Laurentian Bank of Canada

TSX:LB

Earnings Call Analysis

Minor Decrease in Total Revenue and Significant Drops in Net Income and EPS

The company's total revenue amounted to $258 million, which represents a slight 1% decrease compared to last year, but it is worth noting a 4% increase from the previous quarter. The net income and EPS figures tell a different story with reported net income at $37.3 million and EPS at $0.75. Adjusting items for the quarter affected these numbers with an additional $6.9 million in charges after tax, or $0.16 per share, which included amortization of acquisition-related intangible assets and restructuring charges. When we look at EPS in more detail, it has seen a downturn of 21% and 9% from the previous year and the previous quarter, respectively, ending up at $0.91. Net income is also down by 19% compared to last year, and a slight 1% from the last quarter.

Rising Efficiency Ratio and Reduced ROE Amid Operational Challenges

The bank's efficiency ratio has worsened, with a 60 basis point increase since last year and a 100 basis point increase sequentially. This uptick reflects ongoing strategic investments and residual expenses linked to a mainframe outage in September 2023. Despite the challenges, the bank managed to maintain a 6% return on equity (ROE), albeit with a decrease in net interest income due mainly to lower loan volumes.

Strategic Adjustments in Deposit Bases and Other Income Stability

The bank has strategically decreased its deposit bases as a response to the reduction in loan volumes. This led to a $1 billion sequential drop in total funding, reflecting in part a $500 million decrease in deposits from strategic partnerships due to a shift of customer funds into market activities or term products. Despite this, the bank managed to keep a robust liquidity coverage ratio, well above industry averages. Other income remained relatively unchanged from the previous year, balancing higher financial instrument income with lower lending fees and mutual fund income.

Improvements in Capital Ratios and Cautious Loan Management

The bank's Common Equity Tier 1 (CET1) ratio improved by 30 basis points to 10.2%, largely thanks to a reduction in risk-weighted assets. There was also a decrease in the commercial loan portfolio, attributed to sluggish real estate market activity and cautious behavior from the inventory financing dealer base, which became apparent at a recent boat show where dealers preferred a more conservative approach to restocking.

Prudence in Loan Issuance Leading to Better Margins

The bank's prudent management of loan issuance has led to improved margins. By being less aggressive on deposits and focusing on decreasing liquidity, the bank has successfully enhanced its net interest margin (NIM) by 4 basis points. This prudence has extended to the strategic partnership or demand deposits, which have dwindled due to better market dynamics pulling idle funds into higher term Guaranteed Investment Certificates (GICs) and other investments.

Earnings Call Transcript 2024-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, executive]

Good morning, and thank you for joining us. Today's opening remarks will be delivered by Eric Provost, President and CEO, and the review of the first quarter financial results will be presented by Yvan Deschamps, Executive Vice President and Chief Financial Officer, after which, we will invite questions from the phone. Also joining us for the question period are Liam Mason, Chief Risk Officer; and Kelsey Gunderson, Head of Capital Markets. All documents pertaining to the quarter can be found on our website in the Investor Center. I'd like to remind you that during this conference call, forward-looking statements may be made, and it is possible that actual results may differ materially from those projected in such statements. 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 considers 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'll now turn the call over to Eric.

[Eric Provost, executive]

Thanks Andrew. [Foreign Language] Good morning, and thank you for joining us today. Over the past few months, I have had the opportunity to meet with many Laurentian Bank team members, and I consistently hear the same things. They are committed to this institution. They are driven to improving our operations and simplifying our structure, and they are dedicated to serving our customers. Throughout the quarter, we have remained focused on 3 priorities: customer focus, simplification, and strategic investments to improve our technology infrastructure. I would like to thank every Laurentian Bank employee for their efforts while also supporting the organization in our strategic planning exercises. While Yvan will provide further details during his remarks, I wanted to offer some high-level thoughts on our overall performance. I am pleased to report that the bank strengthened its capital position in a time of continued macroeconomic uncertainty. We have managed our funding to our book of business and given the reduction in loans due to the current environment, we executed on our planned deposit reduction activities while maintaining a strong level of liquidity materially above the industry average. We are comfortable with our commercial portfolio and are well positioned for a rebound later this year as business conditions improve. This quarter, revenues were slightly down compared to last year and grew by 4% on a sequential basis. Net income and EPS were both down year-over-year and quarter-over-quarter as expenses remained high. This increase included costs related to the mainframe outage last year, which impacted EPS by $0.04 this quarter. We know there is more work to do to reduce our expenses, and that is why simplification is a key part of our plan going forward. While overall loan growth was negatively impacted by macroeconomic conditions, including business and consumer sentiment, our NIM was up 4 bps to 1.8%. This quarter also saw a small rebound in capital markets-related businesses with stronger trading results in fixed income. The business' results also benefited from recent rightsizing actions. Our credit performance remained strong with a small increase in PCLs compared to Q1 last year and stable versus last quarter. We remain confident in the portfolio and are adequately provisioned. Dealers and manufacturers in our inventory financing business remain cautious. Inventory levels are not rising to the levels seen in previous years. And as a result, utilization was at 50%. This is lower than the mid-50s utilization rate we would typically see at this time of year. Given macroeconomic conditions, dealers and manufacturers are working together on floor planning programs. This shows strong partnership and provides us with significant confidence as we look forward to the remainder of the year. We expect an increase in utilization starting in the fall if interest rates adjust according to projections. Turning now to commercial real estate activities. We have seen a slowdown in construction start, which remains in line with our expectations as developers continue to adjust to the current cost environment. We have seen no cancellation of projects and our portfolio is in line with our credit appetite. The majority of our portfolio is in multi-residential housing, which continues to show resiliency as demand remains stronger than supply. As a reminder, we deal with Tier 1 and Tier 2 developers with significant experience through the cycles. We're pleased with how both commercial portfolios are performing. Our specialized approach gives us confidence as we continue to face uncertainty in the macroeconomic environment. As I mentioned earlier, this quarter also saw a plan year-over-year and sequential decline in deposits, and there are a few points I'd like to make. First, we manage deposit and loan activity on a relative basis. That's why we have executed on planned deposit reduction activities. This includes actions such as more conservative pricing in our broker deposit channel to maintain our focus on profitability, contributing to our NIM expansion. Second, strategic partnership deposits function like conventional demand deposit products. Recent quarters have witnessed these deposits behaving like typical demand deposits with funds being redirected towards market activities and other term deposit products, consistent with our expectations. Third, personal deposit sourced through our retail channel are stable quarter-over-quarter, and personnel deposits overall represent 86% of our total deposits, contributing to the bank's sound liquidity position. In fact, this quarter, we enhanced our Action GIC and equity-linked product with a competitive minimum rate guarantee, which saw a good pickup. We also held a very successful Black Friday campaign, where total GIC sales exceeded last year's performance in the same period, further solidifying our funding sources. Operationally, we have a number of developments to share from this quarter, beginning with our people. I'm pleased to announce 3 new appointments to my executive team. First, we have promoted Macha Pohu to the position of Chief Human Resources Officer. Macha succeeds Sebastien Belair who held this position for the past 3 years, allowing him to better focus on his role running retail and corporate operations. Macha joined the bank in 2022 and has more than 25 years of experience in the financial services sectors and distribution, information technology and human resources. Second, I'm pleased to announce that Benoit Berra has joined the bank as our new Chief Information Officer this month. Benoit's an accomplished technology and digital transformation leader with almost 30 years of experience. He has a history of managing large and complex IT programs as well as architecting and delivering innovative solutions. His mandate will be to align the bank's IT strategy with our overall business strategy, ensuring that our technology initiatives directly support our organizational objectives. Third, it is the creation of our strategy and transformation office, which will be led by Merdici Christoff who has almost 20 years of experience in financial services, including sales effectiveness, change management and business process optimization. This new office will oversee the development, implementation and evolution of the strategic plan, identify organizational priorities and ensure a steady pace of decisions that enable us to deliver value for our customers quickly. The office will work closely with finance to monitor the budget and maximize transformation goals. The bank also announced 3 new appointments to our Board of Directors, Dr. Johanne Brunet, Mr. Jamey Hubbs and Mr. Paul Stinis. These appointments are part of the Board's commitment to ongoing renewal to enhance overall effectiveness and ensures an appropriate balance between skills and experience and a diversity of perspectives. Their backgrounds are varied and include marketing, risk management, capital markets and business development. Looking forward, we are fully engaged on the revamp of our strategic plan. This plan will refine our focus on the areas where we can win to increase our competitiveness, while always maintaining our objective of improving the customer experience. As part of this refresh, we have launched an end-to-end review of all our products, projects and processes to help inform our decision-making as we look to simplify our operating model. This work is ongoing, and we will make appropriate decisions about products and projects as we progress through this exercise. I will now like to turn the call over to Yvan to review our financial performance.

[Yvan Deschamps, executive]

Thanks Eric [Foreign Language] I would like to begin by turning to Slide 8, which highlights the bank's financial performance for the first quarter. Total revenue was $258 million, down 1% compared to last year and up 4% quarter-over-quarter. On a reported basis, net income and EPS were $37.3 million and $0.75, respectively. Adjusting items for the quarter amounted to $6.9 million after tax or $0.16 per share and include amortization of acquisition-related intangible assets and restructuring charges of $6.1 million or $4.5 million after tax, resulting from the previously announced simplification of the bank's organizational structure and headcount reduction. Details on these items are shown on Slide 22. This quarter, an RCN biannual interest payment had a $0.06 impact on our EPS. The remainder of my comments will be on an adjusted basis. EPS of $0.91 was down year-over-year and quarter-over-quarter by 21% and 9%, respectively. Net income of $44.2 million was down by 19% compared to last year and 1% compared to last quarter. The bank's efficiency ratio increased by 60 basis points compared to last year and by 100 basis points sequentially. This uptick reflects our ongoing investment in strategic priorities and the remaining expenses related to the mainframe outage in September 2023, which totaled $0.04 this quarter on an EPS basis. Additionally, and as previously guided, there was a seasonal increase in salary and employee benefits. Our ROE for the quarter stood at 6%. Slide 9 shows net interest income down by $1.9 million or 1% year-over-year, mainly due to lower interest income from lower loan volume. On a sequential basis, net interest income was up by $2.4 million or 1%, mainly due to lower liquidity levels and lower funding costs, partly offset by lower loan volumes. Our net interest margin was up 4 basis points sequentially to 1.8%, mainly for the same reasons. Slide 10 highlights the bank's funding position. Following a period of elevated liquidity, we gradually reduced our deposit bases considering the loan volume reductions and our previously stated objective of reducing our liquidity position. On a sequential basis, total funding was down $1 billion. Strategic partnership deposits decreased by $500 million as customers allocate funds back into market activity or term products. Deposits from advisers and brokers were also down by $300 million, mostly due to the natural runoff and our intentionally less competitive market rates. Despite the reduction in liquidity, the bank maintained a healthy liquidity coverage ratio through the quarter, which remains materially above the industry average. Slide 11 presents other income, which was relatively unchanged compared to last year. Higher income from financial instruments was mostly offset by lower lending fees due to tempered commercial real estate activity and lower income from mutual funds. On a sequential basis, other income increased by $8.5 million or 13% as a result of higher income from financial instruments due to more favorable market conditions and higher service charges as 2 months of fees were waived during Q4 2023. This was partly offset by lower lending fees. Slide 12, shows noninterest expenses, up by 4% compared to last year, mainly due to higher technology costs as the bank is investing in its infrastructure as well as higher professional and advisory service fees related to mainframe outage that occurred last quarter. This was partly offset by reduced headcount and lower performance-based compensation. On a sequential basis, noninterest expenses were up 6%, mainly due to seasonally higher vacation accruals, employee benefits and performance-based compensation, partly offset by lower advertising fees. This quarter, the remaining expenses related to the mainframe outage in the fourth quarter totaled $0.04 on an EPS basis. Turning to Slide 13. Our CET1 ratio was up 30 basis points to 10.2% due to a reduction in risk-weighted assets. Slide 14 highlights our commercial loan portfolio, which was down about $1 billion or 6% year-over-year and was down $500 million on a sequential basis, mostly due to slowing real estate market activity and our inventory financing dealer base being prudent in the current macroeconomic environment. Slide 15 provides details of our inventory financing portfolio. This quarter, utilization rates were 50% and are lower than historical levels as dealers have been taking a more conservative approach to inventory. We expect utilization rates to follow the usual seasonality, which includes a reduction in the spring and summer periods before starting to increase in the fall. Commercial real estate, our unfunded pipeline has been impacted by market trends but remains healthy. We have seen some developers slow down the starts of projects given the current macroeconomic environment as they navigate through this period of high inflation and interest rates. However, demand in residential real estate continues to exceed supply. As seen on Slide 16, the majority of our portfolio is in multi-residential housing and only around 3% of our commercial loan portfolio is in office. Our office portfolio consists of Class A or B assets and final recourse to strong and experienced sponsors. As we have said over the past few quarters, the majority of the portfolio is in multi-tenanted properties with limited exposures to single-tenanted buildings. Slide 17 presents the bank's residential mortgage portfolio. Residential mortgage loans were up 5% year-over-year and 2% on a sequential basis. We maintain prudent underwriting standards and are confident in the quality of our portfolio as evidenced by the high proportion of insured mortgages at 58% and low LTV of 51% on the uninsured portion. It's also worth noting that more than 80% of our residential mortgage portfolio is fixed rate, of which more than 80% will mature in 2025 or later. Allowances for credit losses on Slide 18 totaled $218.5 million, up $15 million compared to last year, mostly as a result of higher allowances in the commercial portfolio. Allowances for credit losses increased by $3.7 million sequentially, mostly as a result of higher allowances on commercial loans due to credit migration, partly offset by write-offs in the commercial and personal loan portfolios. Turning to Slide 19. Provision for credit losses was $16.9 million, an increase of $1.5 million from a year ago, reflecting higher provisions on performing loans. PCLs were essentially in line with last quarter. As a percentage of average loan and acceptances, PCLs were unchanged at 18 bps. Slide 20 provides an overview of the impaired loans. On a year-over-year basis, gross impaired loans increased by $73.9 million and were up $16.5 million sequentially, mostly in the commercial portfolio, which is well collateralized. We continue to manage our risk with a prudent and disciplined approach and remain adequately provisioned. As we look ahead to Q2, I would like to note a few key points focused on the next quarter. We expect our loan book to continue to be impacted by macroeconomic conditions as dealers continue to be prudent in restocking inventory and due to lower level of activity on real estate projects. Adding the impact of the lower number of days, we expect a low single-digit NII reduction for Q2. NIM is expected to remain relatively stable. We are committed to reducing our efficiency ratio, and we'll share more details with you later this year as part of our revamped strategic plan. For the second quarter, we expect a slight increase of our efficiency ratio due to the pressure on revenues I just mentioned and as we incur expenses to support the review of our strategic plan. Given the macroeconomic environment, PCLs are expected to be in the high teens or low 20s. Capital and liquidity levels are solid and expected to remain strong for Q2. We I will now turn the call back to the operator.

[Operator]

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

[Meny Grauman, analyst]

Just a question on the strategic review. Any more you can provide us with in terms of a time line for when we should expect to hear a more fulsome plan from you?

[Eric Provost, executive]

It's Eric. In terms of time line, we indicated that we're aiming spring, and I would clarify later, spring. So the team is working really hard to make this happen and more to come there.

[Meny Grauman, analyst]

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

[Eric Provost, executive]

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

[Meny Grauman, analyst]

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

[Eric Provost, executive]

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

[Operator]

Next question will be from Sohrab Movahedi at BMO Capital Markets.

[Sohrab Movahedi, analyst]

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

[Yvan Deschamps, executive]

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

[Sohrab Movahedi, analyst]

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

[Yvan Deschamps, executive]

Exactly. So as you see, there's been a reduction of commercial. Commercial is a big consumer of capital from an RWA perspective. So that's essentially coming from that impact, yes.

[Sohrab Movahedi, analyst]

Okay. I mean, I think, Yvan, I think I'll reiterate to Meny's point here. I mean -- or Eric, sorry. We need -- like over the last 5 quarters, I mean, the earnings, even if you adjust for some one-timers, are ranging from $40 million to $50 million. That's a wide swing or a wide range. And we need this strategic review to have an understanding of what sort of an organization Laurentian Bank is going to be so that what sort of an earnings potential is going to have going forward. So I guess the sooner you could give us some of that, the better. It's not a question. It's a statement. But I feel like it's hard to make an investment case, not knowing exactly what we're looking.

[Yvan Deschamps, executive]

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

[Operator]

Next question will be from Gabriel Dechaine at National Bank.

[Gabriel Dechaine, analyst]

I just want to talk quickly about other income. One, it looks like the service fees and -- well, in particular, service fees that you would maybe cut or refunded last quarter because of the IT issues look like that's stabilized. So we're through the worst of it, I suppose? Or that's gone completely?

[Eric Provost, executive]

Yes, exactly, Gabriel. So there was 2 months waived in Q4 for about $2 million, and that's the difference in the improvement this quarter. So it's relatively stable, excluding the wave of the fees that we've seen in Q4.

[Gabriel Dechaine, analyst]

Okay. And then the -- what is the investment income or investment instruments, whatever it's called, the $12 million figure. What was behind that spike?

[Kelsey Gunderson, executive]

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

[Gabriel Dechaine, analyst]

Okay. Liquidity has been -- you're reducing liquidity. We don't have an LCR ratio we can look at to kind of track that. I know we talked about this last quarter, the internal measures that you have access to. But what I can say is the loan deposit ratio is nearly 150% now. Are you comfortable with that level? And could we see it even going higher? And there's a bit of an expectation that loan-to-deposit ratios go down, not up in the current market context and probably into the future as well.

[Yvan Deschamps, executive]

Gabriel. So the way we manage the funding of the bank is we look at the deposits plus securitizations, which are long-term, very cost-efficient funding as well. So if you take those two compared to the loans, we try to maintain them relatively in line. If you look at that based on this quarter, we're at 1.03. So that's the way we manage it. It's not only a question of deposits versus loans. It's really a question of securitization plus deposits versus the loans, and we're currently, I would say, in the positive territory because we intend to manage that around 1.

[Gabriel Dechaine, analyst]

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

[Yvan Deschamps, executive]

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

[Gabriel Dechaine, analyst]

Got it. That makes sense. And you say demand deposits, but they're not 0 cost. I would assume they're probably like high interest savings account type?

[Yvan Deschamps, executive]

Yes, exactly. And the difference, and we could simply just reclass that as normal demand deposits. Happy to do that if we want. But the key element here is that we signed some multiyear agreements with some customers and we're managing on their behalf their -- the demand deposits of the idle money of their customers.

[Gabriel Dechaine, analyst]

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

[Eric Provost, executive]

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

[Operator]

Next question will be from Nigel D'Souza at Veritas.

[Nigel D'Souza, analyst]

Apologies if you already covered this, but do you have a breakout of the categories within your commercial portfolio that drove the higher provisioning for commercial loans this quarter?

[William Mason, executive]

Nigel, it's Liam Mason, CRO. It was a broad general migration across the portfolio. Obviously, as Eric articulated, we're seeing a slower environment in commercial real estate, and we are seeing pressures in that space. But for our portfolio, broad general migration across the commercial portfolio. And we've been disciplined around our reserving nodule across all those categories, and that's reflected in our PCL this quarter.

[Nigel D'Souza, analyst]

Any comments on the contribution from inventory financing to provisions this quarter?

[William Mason, executive]

It would be just -- it's part of the portfolio, and we're pleased that our dealers are being prudent with regard to the restocking, as Eric remarked, but a degree of migration, as you'd expect at this point in the economic cycle.

[Nigel D'Souza, analyst]

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

[Yvan Deschamps, executive]

First, the LCR includes deposits includes the funding, the general funding of the bank. And definitely, as you mentioned, the other liquidity baskets that we have. So it's a general trend. I think I just try to make it easy by talking about deposits, which is probably the simplest element to the equation. So when we take all that into account, we are still managing a pretty high level of LCR. We are materially above the industry average or the big 6. So we were elevated. We had built a war chest in terms of liquidity, seeing the macroeconomy change as well as based on the recent events that happened. So we're still very well positioned and very safe from a liquidity perspective. When I mentioned the deposit decrease this quarter, I just reaffirm that we manage securitization and deposits depending on how the loans are going. The difference this quarter is, as stated, we had an objective to reduce it. We've been less aggressive on the deposits, on the rates of the deposits, and that's exactly what it created. The biggest impact of that, you can see is broker GIC that's reduced by $300 million because we've been less aggressive on rates.

[Nigel D'Souza, analyst]

Okay. And just one point of clarification. Put simply, if your deposit balances continue to decline, is that going to increase your LCR ratio? Or is it going to remain stable? And is there any cost to keeping an elevated LCR ratio because it doesn't seem you need it in order to meet these deposit outflows.

[Yvan Deschamps, executive]

As you increase the deposits, you LCR increase. As you decrease the deposits, your LCR decrease. But it's not only a question of deposits or liquidity. LCR is also a question of the flows that you need for the next 3 months as well. So it does depend on the volumes. It does depend on the commitments we have. So there's many aspects impacting the LCR, and you have to put all that in the pudding and just remain cautious, and that's what we've been doing in terms of the LCR.

[Operator]

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

[Darko Mihelic, analyst]

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

[Yvan Deschamps, executive]

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

[Darko Mihelic, analyst]

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

[Yvan Deschamps, executive]

I'll take it and open to my colleagues if they want to complete. But last quarter, we had 2 months of waste fees for $2 million. But in addition to that, we had about $3 million of expenses to remediate and correct what we had to correct last quarter. So in total, what I mean, if you take both quarters together, we had $2 million of fees waived and that was only in Q4, not impacting Q1. We had $5 million of spending to doing professional fees and expenses, $3 million of that was in Q4 and $2 million of that was in Q1. So technically, total of $7 million, and that's now passed. Okay.

[Darko Mihelic, analyst]

Okay. I apologize. I just didn't have my notes at my fingertips. And so now after the fact, has there been any work on the customer experience, given the outage and further remedial steps that are necessary?

[Eric Provost, executive]

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

[Darko Mihelic, analyst]

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

[William Mason, executive]

Sure, Darko. Liam. I mentioned that. Just maybe take you back a little bit and talk about the history we've done with regard to ACLs. If you recall, post COVID, we've been systematically building our reserves based on the forward expectation on our performing portfolio. We have continued to systematically build against performing to position ourselves to the macro cannot conditions. So I would say it's both in the performing as well as within the watch list portfolio. And we're very disciplined in terms of how we set individual reserves on the watch list and the workouts. The broad industry has seen some pressures within real estate, as we've articulated as other players have. But we're very disciplined within our reserves, both with regard to performing and specific watchlist files.

[Operator]

Next question will be from Doug Young at Desjardins.

[Doug Young, analyst]

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

[Eric Provost, executive]

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

[Doug Young, analyst]

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

[Eric Provost, executive]

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

[Doug Young, analyst]

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

[William Mason, executive]

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

[Doug Young, analyst]

Okay. And then just on expenses, lastly, did I hear it right, essentially, excluding restructuring charges and so adjusted the adjusted expense base, the anticipation is that it will be relatively flat in Q versus Q1. Did I get that messaging correct?

[Eric Provost, executive]

Yes. You did, Doug.

[Operator]

Next question will be from Stephen Boland at Raymond James.

[Stephen Boland, analyst]

Just the first question actually was just on -- you had talked before moving into different verticals in the inventory finance and you've added these dealers in those different verticals. I'm wondering if you've gotten the same type of protection or covenants that you have in the traditional silo that you've been in, in terms of guarantees, in terms of actual credit protection. Just wondering if there's any changes in that.

[Yvan Deschamps, executive]

Yes, Stephen, it's a great question there. And the approach is always the same in our operating model. So we always start with the OEM trying to secure, and we have 95%, 96% of OEM repurchase in place, whatever the industry we're chasing. And after that, it goes down to financing the asset at the wholesale price getting PG and dealer guarantees for the overall line utilization and all link, of course, to that repurchase to the OEM. So yes, we maintain the same disciplined approach whatever type of industry we're chasing.

[Stephen Boland, analyst]

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

[Yvan Deschamps, executive]

Well, for us, this is a disciplined approach we gave ourselves and we remain true to it. And that's what we believe allows good companies to go through cycles. So we're quite consistent in our approach. So, that's the way.

[Stephen Boland, analyst]

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

[Yvan Deschamps, executive]

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

[Operator]

That's all the time we have for questions. I would now like to turn the meeting over to Eric.

[Eric Provost, executive]

Thank you for joining the call today. As we head into Q2, our focus remains on our 3 strategic priorities; customer focus, simplification, and strategic investments to improve our technology infrastructure. We continue to work to revamp our strategic plan and look forward to having more to say later this year, including further details about our upcoming investor events. Thank you.

[Operator]

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