450,000 customers. So we're definitely not in those numbers. We don't necessarily disclose all those numbers. But what I can say is that we're definitely on track with our transformation.

[Sohrab Movahedi, BMO]

Okay. And I think, Yvan, you may have mentioned this, but just for crystal clarity, I think you said we should have more tempered expectations for financial markets. And would last year's Q2 have been a high watermark in particular, for financial markets that we should be aware of? Or this quarter is more like what you would expect to kind of continue to get out of it? Just maybe put a little bit more color on that?

[Yvan Deschamps, EVP and CFO]

I'll start and I'll let Kelsey add some comments. But if you look at the trend in Q2 was Q1 and Q2 last year was definitely higher. And then we got into volatile market. due to the rate increases Q3, Q4, and I would say still this quarter. But in terms of going forward, I'll let Kelsey add a few comments.

[Kelsey Gunderson, Head, Capital Markets]

I mean I think that our capital markets revenues are a combination of trading and advisory revenue. We haven't really seen a recovery in advisory revenues with the facility in the market at our trading results have been strong. I think consistent, I would say, it's probably a better way to describe it. And I think it's important to point out, too, because that number has been consistent over many quarters and we've had constructive markets and less constructive markets as well. So I'm particularly pleased with how that performs in the face of a variety of market environments.

Looking forward, obviously, there's still uncertainty out there. First part of this quarter has not started strong in the markets, as we all know here. But to the extent that the market is, we have changed our strategy here. We're aligning our capital markets business with rest [indiscernible]. We're not intending to run the trading risks going forward.

We're trying to align with the bank and drive based earnings revenue stream. So to the extent that the market themselves stabilize, I think you'll see [indiscernible].

[Sohrab Movahedi, BMO]

Okay. And one last one, Liam, I know that -- or the mention of the high teens, low 20s PCL ratio. I think credit, obviously, being a bit of a lagging indicator. That is taking into account the low, call it, single-digit loan growth. So if loan growth, I guess, slowed down further, that basis points would be higher, all else equal.

[Liam Mason, Chief Risk Officer]

Thank you for the question, Sohrab. Yes, it's consistent with that. We're very happy with the portfolio right now. As I said, we're very highly collateralized. And as you know, we got out of the head of the macroeconomic slowdown with our reserves. So we're well positioned right now, and we expect high single digit -- high teens, low 20s.

[Operator]

Your next question comes from Lemar Persaud with Cormark Securities.

[Lemar Persaud, Cormark Securities]

I want to come back to the efficiency ratio and the comment that I think I heard it's going to be elevated in Q2. First, is that correct? And then I think you mentioned there's going to be some pressure on revenues and some elevated project spend. So what's going to drive the lift in revenue in the back half of the year? Is that the expectation for NIMs to move higher? And then what's the elevated project spend in the first half of the year related or at least in Q2.

[Yvan Deschamps, EVP and CFO]

Yes. This is Yvan, Lamar. I'll take that one. So I'll give you some guidance, and we can discuss what, in fact, the various elements you outlined. So -- our guidance is definitely, as we mentioned last quarter that we would have an efficiency ratio that would be elevated for the first half of the year.

So that's exactly what we saw in Q1 as we guided. That's what we expect for Q2 as well. And why we're expecting that for Q2, it definitely related to the fact that we have pressure and we're still having pressure by having a lower NIM and having what I would call as relatively lower capital markets in general. So all that to say that if going forward, we get an increase, a gradual rebound of the NIM in the second half and potentially better capital markets that's a contribution that we should help the efficiency ratio for the second part of the year. We have to keep in mind for Q1 that there has been changes in terms of expenses versus Q4.

We had a onetime salary subsidy in Q4, that's nonrecurring and we have seasonally higher elements that we outlined like vacation accruals. That's a difference of $5 million versus Q4. And we have a few other elements like payroll taxes related to the payment of the bonuses in Q1. But what's going to drive it again in Q2 is that we're still investing in our strategic projects with the VISA project, the digital onboarding projects, but we're also working on the efficiency improvement over time with things like RPAs and automation. So we're going to keep the level of expenses relatively elevated because we're investing in the business. But the recovery of the revenue that we expect for the second part should help with that ratio.

[Lemar Persaud, Cormark Securities]

Okay. And then my next question, I think maybe Doug was asking this, but I had to hop off there. So feel free to let me know if you've answered this one already. But as the bank intentionally slowing loan growth to match deposit growth when you mentioned that dynamically managing capital? Or would the bank allow logo to pace deposit growth?

And where I'm going with this is I'm really trying to understand the low single-digit low growth outlook. And if you're volume growth is intentionally being depressed from what we could be seeing because your large-cap peers seem to be suggesting a slightly more positive outlook for the year.

[Yvan Deschamps, EVP and CFO]

I'm happy to take back some elements if you miss them, Lemar, no issue there. So first 2022 was pretty exceptional in terms of growth, right? We had big growth in real estate, but also especially in inventory financing. Because prism line utilization and inventory financing was depressed because of COVID, but it came back. So the normalization now at 59% at the end of Q1 is back to where it was pre-pandemic. So definitely, we've seen a normalization of the growth or a normalization of the volume with the big growth we had in 2022.

So we're now back to the normal level. we're impacted definitely but what's going on in the economy with the GDP growth that's going to be close to nil projected by the market, we're just being cautious at this point. And we believe that if the GDP is there, our loan is probably going to be somewhere in the same ballpark as well. So those are the key elements that would explain why we're projecting low single digit.

[Operator]

Your next question comes from Joo Ho Kim with Credit Suisse.

[Joo Ho Kim, Credit Suisse]

So just wanted to go back to that discussion on expenses. So it sounds like some lift from margins in the second half and expense sort of pressure in the first half I'm curious how you see expense growth to be for the entire year. I think it was up around 5% this quarter. And just given the timing of the investments that we've seen and we'll have, I guess, going forward, wondering how you see that expense growth playing out for the remainder of the year?

[Yvan Deschamps, EVP and CFO]

Yes, good questions, Joo Ho. Usually, I do prefer talking about the efficiency ratio because that's really how we manage ourselves, depending on the revenue level, we'll manage the expenses as well. But currently, we have 69.4% adjusted number for Q1. We do expect to have an elevated number. So same ballpark roughly for Q2, and we will see an improvement of the revenue, as I previously mentioned, improved for the second part.

[Joo Ho Kim, Credit Suisse]

And just a quick number, one last one for me. And I'm just looking at your balance sheet here. And I see a decrease in both cash and other interest-bearing deposits. I'm curious if -- on a sequential basis, I'm just curious if that impacted the net interest margins results this quarter? And any of it date if you could help sort of quantify that?

[Yvan Deschamps, EVP and CFO]

I would say there's a lot of elements that impact the NIM to be transparent. So definitely, we do manage liquidities on that balance sheet as we need to be prudent in the current environment, but based on the needs of the bank. So as we need more, a bit more, a bit less, we'll manage accordingly. But there's -- I wouldn't get any conclusion from the variation this quarter.

[Operator]

Your next question comes from Mike Rizvanovic with KBW.

[Mike Rizvanovic, KBW]

Maybe a quick one for Rania. Can you just give me a sense of -- are you at the point now where you're adding customers in the retail business on a net basis? Because I think sometimes things can get skewed on whether we look at deposits are low and just the balance has increased, but I'm just trying to understand from a like number of customer perspective and I don't know whether you want to talk high level on the absolute number or maybe the ones that are considered to be core or key relationships. But are you at the point now where you're adding customers on a net basis?

[Rania Llewellyn, President and CEO]

Yes. So thanks for that question. As we always said in the personal bank, it's a multiyear strategy. We're simplifying our product offering. We're simplifying our end-to-end processes. We're improving our customer experience. And so we started with the mortgage business and our goal last year was to stabilize kind of the consumer attrition there, and we did just that. Now obviously, market conditions have changed as well. And so now for the launch of the VISA, our repositioning of some of our deposit products, and we're really excited about our upcoming digital onboarding, the goal is ultimately two-pronged. Number one, as we always said, 50% of our clients only have 1 product with us.

So there's a great opportunity for us to deepen those customer relationships and cross-sell products and services for them as we continue to launch. And number 2 is to absolutely grow from a customer -- net new customer acquisition perspective. And that's definitely -- we're starting to see some green shoots with our new VISA launch. We're seeing it with our new repositioning of our term deposits, which we did a campaign. It was obviously just focused on Quebec because that's where we're limited from a physical footprint and that was successful. And so again, the digital transformation is absolutely going to be critical for us to continue to acquire net new customers, which is ultimately our goal.

[Mike Rizvanovic, KBW]

It does sound like you have a lot of avenues where you could grow, but just as far as currently, is it fair to think that you're still net losing customers up until Q1. I'm just trying to get just very high level, is this something that -- it sounds like it's still a work in progress, but were you still a net loser or a net reduction on your customer base in the quarter?

[Rania Llewellyn, President and CEO]

Yes. What I would say, as we've always said, our goal last year was to stabilize and we stabilized. And so now we're starting to see an uptick.

[Operator]

Your next question comes from Nigel D’Souza with Veritas Investment Research.

[Nigel D’Souza]

I just had a quick follow-up questions on, first, on your margin. I believe last quarter, you mentioned repricing lags have been an impact, and I think it was about 10 basis points that you highlighted. Could you provide an update on that? Have you recaptured that repricing lag? Is this still something that has to be captured in subsequent quarters? And it sounds like your main takeaway is that you need rates to stabilize from a policy rate perspective before margins are expanding. Did I -- do I understand that correctly? .

[Yvan Deschamps, EVP and CFO]

Yes. The key point and Nigel to say from what I discussed previously is that this quarter since October or last quarter since October, we've seen 125 basis points growth in Canada and 150 basis points growth in the U.S. So the big rate increase and PD rate increase that we have seen has now extended to what I would call it, third quarter after Q3, Q4, now Q1 was a bit of the same story. So there is still that repricing lag and we're more guiding towards the second half of the year in terms of gradual rebound should the interest rates stabilize. And I must admit, I have to say all other things equal because there's a lot of things impacting.

[Nigel D’Souza]

Great. And a second quick follow-up was on credit losses and impairments this quarter. For commercial lending, could you -- and I apologize if you already answered this, but could you kind of drill down into which categories within your commercial loan portfolio drove PCLs and impairments this quarter?

[Yvan Deschamps, EVP and CFO]

Nigel, thank you for the question. The -- our portfolio overall remains very strong. There are no specific segments that I'd highlighted at this time. There are challenges in the marketplace. Loan growth is slowing. The economic situation is more uncertain above portfolio remains strong, well flatline, and I'm not seeing any particular segments in commercial that are concerning at this time.

[Operator]

Your next question comes from Marcel McLean with TD Securities.

[Marcel McLean, TD Securities]

Okay. I just want to talk to your medium-term financial targets, the big for the EPS growth, ROE, efficiency ratio and operating leverage. I want to gather from the -- what the result from Q1 and some of the guidance you're and headwinds you're naming here, and 2023 is supposed to be your growth here. I'm getting the sense that maybe not all of these are going to be achievable this year, but possibly by 2024, it could be back to achieving those. Just looking at your thoughts on overall high level how this all kind of adds up here to -- with respect to these 4 targets?

[Yvan Deschamps, EVP and CFO]

Yes. Thank you for the question. I would say, first, they are medium-term targets. So we're still working towards the same objective and the same results. We have the same plan, and we'll just keep going and delivering on every milestone that we have in that -- so for sure, 2023 is a situation that is more uncertain in terms of macroeconomy than what we had probably projected 18 months ago like everybody in the market.

Second thing I would keep in mind is despite we had caused this growth 18 months ago, the growth that we had last year was pretty exceptional. So that has definitely moved us forward in terms of accomplishing that growth that we expected to be making. So we're still leading towards the same direction.

[Marcel McLean, TD Securities]

Okay. Perfect. And then just to get very specific on the the NIM and what you're incorporating in the guidance and your expectations. Specifically, do you have any cuts forecasting by the end of this year in your projections or is that not the case?

[Yvan Deschamps, EVP and CFO]

The answer is no. At this point, we're being prudent with the rate increases and projecting no rate cuts.

[Marcel McLean, TD Securities]

Okay. And if we were to see a rate cut, what sort of impact could we expect from that late in the year?

[Yvan Deschamps, EVP and CFO]

Yes. If you look at the financial statements, it says it's a few million bucks for 100 basis points. But at this point, it really depends on a lot of factors, right? It depends on how the theslope of the curve is going to move. It will depend on how aggressive are the banks and the GIC market. It depends on a lot of elements. So at this point, I don't think a 25 basis points is pretty material for any bank. What is material is that we see stabilization after 3 quarters of very high interest rate.

[Operator]

Ladies and gentlemen, thank you. That's all the time we have for questions. I would now like to turn the meeting over to Rania.

[Rania Llewellyn, President and CEO]

Thank you for your questions today. We continue to make good progress against our strategic plan and are focused on our 3 priorities for the year. We will continue delivering excellent customer service through new products and services like our reimagined VISA experience. We're excited about the upcoming launch of our digital onboarding solution, which will drive further deposit growth and support our continued expansion across Canada. We remain committed to reducing our efficiency ratio, and we'll continue to simplify processes and automate while also making investments in strategic priorities.

We have a prudent approach to credit and we'll continue to dynamically manage our capital to support growth. I look forward to speaking to everyone again in a few months. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.