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Laurentian Bank of Canada
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Good day, and welcome to the Second Quarter Results 2022 Laurentian Bank Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Ms. Susan Cohen, Head Investor -- Head of Investor Relations for Laurentian Bank. Please go ahead, ma'am.
Thank you. Good morning and thank you for joining us. Today's opening remarks will be delivered by Rania Llewellyn, President and CEO and the review of 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; Éric 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 to Slide 2 of the presentation.
I would also remind listeners that the bank accesses 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.
As many of you know, several months ago, I made the decision to retire from Laurentian Bank after more than 10 fulfilling years as Head of Investor Relations. During that time, I have had the pleasure of working closely with the investor and analyst community in communicating the Laurentian Bank story. The bank is entering a new chapter, and I look forward to the progress it will continue to make.
I would also like to formally introduce Andrew Chornenky, who joined the bank in May as Vice President and Head of Investor Relations. Andrew has extensive experience in banking and Investor Relations and has worked closely with the bank over the last 18 months. I know that he will be a great and collaborative partner with all of you.
It is now my pleasure to turn the call over to Rania Llewellyn.
Thank you for joining us today. We continue to make good progress against our strategy this quarter. We are confident that our strong prudent risk culture and disciplined focus on cost management will allow us to manage through the evolving macroeconomic environment, and we expect to exceed our 2022 financial targets. On behalf of the entire leadership team, I would like to thank everyone at Laurentian Bank. The results this quarter demonstrate their commitment to working as one winning team and putting the customer first.
I will now review our Q2 2022 results. Driven by top line revenue growth of 4% year-over-year, net income for the second quarter was $61.6 million or 9% higher than a year earlier, with earnings per share of $1.39, up 13% year-over-year, leading to our most profitable quarter since Q2 2018. ROE reached 10.3%, up 110 basis points from a year ago, and pre-tax pre-provision income improved by 20% year-over-year.
Results were primarily driven by strong performances in commercial banking and capital markets and our continued focus on cost management. Quarter-over-quarter, net income was up 4% and earnings per share increased 10%. ROE was up 110 basis points sequentially, and pre-tax pre-provision income improved by 6%. With strong revenue growth and our focus on cost management, our efficiency ratio improved to 65.2%, a 470 basis point decrease year-over-year and 180 basis point decrease quarter-over-quarter.
Operating leverage was positive at 2.7%. The bank's CET1 capital ratio, which is presented under the standardized approach, was 9.3% compared to 9.8% last quarter. This variance was a result of redeploying capital accumulated during the pandemic and is in line with our strategic plan to invest in profitable, sustainable organic growth.
Given the current macroeconomic conditions and ongoing market volatility, a few additional highlights from this quarter showcased the continued confidence in our strategy, including the successful issuance of $300 million of covered bonds and $350 million of subordinated debt, leveraging our diversified sources of funding. And the confirmation of our long and short-term credit ratings from S&P with a stable outlook. We are also pleased to announce a $0.01 increase to the bank's dividend to $0.45 per common share. This is a 13% increase compared to the dividend declared in the previous year.
As I outlined at our Investor Day, our business lines play a key role in the success of our strategy. Commercial banking continues to be our growth engine and is executing on a proven business model highlighted by a record quarter for organic loan generation, led by inventory and real estate financing.
Inventory financing was up by over $800 million or 32% quarter-over-quarter to $3.4 billion. Real estate financing grew by over $300 million or 4% to $9.4 billion over the same period. And equipment financing is tracking to plan, driven by strong originations and asset price increases.
In Capital Markets, we saw a strong rebound in revenues compared to last quarter, reflective of active debt markets and continued progress on our strategy to provide a more focused and aligned offering. First, we improved our syndicated position with several provincial borrowers in line with our objective to grow with core issuers, while also participating in the Government of Canada's inaugural green bond issuance as well as a sustainable bond issuance from the First Nations Financing Authority.
Second, we achieved our fiscal year 2022 goal to provide coverage to at least 75% of our top tier commercial clients, up from 50% last year. And third, we integrated our new real estate research capabilities in our offering, which has led to improved deal pipeline conversion.
In line with our strategy to reposition for growth with a digital-first approach, Personal Banking continued to make progress in closing key foundational gaps to drive customer retention and acquisition while deepening existing relationships.
First, the bank launched a new contactless TAP debit card with Interact Flash functionality. The launch of the new card closes a key foundational gap and supports the bank's strategy to drive customer acquisition and enhance the customer experience. The new card continues to give customers access to more than 1 million ATMs across Canada and around the world.
Second, following our commitment to improve the onboarding experience, we have announced a strategic partnership with thirdstream to enable digital account openings. Rolling out later this year, existing and new customers will have access to a simplified fully digital application process to open an account in minutes.
Third, we’ve reduced redundant systems and processes by more than 60% for mortgage originations so far this year, and we remain on track to meet our time to yes target of 3 days by year-end. As we said at our Investor Day, our strategic plan is underpinned by a strong culture and commitment to ESG.
Recently, as part of making the better choice, we added 4 new ESG themed funds and launched green teams at the bank, an employee-led initiative to identify low-cost and innovative ideas to make our bank more environmentally friendly.
We have also been taking action to support our employees, including a work-from-home first approach, reducing commuting time and expenses for employees, allowing them to spend more time with their families, providing four summer afternoons off as well as a day off on their birthday, for a total of three additional days off per year.
And the launch of LifeSpeak, a new mental health resource and wellness platform that provides education and advice on mental health issues. The physical and emotional strength of our one winning team is a priority, and we believe that maintaining good mental health contributes to personal and professional development.
Our culture is our driving force and our employees are the biggest stakeholders in our success. Over the past few weeks, we have held a series of employee appreciation events to thank them for their contribution to the bank. Their energy and ongoing commitment will help fuel our path forward.
I would now like to offer some thoughts on the evolving macroeconomic environment and potential impacts on the bank. Regarding our loan portfolio, we are pleased with our recent results. Inventory financing is significantly ahead of expectations as a result of three factors. First, OEMs are recovering faster than anticipated from the pandemic and are able to shift more product than expected. Second, the successful growth of our dealer network, which is 20% larger today than it was last year. Third, an increase in the cost of goods driven by supply chain issues and inflation impacting the cost of materials. Looking forward, we expect a tempering of consumer demand as a result of the current macroeconomic environment and a seasonal volume reduction in Q3, followed by a gradual recovery in Q4.
Turning now to our real estate portfolio. We have a healthy pipeline of $4.4 billion, up from $4.3 billion last quarter. While growth is expected to moderate, the country is still experiencing a structural housing supply shortage, especially in certain regional markets. Given our specialization in this sector, we continue to support our long-term top-tier clients as they work to meet demand. In speaking with them, they see further opportunities as a result of future immigration waves, which will lead to sustainable population growth in Canada and the continued need for more housing.
As we look to the residential mortgage sector, we expect loan growth to moderate in this rising rate environment. With a potential cooling period, it enables us to continue to make the strategic improvements we laid out at our Investor Day, to enhance the customer experience and better positions us to capitalize on future growth. Across our loan book, our underwriting practices are strong, and our portfolio is highly collateralized. We take an extremely disciplined approach in dealing with uncertainty and remain adequately provisioned to weather the rapidly changing environment.
Before I conclude my opening remarks, I would like to personally thank Susan Cohen for her dedication to the bank's leading Investor Relations for the last 11 years. She has played an important role over that time in establishing strong relationships with our analysts and investor community, and we would like to take this time to wish her all the best in her retirement.
I'm also pleased to welcome Andrew Chornenky to the bank. His background and extensive experience in banking and financial communications will be announced as we continue to execute on our strategy. He knows the bank very well, and I know he's looking forward to meeting and working with all of you.
I would now like to turn the call over to Yvan.
I would like to begin by turning to Slide 12, which highlights the bank's strong financial performance for the second quarter of 2022. Reported EPS was $1.34, and net income was $59.5 million. Adjusting items this quarter amounted to $2.8 million before taxes and included $3.1 million related to the amortization of acquisition-related intangible assets and a favorable adjustment of $300,000 to the provision related to premises.
In December 2021, we estimate the charge related to subleasing of our corporate office spaces and for the write-off of the related leasehold improvements. On a quarterly basis, we review and update our estimates. As a result, there may be further adjustments, including once the subleases are finalized. Details of adjusting items for the quarter are shown on Slide 26.
The remainder of my comments will focus on adjusted results. EPS and ROE were $1.39 and 10.3%, an increase of 13% and 110 basis points, respectively, compared to a year ago and ahead of our 2022 financial targets. The pre-tax pre-provision income or PTPP was $90.3 million, a 20% increase compared to last year, driven by both strong revenue growth and a reduction of net -- of noninterest expenses.
Compared to the first quarter of 2022, EPS and ROE increased by 10% and 110 basis points, respectively, mainly from sustained commercial loan growth, other income related to financial markets and continued cost management. PTPP increased by 6%.
Slide 13 shows the net interest margin. At 1.87%, NIM was relatively flat, down 1 basis point year-over-year and quarter-over-quarter as the improved commercial banking contribution was offset by a lower contribution from Personal Banking. Regarding rising interest rates as outlined by the sensitivity analysis in the MD&A, a 1% parallel rate increase on the yield curve would have a positive impact of $12 million on NII over the next 12 months.
Other income, as presented on Slide 14, increased by 2% compared with a year ago and 4% sequentially, mainly due to a strong performance in financial market-related revenues being fees and securities brokerage commissions as well as income from financial instruments.
Slide 15 presents noninterest expenses that decreased by $5.3 million or 3% compared to a year ago. This was mainly due to lower amortization charges and rent expenses resulting from the strategic review and our decision to reduce our corporate office footprint by 50%. Partly offsetting this decrease were regular salary increases and the higher level of performance-based compensation related to the bank's improved performance.
Sequentially, noninterest expenses decreased by 2% due to lower premises and technology costs as well as cost discipline in other expenses. The efficiency ratio this quarter stood at 65.2%, an improvement of 470 basis points year-over-year. Sequentially, the efficiency ratio improved by 180 basis points.
As a result of revenue growth and our focus on cost discipline, the efficiency ratio has exceeded our expectations this quarter. Given our strategic investments to close key foundational gaps and improve the customer experience with a digital-first approach in personal banking, overall spending will increase in the second half of 2022. Operating leverage was positive at 2.7%.
Slide 16 presents our diversified sources of funding. In the last two quarters, deposits increased by 9.8% or $2.3 billion and loans grew by 6.6%. Sequentially, deposits grew by 4.7% or $1.1 billion, while loans grew by 4.3%. The deposit growth tracks positively with our objective to grow deposits in line with asset growth on a relative basis. Growth in personal notice and demand deposits reflect our ongoing strategy to deepen and expand relationships with advisors and brokers.
Slide 17 highlights our capital position. The CET1 capital ratio, which is presented under the standardized approach, stood at 9.3% at the end of the second quarter compared to 9.8% last quarter. This quarter's variation was directly linked to the redeployment of accumulated capital during the pandemic to sustainable, profitable commercial loan growth in line with our strategic plan.
Considering the current macroeconomic environment and in line with our disciplined approach to capital, we have taken the prudent step of pausing our activities to repurchase additional ships as part of our normal course issuer bid. To date, we have redeemed 401,000 common shares or about half of our entire program.
We will continue to monitor the macroeconomic situation and reassess the program throughout the rest of the year. Given our prudent approach, we are confident that our internal capital generation will sustain loan growth for the remainder of the year.
Slide 18 highlights the commercial loan portfolio, which delivered strong growth. Loans increased by $1.3 billion or 9% quarter-over-quarter, driven by growth in inventory financing of over $800 million or 32% and real estate financing of over $300 million or 4%. As Rania mentioned, the ability of OEMs to ship more product, the growth of our dealer network and the increase in the cost of goods outpace the expected normal seasonal volume reduction in inventory financing this quarter.
Slide 19 presents the Pan-Canadian residential mortgage loan portfolio. Residential mortgage loans increased by 1% sequentially. We previously mentioned that improving the performance of the mortgage business is expected to be gradual, and we continue to take actions to improve the customer experience, retain customers and renew growth.
The bank's residential mortgage portfolio remains relatively weighted towards insured mortgages at 56% when compared to the industry and combined with a low LTV of 44% on the uninsured portfolio, contributes to reducing the overall risk of this business despite the changing macroeconomic environment.
Turning to Slide 20. Allowances for credit losses totaled $196.9 million, a sequential decrease of $12 million, mainly due to write-offs of previously provisioned accounts in the commercial loan portfolio.
As shown on Slide 21, the provision for credit losses was $13 million in the second quarter of 2022, increasing by $10.6 million from a year ago. This was mainly due to releases of provisions on performing loans of $9.9 million last year. Sequentially, the provision for credit losses increased by $3.6 million due to volume growth in commercial loans and changes in the macroeconomic outlook. The PCL ratio stood at 15 basis points.
Slide 22, highlights the improving trend in gross impaired loans, which decreased by 12% quarter-over-quarter, mainly due to write-offs of previously provisioned accounts in the commercial loan portfolio. We have a prudent and disciplined provisioning process, which includes setting reserves that allow us to be responsive to changing macroeconomic conditions.
We further stress the portfolio against various scenarios, and this quarter, given the heightened level of uncertainty, we increased the severity of our pessimistic scenario and it's waiting in selling our ACL. Given the level of uncertainty in the market, we continue to manage our risk with a cautious approach and remain adequately provisioned.
We would now like to offer some thoughts on how we see the remainder of the year developing. We expect revenue growth to continue in Q3 as a result of three additional days in the quarter as well as tailwinds from recent commercial loan growth. NIM is expected to move north of 1.90%.
We expect continued good performance from our capital markets business line, but remain cautious as uncertainty and market volatility remain elevated. Our focus on cost discipline will continue. Overall spending is expected to increase in the second half of 2022 as we deliver strategic initiatives to improve the customer experience in personal banking and invest to support our growth.
Despite the anticipated increase, we expect to remain below our 2022 efficiency ratio target of less than 68%, leading to a positive operating leverage for 2022. The provision for credit losses remains difficult to predict on a quarterly basis, given the macroeconomic environment.
We efficiently redeployed previously accumulated capital into profitable organic growth during the quarter, leading to an improvement of our financial results. We now expect more tempered growth for the balance of the year with internal capital generation expected to sustain loan growth during the second half of the year.
As a reminder, next quarter, the semi-annual LRCN interest payment will impact EPS by $0.06. Despite the current environment and related uncertainties, we expect that the strong results delivered in the first half of the year position us to exceed our 2022 financial targets.
I will now turn the call to Andrew.
Good morning. Thank you, Rania, and Susan for those introductions. Susan, I'd like to wish you all the best in your retirement. Those of you on the call, I look forward to introducing myself either in person or virtually over the coming weeks and working closely with you in the future.
At this point, I'd like to turn the call over to the conference operator for the question-and-answer session. Operator?
[Operator Instructions] And we can take our first question now from Meny Grauman of Scotiabank.
Hi. Good morning. I wanted to start off just by asking a question about loan growth. Commercial loan growth up very strong sequentially and year-over-year. I'm just wondering if you could break that out between increases in line utilization versus new business, how that would break out in terms of the growth?
Yes. Thank you, Meny, Eric here. It's a good question. Actually, our utilization right now is at 50%. So closer to the mid-50s, we guided you towards and significantly above the mid-30s we’ve experienced last year. And like I mentioned in the opening remarks, like the team did a great job in terms of growing our dealer base over 20% year-over-year. So I'd say those are the biggest drivers for that growth increase in inventory financing. We are seeing more of a trend towards normalization in that portfolio from what we've experienced prior to the pandemic situation.
So just specifically digging into that inventory finance business, I just wanted to clarify relative to the expectations that you provided when we spoke on the back of the Q1 results. Just what's happening there? I know you spoke to it a little bit, but just to clarify in terms of -- clearly, the environment is better than you expected. So is that sustainable? And in terms of the seasonality that we would typically see, is that something that is going to be observable in Q3? Or the bigger growth trends going to I think going to not make that observable in Q3 either.
Yes, Meny, what we expect is really a volume reduction in Q3 due to the seasonality of the product. So we expect some reduction, but that will be followed by a gradual recovery in Q4 in terms of growth. The big, big driver is the fact that some OEMs are just recovering faster in terms of the supply chain, and they're able to replenish the dealerships. But again, in terms of line utilization at 50%, this is pretty much where in normal trends, we should expect the dealers to be right now. So we are very comfortable where we are, and we expect seasonality to have, again, an impact this year for Q3 in terms of volume reduction there.
So Meny, maybe if I could just add to Eric's comments. As we said in all of our remarks, the results this quarter did exceed our expectations. So based on the guidance that we provided in the last quarter, this did exceed our expectations. And primarily driven, like we knew we had grown our dealer network. We’ve said we put the pipelines in place. The OEMs recovering faster was really kind of the biggest driver here in addition to the increase in the cost of goods. So -- but as Eric mentioned, in terms of the utilization, we're going back to pre-pandemic levels. So in terms of the Q3 forecast, as Yvan mentioned in his remarks, we are likely going to see a small seasonal reduction in Q3, which is why we are still forecasting that revenues are going to continue to grow because of that tailwind in commercial with a gradual recovery in Q4.
Got it. So just putting it all together in terms of overall loan growth. So it seems pretty reasonable that, that utilization piece has largely run its course. And so going forward, I guess is it feasible to expect a moderation in loan growth just because utilization is not going to be a driver as much of a driver as it has been?
Yes, Meny, this is Yvan. For the second half of 2022, definitely, you should anticipate that the growth is going to temper and that’s impacted by what we just discussed. So that’s also why the internal capital generation is going to sustain it or even more than sustain it for the next 6 months. And next year, we are going to restart as well the growth in that portfolio with normal seasonality that we are going to see. But for the second half, expect a tempering of that growth.
Got it. And I guess you preempted my question on capital, but maybe I will just ask, we’ve seen one of your peers tap an ATM to help fund growth. Is ATM something that you would consider, if growth exceeded your expectations? So once again, is that something on the table for you?
Yes. Since you opened the capital topic, Meny, I will just use a few messages and finish and answer by your ATM question. So we have a solid capital base. Right now we are at 9.3% CET1, and we do manage capital prudently. And as a reminder, we always stress that we are under the standardized method, which is important to note for some investors. Our objective is to manage above 8.5%. So we are still quite above that level. As a reminder, pre-pandemic, we were at 9%. So we are still ahead of where we were pre-pandemic. So the pandemic caused deceleration or reduction of some portfolio. We had a catch-up to do. So we've seen the up and now a recovery of that portfolio, but we are still at a good place in terms of capital.
Our first priority has always been and remains to deploy that capital through organic growth. And that’s what we've seen over the last 6 months, and that definitely come due to an improvement of the financial statements. So as I mentioned, we expect now tempered growth for the remainder of the year and the internal capital generation to cover that, which leads to finishing the year probably around the same level or slightly a little bit up depending on what's going to happen exactly. So to answer your question, the ATM is definitely part of any toolbox in terms of management of the capital, but at this point, based on the comments I just provided, we are comfortable with the level, and we don't anticipate having to use that.
Thanks for that full answer. Thank you.
We can now take our next question from Doug Young of Desjardins Capital Markets. Please go ahead.
Hi. Good morning. Just going back or going to net interest margins, given the pickup quarter-over-quarter in commercial loan balances and decline in the personal side and deployment of capital or the deployment of funding and whatnot, I would have expected NIMs to be actually up sequentially. Is this -- is there something else going on here in terms of asset yields or competitive pressures or funding costs. Hoping you can just kind of like maybe elaborate a bit?
Yes, definitely a good question. And what I can do is explain a bit -- give you a bit more color as well as a bit of guidance going forward as well. So the NIM was relatively stable this quarter. So the higher commercial loan growth definitely contributed favorably to it. But as I mentioned and used in my comments were personal, but I will generalize that there was definitely an impact of higher funding costs this quarter and a very competitive pricing environment for all the banks, so not just for us.
So on the funding side, by example, in a raising rate environment, what happens is as an example, in the CDOR rate is going to move faster based on anticipation and the primary is going to move after when the rates increase. So that delay is something that kind of delay the recovery of the NIM. But we now expect that for the second part, we are going to be north of 190 and a few basis points, probably above that 190. So we will see the tailwind of that growth fully kicking in over Q3 and depending on the level that we will experience in the portfolio mix in Q3, that should be sustained in Q4.
And then just a follow-up on that. Is that because the delayed prime increase is starting to kick through post the funding cost going up? Is that the main driver that's pushing it up over 190 in Q3?
Yes, there's two impacts. Definitely, that is an example. We've been competitive from a funding perspective as well because we have strong growth, and we have to sustain it. But what you see also is that the full growth or the full impact of that growth usually kicks in the next quarter, right, because there is half of the quarter, and then you get the full benefit in the next quarter. So that’s really for the remainder of the year that will be north of the 190 and that you'll get the full benefit.
And that's factoring in in terms of Bank of Canada rate cuts, obviously, there's been one already. Is that factoring in two more additional rate increases -- sorry, cut increases?
Yes, at this point, we are all looking at rates, including today. So everybody is expecting a rate increase. So on the rate increase, we mentioned in the MD&A that currently the way we are positioned at the end of Q2, a 1% increase parallel increase on the rate curve would be equivalent to $12 million. So depending on how the rates evolve towards the end of the year, there will be an additional kick in the NIM and in the NII as well. But we will see probably most of it ticking towards the end of the year and next year, not necessarily [indiscernible].
Okay. So that's not in the Bank of Canada future [ph] rate increases is not in your above 190 guidance?
It's partly included, but again, it depend where it's going. Everybody expect now it's leading towards the neutral zone, that’s 2% to 3% towards the end of the year. And we all know or expect today there is probably going to be an increase, which will gradually benefit. But as I mentioned, there's a question of repricing of the assets. There is a timing of all of that. So it will be a gradual benefit over the next two quarters and with the May or the full contribution in 2022.
Okay. And then just I’m hoping you can unpack a bit of what's in other income, specifically the income from financial instruments was a big increase. And I think there was a mention of capital markets a few times, have you disclosed like how much capital markets contribute? Or would you disclose how much capital markets contributes the pre-tax pre-provision earnings? Or what was the quantum of the benefit you got from capital markets into your results this quarter? And was that a big part of what's in that income from financial instruments line?
Yes. The increase this quarter is mainly related to what we describe as other income related to financial markets. We don't disclose the segment. So there is no segment called capital markets, and we don't disclose that. But as we have done in the Investor Day, what we give as a proxy is two categories of the other income fees on the fixed income deals and things like that. So Kelsey is going to go through that as well as income from financial instruments. So I will pass it to Kelsey that will provide more color.
Yes. Thanks, Yvan. Yes, we are pleased with the quarter in capital markets, especially in the context of what was a pretty volatile market as everybody knows. For us, our fixed income business continues to perform really well. We saw good capital markets activity in the quarter, particularly with our core customers. As we talked about through the last quarters and last in the Investor Day, and as Rania mentioned in her opening remarks as well, we continue to align our entire capital markets franchise with our -- with the rest of the bank and in particular, commercial as well. And again, as Rania mentioned in her opening remarks, we've improved our coverage of our commercial clients from 50% to 75% in the last little while as well. So really good performance there, and particularly as well, actually, I should mention, too, that as Rania said in her opening remarks, we’ve improved our syndicated position with a bunch of our issuers, in particular, the government issuers. So, yes, really good quarter for us. I'm pleased with the results and -- yes.
And so just I will clarify it and then I will [indiscernible] questions, but the capital markets goes through the fees and security broker commission line and then the income from financial instrument is a separate than capital markets, is that right?
Yes, those are the two main lines.
And then income and financial instruments, like what was the big driver within that? Because it was up 57% really. I guess my question is what's in there, what is the sustainable?
Yes. So, I mean -- well, I mean, those are obviously mark-to-market adjustments on inventory positions as well. I think it's probably we are pointing out, we don't run large inventory positions here. We’ve been evolving our business kind of away from what you probably consider trading strategies into more kind of fee-based strategies and I kind of described the kind of the rationale for that kind of a minute ago. But -- so the percentage increase quarter-over-quarter is certainly large, but the absolute dollar amount is not particularly large. We typically run that line somewhere between $5 million and $6 million in the quarter. We were on high end of that this quarter, and -- but I think that’s probably a sustainable level to think about going forward.
Perfect. Great. Thank you.
We can now take the next question from Paul Holden of CIBC. Please go ahead.
Thank you. Good morning. I want to ask you some NIM-related questions, but from a little bit of a different angle and that relates to bank account opening and sort of growing those low-cost deposits, which are obviously becoming increasingly important given the trends you talked about for deposit costs. So maybe some thoughts there. Could they also now in terms of execution on our strategic plan you're on track on most objectives and one where you're falling a little bit behind this new bank account opening. So maybe we can address that and if it's becoming of increasing importance to you.
Thank you, Paul, for your question. It's Karine. So as you know, deposits are core to our bank and really a key focus in our strategic initiative as shared for Investor Day, we are focusing on three key segments, one of them being deposits and then credit cards and mortgages. We are well-positioned to compete in the market through the competitive rate, and we announced a strategic partnership with thirdstream, which is really going to allow us to enable digital onboarding and further drive deposit growth. So we will have an opportunity to grow nationally outside of Quebec. We’ve also introduced the loyalty team, which is really setting us up for good progress in terms of proactively reaching out to customers in order to retain their deposits. But we need to continue to improve as we build digital capabilities our account opening target is -- was really a stretch that we've established, and it's aligned to a digital journey. So it's really just a question of timing. So we believe that we're building the right foundation for growth.
Okay. And when you say it's a question of timing, how should we thinking about that timing given you're going to launch the thirdstream partnership sort of in the back half of this year. Is it reasonable to have expectations than that branch-raised deposits should start to accelerate in 2023? Or might it take longer than that?
Yes, that's a fair assumption that you're making, because overall the key message is really around the foundational gap that we are closing this year. So this year is a year of stabilization and we are focused on the customer acquisition and retention pieces and improving the customer experience. So as a digital-first approach and journey mapping keeps on happening and being delivered this year, we are going to see key benefits as we progress.
Okay, great. And then final question on this topic. Any kind of sense you can give us on what those digital deposits might cost from a funding perspective versus the pursue with the broker-based deposits? Like is there a significant spread between the two? I imagine there is, but I just want to verify.
I wouldn't say there is that much difference between the two. It's -- you can see, in fact, the rates they're public. So you can see that, and you're going to see they're relatively along with the short-term term deposits. So at this point, I wouldn't say there is a material and the amount is starting to be relatively small, what we have right now in digital because we are changing the platform, and we are changing that project as well. So that base we let it run off a bit this year as we transition to the new technology, the new platform, the digital onboarding that Karine is doing and next year, we are going to revisit exactly what's our strategy with those.
And Paul, just a reminder, so right now to a certain extent, the majority of our deposits are kind of on the retail side or kind of Quebec base with the digital onboarding platform, that gives us now a new platform to be totally paying Canadian and that -- and its fully self-serve in terms of account opening. So we are very excited about delivering that solution at the end of the year and reaping the benefits in fiscal 2023.
Got it. One last question on a different topic. I've talked a little bit about the inflationary impact on some of your customers, particularly in inventory finance. Wondering if there's any particular risks you're seeing or thinking about in terms of inflationary impacts on your commercial customers from a margin or profit perspective.
Well, Paul, we are highly specialized in our industries. And right now, yes, there are some inflation pressure. But like from our perspective in terms of how we underwrite, how we go to market, we are very cautious and prudent. And what we hear from customers that they are planning and making sure that they provide either contingency or some reserve on those potential increase in prices. So we feel good about where we are in the portfolio and I think that can be managed throughout our underwriting processes.
Yes. Well said, Eric. I mean, Paul, we factor, as Eric said, into our underwriting process, the rising construction and higher cost inflation in commercial real estate, the increased debt service into the leveraged finance and syndicate portfolios. And we are really very focused on how that will impact the customer and managing to prudent LTV metrics and assessing, as Eric said, the contingency levels in the [indiscernible]. So with the real estate, you factor in your contingencies when you are underwriting. We are comfortable with where the portfolio is, and managing to support our customers.
Okay. That’s good. I will leave it there. Thank you.
We can now take the next question from Nigel D'Souza of Veritas Investment Research. Please go ahead.
Thank you. Good morning. I had a question for you on the funding side. When I look at your term deposits this quarter, they were up by $1 billion. And last quarter, I believe they declined by $1 billion. I know that's year-over-year, but are you seeing a shift in preference away from notice and demand to term in a rising rate environment? And are you also seeing a shift maybe towards the advisor and broker channel in a rising rate environment? What's the outlook on the funding side? And how does that impact your NIM outlook?
Yes. Thank you for your question on deposits. I would say there is a big change of strategy between this year and last year. Last year, we were optimizing the funding of the bank, and we use in much more. So I will just push that aside because we can rediscuss it if I focus on what's been happening this year. This year, over the last 6 months, as I mentioned, we've been highly successful in terms of growing our deposits and really pleased with the performance.
On the demand deposits, we grew in added [ph] relationships. And that's been a very big contributor to the growth that we have. So we are pleased with that. On the term deposits, we've been active. In fact, in the branches, we did increase the rates and got good success at stabilization of that base, which is the objective that Karine discussed a few minutes ago for this year. From a broker perspective, we've been active in the market pretty competitive to sustain the growth of the bank. And what we're seeing is that the market is slightly shifting longer on the curve. But I wouldn't expect that, that's going to drive much on the NIM side because if you factor all the elements on the funding, we do hedge the balance sheet, and we do allow the terms of the funding and the assets. So at the end, treasury is going to realign all of that.
But definitely, from a deposit perspective, the longer we get the term deposits, the positive it is for us because you don't need to renew it constantly, which has been the trend for the last few years with shorter term, like 1-year was the key term deposits that people were getting in the market. But we feel and what we hear from customers and our advisers right now is that longer term are starting to get some traction. But as the interest rates continue to increase, we will probably continue to see that trend. But again, from the NIM, I wouldn't put too much impact on this. We do manage at a bank level, the overall balance.
Okay. That’s really helpful. Thank you. That’s it for me.
We can now take our next question from Jooyoung Kim of Credit Suisse. Please go ahead.
Hi. Good morning. I wanted to ask on inflation. But from an expense perspective, just wondering if you're seeing any inflationary pressure from wages. Just given some other commentary this quarter we saw from your larger peers on rising salaries and benefits. I wonder if you could give us a bit of color on what you're seeing from an inflation and wage perspective there. Thank you.
Yes. So thanks for the question, Jooyoung. I would say is that we continue to be focused on cost discipline, that's something that we embedded into the culture over the last 18 months. But just a reminder, cost discipline is only one aspect of it. We've also started to cost optimize structurally our organizations. So if you actually look at our expenses, year-over-year, we are down 3%. We are down 2% quarter-over-quarter. And so while everyone is experiencing some inflationary pressures, we have lots of levers that we can pull on. And it's something that we are dynamically managing our expenses.
So it's really finding that right balance between investing in the future while being prudent. And as Yvan mentioned in his opening remarks, the second half of the year, expenses will likely go up, to continue to deliver on our key strategic priorities, primarily BRAM, the Visa transformation and onboarding. But what we can guarantee and that's what we are very confident about at this point in time is that we will maintain our efficiency ratio below 68% with a positive operating leverage.
In terms of your question around just in terms of compensation and salaries, salaries have gone up, like I said, everybody is impacted by inflation. But when we look at the war on talent out there, we view salaries as just one small aspect of what the employee experience and total compensation is. And so -- to put that in perspective, despite the war on talent, we've been able to attract top talent since November 1, representing almost 20% of our overall employee base. And that's a factor for a number of things.
We've really differentiated ourselves in the market by offering our employees a work-from-home first approach, and that's given them flexibility. And in this current macroeconomic environment, it's actually created some real cost savings for our employees. So they don't need to commute. They're not spending as much on gas. They're not spending as much on in terms of workload. We've given them some summer afternoons as well as their birthday off, so additional time off. And then most recently, the new mental health resource LifeSpeak that we launched.
And we are further comforted by the fact that we hosted 1,000 of our 3,000 employees over the last 3 weeks at different appreciation events in Toronto and Montreal. And they told us it's the cultural shift is helping drive that renewed sense of pride, their productivity and their commitment to the overall organization, but as any good employer, we are constantly reviewing our compensation packages to make sure that we are competitive and that our employee experience is competitive, and so we will continue to benchmark. But we are very comfortable in terms of our ability to pull the right levers and manage our costs appropriately.
Thank you. That's very clear. Just lastly from me, just on credit. Just looking at the performance this quarter, I think we saw some of the peers, I guess, see similar increase to the adverse scenario weighting, but parts of that, I guess, impact being offset by positive credit migration. I’m wondering, if you could give a bit more color on sort of the moving parts in the performing PCLs build this quarter, if there's any? Thank you.
Sure. Thank you for the question. Q2 '22 PCL of $13 million or 15 basis points is really in line with normalized run rate of PCLs given the portfolio mix. We continue to see good underlying credit quality in the portfolio. The growth in PCL was mainly due to commercial volume growth, but we did increase our performing ACL due to the changes in the macroeconomic outlook. We take a prudent conservative approach to setting ACLs. We did increase the weighting on the pessimistic scenario, and we adjusted the conservatism of our forecast and the economic scenarios based on the forward looking, and I should note that ACL is forward-looking, economic outlook based on GDP, higher inflation, housing pressures, unemployment. And so we are going to continue to drive a prudent measured reserving approach going forward. And I hope that gives you the components. But top line, volume but also appropriate conservatism given the macroeconomic forward environment.
Got it. Thank you very much.
And we can now take our next question from Sohrab Movahedi of BMO Capital Markets. Please go ahead.
Yes, thank you. Just two clarifications. Liam, just on the answer you gave -- so was there -- like can you talk about whether or not there was any negative migration in the overall portfolio? Or was it net positive migration? Or was it just a portfolio size growth?
From a stage migration perspective, Sohrab, I did not see new adverse formations. We haven't seen a lot of stage migration relatively stable. To give you some context, 95.5% of our portfolio is in Stage 1, 4% in Stage 2. We are really -- we are not seeing adverse formation. That reflects sort of current economic environment, which is really quite strong. It's the forward-looking element that is driving our prudence in selling the ACLs.
Okay. And just maybe an abundance of clarity, because you still standardize any portfolio quality degradation wouldn't necessarily show up in RWAs. Is that fair?
It would not show up in RWAs, but it would very much show up in our ACLs. And so the key for me is always about that prudent measured approach to ACLs. And unlike some of our competitors, we took the stance of looking at that forward economic outlook. We don't think it is as strong as where we are today, and we are being prudent and measured in taking additional reserving steps and increasing our reserves for it, and we will continue to operate that way.
Okay. And then just -- you provided a relatively detailed, I guess, roadmap or dashboard on how more tracking relative to some targets that financial and otherwise that you've got out there. Is the intention to provide this every quarter with an update to it?
So, Sohrab, we -- in the appendix on the investor -- in the investor presentation, there's an appendix that actually tracks every safe KPI, and we have been presenting that every quarter. So that's our intention. By the end of the year, as we are going into profit planning season for next year, we will be looking to revisit those and we will obviously share that at the end of the year as well in terms of what we are going to be tracking to next year. But it is available on the appendix on a quarterly basis.
Perfect. Thank you.
And we can now take our next question from Lemar Persaud from Cormak. Please go ahead.
Thanks. I just want to come back to your opening comments on the strength in inventory finance and specific -- inventory financing and specifically the 20% year-over-year growth in the dealer network and really just questioning the 20%. That seems like a big number, but maybe just because you're going from a really small base, so that 20% isn't really that large. So maybe if you could offer it, how many additional OEMs specifically was that 20% growth made up of like maybe you went from 10 to 12 relationships. So 20% is only two additional relationships. So any color there would be helpful.
Yes. Thank you for the question. It's a good question. But no, actually, the team executed quite strongly on onboarding new programs and new dealers. And when we're talking about increasing dealer base, it's really at the dealer level. So we went from just over 4,200 dealers to now servicing over 5,000 across North America. So we definitely saw very strong organic work throughout our dealer base from the team in inventory financing. And we service close to 500 plus OEMs into various types of products. So now I would just say that it's really good work from our inventory finance team, and it's a result of our strong specialization there.
That's good color. So that bring me to my next question. What's the outlook for continued growth there? Is 20% for the next few years of reasonable expectation? Or is this more of a one-off? And I guess I'll tell you I'm going with this. I think one of the comments you guys have made in the past was that as you add more relationships, it should over time reduce the impact of seasonality. So that's why I'm interested to see if you guys can -- like first of all, is that true? And then secondly, can you continue to add like years of 20% growth such that seasonality in a couple of years is not something that comes up in the Q&A for your conference calls.
Yes. Again, it's a great question. As we mentioned in our Investor Day, we intend to diversify the portfolio. When we've acquired Northpoint in commercial finance and still now, there's a strong focus into RV-type dealers as well as marine. So that accounts for about 60%. And the expertise we have there and the deployment of our sales force really makes us very successful into winning market shares, but as we said, like we want to diversify in technology, agriculture, small construction equipment and some of also green type products, EV products.
So right now, the team is building those specialized approach. So we should expect to grow those dealers. We grew maybe 30 dealers in those segments in the last quarter. So overall, we feel that we have good momentum and by focusing sales force towards those, less seasonal type industries will reduce seasonality. In terms of pace, I think that the team did a great job. It's hard to predict the pace of dealer growth, but we feel that we have good momentum and -- this is a growth focus for us in terms of segment, and we will continue to pursue that.
Okay. That's helpful. And then maybe I'll leave it there on that. And just coming back to one of the answers earlier, I think I heard that line utilization is in line with normal trends. What would prevent it from going above pre-pandemic trends?
Well, actually pre-pandemic, if we go back to Q2, just before Q2 '20 was utilization at that time was around 58%. So during the low season, right now, we run at about 50% utilization, which for us is -- it's not a question of going up or not. It really depends on the type of products on the line and the ability of the OEM to replenish the dealers as per their forecast of their sales season. So again, if we diversify that portfolio, you will see a more normalized type utilization, which should average mid to high 50s, but not being a hard number. Like it will always depend on the economic macroenvironment, and that is very hard to forecast or to predict.
Okay, great. Thanks. That’s it for me.
We can now take our next question from Gabriel Dechaine of National Bank Financial. Please go ahead.
Good morning. I apologize if I ask something that's already been asked because I got some technical difficulties during most of the Q&A here, but good quarter, very encouraging guidance. I have a question on the capital. You're indicating you expect it to be flattish from here on out, but what if loan growth continues to surprise the upside? Like what's your minimum comfort level for capital? And is there any thought towards some strategies to maybe enhance your capital position? If you like -- that’s one of your peers does an ATM program. And I don't know if that's crossed your mind at all.
This is Yvan. That question was asked, but it's -- but no problem. It's an important one and it's my pleasure to give you the same color. So we definitely manage the capital prudency, right? And as a reminder, I always remind that we're under the standardized approach. We are currently at 9.3% CET1. We mentioned that our objective was to remain above 8.5%. So there is still a good cushion in place.
And the second thing, as I mentioned a few minutes ago, is that pre-pandemic, we were at 9%. So people kind of forgot that there has been increase of the capital that was due to a slowdown of some portfolio. We are seeing the catch-up over the last few quarters. So we are getting back to a more normal level in terms of what we had been running pre-pandemic. And that's great because we've been able to redeploy capital to organic growth, which is the redeployment of the capital accumulated during the pandemic, but that contributed a lot to the financial results, which are pretty good, as you can see this quarter.
For the remainder of the year, we had mentioned that the growth is going to temper. And a portion of that is what Eric just mentioned about the seasonal reduction in inventory financing. So for the remainder of the year, we would expect that the capital -- internal capital generation is going to sustain the capital or slightly improve it. So there is no stress at this point. We're pretty comfortable with the levels. We will reassess and provide more guidance at the end of the year going forward in terms of growth.
But the key point that Eric just mentioned, is we're not yet back to a historical level of utilization, but we're getting closer. And we are expecting that the last probably shut of catch-up that we need to do is going to be more gradual than what we've seen over the last two quarters. So we are pretty comfortable. And if you refer to the ATM program. At this point, based on the comments I just gave, we don't feel it's in the toolbox. It's one of the elements you would use and consider in terms of capital, but we're comfortable with the base that we have, and we don't feel that we need it at this point.
Okay. Thanks for repeating an information. Again, apologies and good quarter. Thanks.
No, problem. Thank you, Gabriel.
And we can now take our next question from Marcel McLean of TD Securities. Please go ahead.
Yes, thank you. Most of my questions have been addressed. But just on the capital one more, if I could dig it one step further. Is there a level of loan growth where you do start to consume that capital? Is it 70% for the overall bank? Or is it higher than that? Or is it more complicated that you can't provide that simple of an answer?
I'm not sure about your 70%, but the key comment I could give you is that in a normal year with by example, if we had had the growth that we expected at the beginning of the year, with double-digit or so growth in commercial with stabilization in personal and growing in 2023 with the improved profitability that we have, it also adds to the capital generation that we're having. So we do intend to put in place a plan where the internal capital generation sustain mostly that growth, but we have the catch up to do, and that catch up happened over the last few quarters. It did reduce the capital. But for me, it's really a positive outcome of really redeploying that capital and generating profitability with it. And as I mentioned, we were at 9% pre-pandemic. So there is no stress in the house with being at 9.3% right now because we are above where we were pre pandemic.
Okay. Thank you. That’s it for me.
We can now take our final question from Darko Mihelic of RBC Capital Markets. Please go ahead.
Hi. Thank you. I know we've gone over. So thank you for taking my question. A lot of my questions have been asked and answered. So I thought maybe, Rania, I would ask you a couple about outlandish questions just to finish this off. Because I'm sitting here punching in my model, everything that you guys talked about. Everything looks neat and tidy when I look at the appendices, everything is going according to plan. And the way my mind works is when everything is going according to plan, I start to worry about what could go wrong. So my question, Rania, is what could go wrong in the second half of the year? I'm thinking about outlandish things like the French language law in Quebec, maybe the union coming back, can you give me what is your biggest fear in this year of execution for the back half of the year?
Well, Darko, thank you for these outlandish comments at the end of the call. Delighted to answer some of them. Listen, I get paid to worry and to think about the future. And so I don't think I'd open my remarks by saying that we're confident that we're going to exceed our targets, if we're not comfortable as a management team in terms of the quality of our portfolio, our underwriting capabilities, our ability to actually manage through all those volatile macro changing environments. And I think we've been delivering quarter-over-quarter and showcasing that. We showed that through the pandemic as well. And so I think our cautious, disciplined, prudent approach is definitely paying off. We are confident in our ability to deliver on our digital road map. And again, we've been delivering quarter-over-quarter.
The biggest thing that I always talk about is people, people, people. We are in the people business, and that's really where we spent a lot of time, and that's why we've always said culture is going to be our driving force. And so ensuring that our people are equipped, we are attracting the right talent, we are retaining them, we're promoting them internally, and that's really the role of leadership and management throughout the whole organization. And that's why we increased our PCLs this quarter as well.
So again, it really speaks to prudently managing what we think could potentially be on the horizon and how do we weather through that storm. And that's why we're also prudently managing our capital, and that's why we're pausing our share buyback program. It's not that we're concerned, but it's being cautious and prudent. And so, maybe I will just leave you on that now, but we are very confident at this point that we are going to exceed our financial '22 targets.
And with respect to employees, just getting back to my concerns on costs and possibly the union coming back. Is there any concern or anything -- any indication out there at all that, that is even plausible at this point in time?
So from a cost perspective, I mean, salaries have gone up, right? And so ensuring that we retain our top talent as we are attracting new talent, cost of attraction has gone up, but we've been offsetting it with other things. And as I mentioned in my comments, salaries are just really one component of making sure that your employees are engaged. So as an employer, we focus on ensuring that our employees are engaged and are happy.
In terms of the union, I mean, that's really between the employees and the unions. So it's not something I can comment on. Other than we know based on our most recent engagement with a third of our workforce, and we are doing another employee survey at the end of the year in September, which is one of the key metrics. We feel that there's -- they're reenergized, they're excited about their future, they're committed about our success. And so we're feeling very confident in terms of attracting and retaining talent as we stand today.
Excellent. Thank you very much.
Thanks, Darko.
I would now like to hand the call back to Rania Llewellyn for any additional or closing remarks.
In closing, I’m pleased with our strong results this quarter and continued momentum into Q3. We redeployed capital accumulated during the pandemic towards sustainable, profitable organic growth and internal capital generation is expected to sustain loan growth for the remainder of the year. We continue to apply strong cost discipline across the organization and identify additional cost optimization opportunities. Our credit quality is sound, and we are confident in our strong underwriting processes and highly collateralized portfolio to manage through macroeconomic uncertainties. We continue to make significant progress on our strategy.
Over the second half of the year, we will be focused on initiatives that drive customer acquisitions, including the rollout of our new public website with a new look and feel and enhanced and simplified user experience. Additional targeted marketing and the rollout of our new brand and refreshed logo that I announced at our AGM in April and the delivery of our digital onboarding solution and reimagined Visa experience, which will enable us to grow products with existing customers, acquire net new customers and continue to grow our national presence. Our one winning team is engaged, and we continue to make solid progress against this plan. We are confident in our ability to exceed our 2022 financial targets despite the uncertainties in the market. Thank you for joining the call today.
This concludes today's call. Thank you for your participation. You may now disconnect.