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Laurentian Bank of Canada
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Good day. [Foreign Language] and welcome to the Laurentian Bank Financial Group Third Quarter Results -- 2018 Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the call over to Susan Cohen, Director, Investor Relations. Please go ahead, ma'am.
Thank you. Good morning, and thank you for joining us. Today's review of the third quarter of 2018 results will be presented by François Desjardins, President and CEO; and François Laurin, Executive Vice President and CFO. All documents pertaining to the quarter, including Laurentian Bank Financial Group's report to shareholder, investor presentation and financial supplement, can be found on our website in the Investors Center. Following our formal comments, the senior management team will be available to answer questions, after which François Desjardins will offer some closing remarks. Before we begin, let me remind you that during the conference call, forward-looking statements may be made, and it's 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. It is now my pleasure to turn the call over to François Desjardins.
Thank you, Susan, and good morning, everyone. My formal remarks today will focus on a 4 core of following items: the mortgage loan portfolio review; appointments of the executive team; strategic objectives; and finally, financial performance for the quarter. I'm pleased to announce that we have completed the mortgage loan portfolio review and have resolved the situation with both the TPP and CMHC. With sincere thanks to the teams involved, this matter was resolved within the guidance that was given last quarter. As you know, this review garnered some media attention. Everyone, at Laurentian, felt that it was important to put decision behind us as quickly as possible and allow current and potential shareholders to have the same level of confidence in our organization and our plan that the team, management and the board have. Certainly, the events of the last 9 months have been hard on the team. But this has been a tremendous learning experience that in the end, makes us stronger and more determined than ever. Turning to talents. We continue to attract experienced and seasoned executives to the team. First, we hired William Mason, as our Chief Risk Officer. Formerly from CBIC, William brings extensive risk management experience to the group. He also served as Managing Director Bank Supervision at OSFI for the last 2 years. To further reinforce the team that is already in place, William has brought on additional bench strength with John Penhale, formerly from TD and CIBC, who has served as Senior Vice President, Integrated Risk Management.I'd also like to announce that Vania Artinian, has been appointed Senior Vice President in General Audit. With a distinguished career of State Street, Royal Bank, and Genworth. Vania will bring a disciplined approach to improving on effectiveness of our governance and control. We promoted Deborah Rose to the position of COO of Laurentian Bank Financial Group recognizing her 25 years of experience and accomplishments within the financial services industry, of which 7 has been at B2B Bank. Deborah Rose will see the group's activities relating to administration, technology and operations and lead our largest initiatives. Craig Backman has joined the team as our new EVP of personal digital banking. Craig comes to us from a long career in the consumer product and financial services industry, most recently in charge of digital strategy across the Canadian business line of TD Bank. At LBCFG, Craig will be responsible for digital retail banking, product development and distribution across Canada advancing the works begun by Deb. Moving to strategic objectives. As you know, the industry continues to evolve, and so are we, to move swiftly up to becoming a renewed financial institution remains a priority. Our commitments have been different and better to delivering value to our customers, [ not later ].We have made progress on several fronts: simplifying product line, making inroads into equipments and inventory financing, the new Montreal Corporate Office and the move to Advanced Internal Ratings-Based approach to credit risk. We have made good progress on the implementation of the new core-banking systems, and are just weeks away from the implementations that will see all B2B Bank and most of digital services products onboarded. Our new core-banking system will soon enable the launch of digital product. And transactional digital banking products require mobile devices, not necessarily a branch network. As you know, since 2004, we have limited our direct-to-client development to our branches in Quebec. As these changes, we are paying Canadian Bank, and it's time that we grow our consumer base outside of Quebec. B2B Bank will be launching transactional digital banking products through the independent adviser network. And in parallel, Laurentian Bank will be gradually launching the same products directly to consumers across Canada. As for Quebec Branch Retail Services, we continue the migration of branches towards advice-only financial centers and increased the total number of financial advisers.But as you know, unionized employees have been without a contract since December, and we are in negotiations with very slow progress. Until we know the outcome of ongoing legal discussions, we must delay investments in technology and real estate with this factor, including the migration of accounts onto the core-banking platform. I will conclude my remarks with the word on our quarterly result: From my perspective, this quarter's results are below what we are aiming for. Obviously, I would prefer to report better financial performance. But all things considered, I'm happy with the progress we are making. We have made decisions that allowed us to manage with the mortgage loan portfolio overview, which is now behind us, strengthening the team and reinforced foundations. In short, we are making investments at the right places to support future growth.Now let's back to plan. Changes to customer behaviors are either an opportunity or a challenge for all banks and we must be prepared. We are continuing to make investments to ensure competitiveness in this changing financial landscape which in turn will improve the efficiency and profitability on a sustained basis and build long-term shareholder value. But as I have said in previous calls, management has been prudent. We are maintaining a healthy level of liquidity and capital. We continue to manage the balance sheet conservatively and regularly review our risk profile and have concluded that CET1 ratio of 8.3 to 8.7 is the right levels to target to withstand market volatility, continue to increase loans to these customers in the bank mix and pursue our strategic objective. All this puts pressure on short-term performance, but ultimately ensures the financial strength of this organization. I will now invite François Laurin to provide a more in-depth review of financial results for the third quarter. And following the Q&A session, I will return to offer some closing remarks. François?
Thank you, François. Good morning, everyone. At the end of May, we announced that the mortgage situation with the TPP was resolved. And as François mentioned, today, we can say the same regarding CMHC. Specifically in the third quarter, we identified and repurchased mortgage loans totaling $135 million, that were inadvertently portfolio insured and sold into CMHC securitization programs, as highlighted on Slide 12. The amount was in line with our estimate of $125 million to $150 million that we recorded at the end of the second quarter. CMHC insurance on the inadvertently portfolio insured mortgage loan was concurrently canceled, and as a result, a onetime charge of $1.5 million was included in other noninterest expenses in the third quarter of 2018. CMHC will release the $20 million cash-reserve deposit previously made by the bank in the fourth quarter. CMHC securitization program remains available, and the bank has been securitizing mortgage loans as usual during 2018. I would like now -- like to discuss the bank's core financial performance, beginning on Slide 14. Results reflect our investments in people, processes and technology and our actions to strengthen the bank's financial foundation, including maintaining high liquidity and strong capital, which position us well to deliver our strategic objectives. Adjusted net income in the third quarter of 2018 declined by 1% compared to a year earlier. Adjusted EPS was $1.34, down 18% over the same period. Sequentially, adjusted EPS declined by 9%. Adjusted ROE was 10%. And while lower than a year earlier, it reflects a strong capital base. As I climb down Slide 15, reported earnings for the third quarter were affected by adjusting items totaling $4.5 million after tax or $0.11 per share and are largely related to business combinations. The drivers of our performance are presented on Slide 16. Total revenue in the third quarter of 2018 increased to $260.7 million, up 5% compared to a year earlier. Net interest income rose by 12%, mainly due to strong volume growth from the acquisition of Northpoint and the higher margins earned particularly on the acquired loans. Other income decreased by 7%. Net interest margin, shown on Slide 17, was 1.77%. The main factors contributing to the 14 basis point year-over-year increase was the larger proportion of higher-yielding loans to business customers, including the acquisition of Northpoint with corresponding higher margins and recent increases in the primary that were partly offset by the higher level of liquidity -- liquid assets. Sequentially, the margin was down by 5 basis points, largely reflecting the higher level of liquid assets. As previously mentioned, 2018 and 2019 are important years of investment in our strategic plans and we expect to maintain a high level of liquidity over this period. Considering all these factors, we expect a modest improvement in NIM over the next few quarters. Average earning assets rose 3% year-over-year reflecting 14% growth in loans-to-business customers and a level of residential mortgage loans through independent brokers and advisers that was relatively stable from a year earlier. Residential mortgage loans through the branch network were 10% lower than a year earlier, largely reflecting the decision last November to no longer accept referrals on the broker network. As well, personal loans were down 10% over the same period, mainly due to lower investment loan balances reflecting consumer behavior to accelerate repayment following strong capital market performance. Over the past 6 months, we have also been managing asset growth more tightly to optimize the profitability of the product mix and the related risk-weighted exposures. Other income as presented on Slide 18, totaled $83.7 million, down 7% from a year ago. The decline was primarily driven by lower service charges as clients continue to modify their banking behavior and as we simplify our product offering. As well, income from brokerage operations declined due to a lower level of activity. Sequentially, other income was up slightly. There was improvement in lending fees reflecting higher activity in the commercial loan portfolios, higher income from treasury and financial markets due to better results from treasury operations and higher income from brokerage operations relating to a rebound in fixed income activities. In the second quarter of 2018, we recognized a $5.3 million gain from the sale of the agricultural loan portfolio. Slide 19 highlights that adjusted noninterest expenses rose by 12% year-over-year. This increase was due to the acquisition of Northpoint, regular salary increases and higher technology costs related to running 2 core-banking platforms. As well, other noninterest expenses increased resulting from a variety of items, which are also highlighted on Slide 19. We anticipate that the ongoing cost will remain at a similar level over the next few quarters. Our adjusted efficiency ratio of 69.7% was 410 basis points higher than a year ago. As discussed on previous conference calls, we expect that over the next few quarters, this ratio will remain volatile and high. However, as we make progress on our strategic initiatives, this ratio is expected to improve. Slide 20 highlights our well-diversified sources of funds. Deposits stood at $29.1 billion, up 3% compared to a year earlier. Total deposits sourced through independent brokers and advisers grew by 10% and amounted to $15.1 billion. While we have reduced our footprint by close of third, our branch source deposits have been relatively stable over the past 2 quarters and have experienced low attrition over the past year. Debt related to securitization at $7.8 billion decreased by $636 million compared to a year earlier, mainly due to maturities of Canada mortgage bonds and the repurchase of mortgage loans resulting from the mortgage loan portfolio review. Slide 21 demonstrates the success of our strategies to increase our nonredeemable broker-sourced GICs over the past 2.5 years, a higher-quality term funding source, while reducing our exposure to more volatile broker-sourced high interest investment accounts. With respect to liquidity, our positions continue to be strong and well above our internal and regulatory requirements. Furthermore, Slide 22 highlights the high-quality composition of our liquidity portfolio. Almost 90% is invested in low-risk, highly rated liquid assets, such as Canadian government provincial and municipal securities as well as in cash. We expect to maintain a healthy level of liquidity over the next few quarters. Slide 23 presents the CET1 ratio under the standardized approach of 8.8% at July 31, 2018. Our capital ratios are strong and support the bank's strategic plan. Our diversified loan portfolio is highlighted on slides 25 to 27. Loans-to-business customers have increased to 35% of the portfolio from 31% a year ago, and residential mortgage loans remain relatively unchanged at 50%. Within the residential mortgage loan portfolio, Alt-A mortgages totaled $1.4 billion and represent 8% of the total residential mortgage loan book and 4% of the total loan portfolio. As well, residential mortgage loans in the GTA represents about 20% of the residential mortgage loan portfolio and the GVA accounts for 4%, equal to last quarter. LTVs remain low and credit scores remain high. Turning to Slide 28. Credit quality remains strong. The provision for credit losses at $4.9 million compare to $6.4 million a year ago. The loss ratio was about 5 basis points in the third quarter of 2018 compared to 7 basis points a year earlier. 97% of our loan book is collateralized, and the underlying credit quality of the portfolios continues to be excellent. The bank will adopt the IFRS 9 on November 1, 2018, and we will provide more -- some insight at year-end. Impaired loans are shown on Slide 29. The gross impaired loan ratio stood at 45 basis points, 2 basis points higher than the previous quarter. However, credit quality of the underlying portfolios remains strong. The net impaired loan ratio stood at 37 basis points and we remain adequately provisioned. We continue to expect that over the medium term, the loss ratio will gradually move higher to reflect our changing business mix. Nonetheless, with our current portfolio mix and lending practices, we expect that the loss ratio will remain below other Canadian banks. To conclude, we're building a solid foundation to pursue our plan which would -- which will allow us to deliver sustainable profitability and create long-term value for our shareholders. Thank you for your attention. And I will now turn the call back to Susan.
Thank you. At this point, I would like to turn the call over to the conference call operator for the question-and-answer session.
[Operator Instructions] Your first question will come from the line of Richard Roth of TD Securities.
First question on expenses. What's the -- what are the exact details around that $1.5 million write-off? Like what exactly does that relate to?
François, can you answer that?
Thank you. Basically, it's related to the cancellation of insurance from the mortgage loan portfolio. So those inadvertently insured loans, we stopped the insurance, and we add an amount of insured premiums paid, not amortizing the books that we have to take as a onetime charge.
Okay, understood. And then you also mentioned in your commentary that there was an increase in deposit insurance. Historically, I mean these are typically small enough not to mention. Was there a specific reason you guys mentioned it this quarter?
Yes, François?
Yes. The higher deposit insurance cost is related to an increase in premiums and deposit volume growth that we incurred starting this quarter.
Well, I guess deposits really didn't...
Don't [indiscernible].
Okay. So it's just entirely driven by higher-deposit levels rather than anything else.
And the premium as well.
The premium went up, okay. And then you mentioned in your commentary that you anticipate ongoing costs to remain at this similar level over the next few quarters. Of the cost you had this quarter, which ones are not ongoing? So the write-off is one of them, but are there any others that are baked in that would not be ongoing?
No, basically, Richard, basically that's right. Given, you knock off that $1.5 million, the rest is basically the level we expect to sustain for the next few quarters.
Okay, fair enough. Just wanted to clarify that, that was sort of a guidance. And then with respect to capital, I noticed that you're moving your range, it's fairly substantial, I guess 0.4%. What -- now that the mortgage thing is concluded, what sort of drove you to increase your comfortable capital range? Like what's the catalyst for that?
Well, the biggest -- it's François, the biggest catalyst has been -- was the move towards loans to business customers. But we [indiscernible] the fact that maintaining a strong capital position to withstand market volatility continued to increase business customers in the bank mix. And to pursue our bank, I think that from the beginning of my tenure, I think it is -- one of our objectives was to change the mix of the bank slightly and gradually towards loans to business customers. And that drove the changes in CET1 range targets that we have had this quarter and in previous years.
We'll go ahead with our next question from Scott Chan of Canaccord Genuity.
Maybe just a follow up on the new target ratio on the capital side. With your earnings outlook probably impacted near term in your payout ratio at the high-end of your range right now, and also the increased capital range. Does that affect the yield of dividend growth that LB has historically done every other quarter? Or how do we think about that in terms of the new capital?
I think you should think about it as we do. The Board of Directors and management review our dividend rate every quarter. We have great dividend yield and have -- this has been key to our investors. And we're aware of that. So as we're making these reviews and decisions, we're considering that 2018 and '19, are investment years where expenses are going to be slightly higher, and therefore, performance is going to be under pressure. But we are thinking about rewarding the patient investors that we have, and hopefully not more.
And then when I think about forward-looking growth on your portfolio, you've scaled back mortgages personal. So how do we view about overall growth sale for the next year? And how does commercial, sort of, planned to that in terms of the outlook there?
We're still working towards our 2020 growth target. And as you might recall last Q4, we -- because we were so far in advance in our mortgage targets, we decided to scale those back and really focus on loans to business customers. As expected, growth is higher in most of the business customers and slower to the residential mortgages. And as we move forward, that will continue to be the case. We want to concentrate on target niches and profitable growth. We're also reviewing our activities to determine areas of portfolios where we want to grow and maintain and those where we want to fix or exit. And for example, last quarter, we exited the agriculture portfolio. This should result in a net growth of low single digits in 2019 for growth overall in loans. And low double digit growth in loans to businesses in same period.
And your next question will come from Gabriel Dechaine of National Bank.
I just want a follow up on the -- for the higher core Tier 1 target range. So what I'm hearing is you're kind of bracing yourself from market volatility and then you want to have higher capital ratios as you push further, I guess, into commercial lending. What else changed? I mean, just last quarter, or the quarter before where content was 7.9% to 8.2%, and all of the sudden, we're higher than that. I mean, it seems sudden. Not like the commercial lending.
I don't think that it's a sudden idea. I think that we have been moving our target range, slowly but steadily, as the loan portfolio is moving. And of course we have to move the range before we get the loans in as well. So if we're looking for more loans to business customers in 2019, we have to make that adjustment beforehand. But you're right. I mean I can read the news and so can investors. And I think that we have been managing the bank in certain [indiscernible] over the last period. And I think that investors want to be safe and secure in investing in Laurentian. And I think that having a high level of capital and healthy capital position. And for that matter, a high -- or healthy level of liquidity, the issue is also in the market that we can withstand the market volatility and continue with our plan in terms of the growth.
Okay. Then speak -- while speaking of these commercial borrowers, can you tell me what the organic growth was? Or can we carve out the Northpoint on a year-over-year basis? I want to know what the ex Northpoint ex that agricultural loan sell-off was.
I'll ask Stéphane Therrien to comment generally on business services growth.
Yes, the -- year-to-date, our growth has been 14%, as you mentioned, including Northpoint. Would have been 8% organically without Northpoint.
And that's -- that 8% is, I guess, understated given the sale of Ag portfolio?
Yes, slightly.
Okay. And then if I look at the trend in the commercial -- sorry, the mortgage book, the personal loan book, which has been shrinking for quite some time now. The pressure is on the fee lines there from your branch transformation. And then, what you're saying about expenses being elevated for a few quarters. What does that imply about your efficiency ratio into 2019, not just Q4? Are we looking at maybe a similar year, next year to this year and then a hockey-stick type 2020 when you push through to get to that 5% level? Is that kind of the progress you have in mind now?
I think I'd push back a little bit and comment on how the group is working investments to increase its competitive nature, right. One of the things that's important in the plan is that we operate in niche markets where we can win. And we try not to be everything to everyone. And it's chosen -- that choose to be great where we want to play to become experts and win the business. This has been true on the B2B side -- B2B Bank side, it has been true on the commercial side. It has been true from the Laurentian Bank Securities side. The one sector that I'd like to see some more progress on is our retail branch network. And that's -- we made some great strides there in terms of managing the size of the network in managing expenses down, but you can't shrink the [ rate ]. So what we need to do is to move the branch network towards financial advice and increase the number of financial advisers and other advised-type jobs to generate more customers and more of our clients. In short, guidance for 2019, I'll just make a general summary here I think is probably best. We're going to see some better growth still organically from our loan-to-business customers, specifically in inventory financing, in equipment financing, in loans-to-commercial customers as a whole, specifically real estate financing and construction lending. I think we're going to see a little bit better growth in this quarter on mortgage size as we are going to aim for low single-digit growth and aiming for our 2020 target. I think we're seeing some really interesting developments in terms of investments that we're making in core banking and the digital offer. I think that from a digital perspective, being able to grow deposits directly from the consumers across Canada is something that digital is giving us an opportunity to further diversify our funding sources. And of course, in my comments, I said before assure liquidity and capital are going to have -- put some pressure on short-term performance. And we expect that for the next few quarters. But really what we're -- we would like to see some progress on, is on the Retail Services branch network side. And we need some clarity on the labor discussions to be able to give you some more guidance there.
Okay. And then actually touching on my final question here. Because you do mention that in the Page 7 of the report to shareholders, how the union negotiations uncertainty there. That's forcing you to review the pace of the conversion to advice-only branches. So what is the implication there? What are you seeing? Try -- just trying to understand what's the...
I think that -- well, from the beginning of the plan, we have spoken about really making a general migration of the branch network towards advice. As you know, customers are not really going to branches as they were in 1980s or '70s. They're going to branches now -- great majority of transactions, 94% of them are made online ATMs, et cetera. So we have to move the physical attributes of the branches. And also the people that work there. And what they did. And because in Quebec, a large portion of our branch network is under potential agreements because we have been trying to move that from [indiscernible] to get some clarity on the labor front for last 2.5 years. And as I said, as part of the agreement, it's passed its term now for about 9 months. And so we have hoped that this would be behind us right now. And it has -- it still isn't. So for the moment before putting more money and investments in technology and real estate, we'd like to know what the rules are.
We'll go ahead with our next question from Darko Mihelic of RBC Capital Markets.
On that note, when you accrue for expenses, are you accruing as per the past collective bargaining agreement or are you accruing a slightly higher amount?
I'd like François Laurin to answer that.
So I imagine if we accrue for potential expenses or settlements.
Well, I'm just curious. So right now -- can you hear me?
Yes. Repeat your question, Darko.
Sure. So my question is with respect to your compensation in expense that is currently -- that you're running. Is that based on the previous collective bargaining agreement, in other words the costs? I guess where I'm going with this is, if you hash out a new agreement...
François Laurin.
We accrue what we currently pay the employees according to the current agreement, which is still in place with the one that expired at the end of 2017.
And if the -- if a new collective bargaining agreement is put forward, is it not retroactive to the end -- to where -- to December of 2017?
Usually from our financial perspective, no.
Okay. And my second question then is you mentioned in your shareholders report that you're carrying higher liquidity for market volatility. But you're the only bank to actually mention that. And other banks actually are reducing their liquidity requirements. So what specifically -- what specific volatility are you seeing in the marketplace that would require you to carry extra liquidity?
I think that the insurers market volatility, those turns well to encompass whatever you would like. I can't really go talk to find specific, but I think that -- no, we have ongoing labor discussions. I think that if you read the news [indiscernible], I think that even some of the smaller players have had some incidents in 2017. All that goes to wanting us to put ourselves in a stronger financial position and reassure investors that they're investing in something that they didn't have some specific rate that we run Laurentian Bank in a conservative fashion. And I'm just reading the environment here. I think that, that is the same thing to do. François, you want to add a couple of thoughts on this?
Sure. I would add to this, the regulatory environment since over the past year or so and the execution of our plan comes with them to make sure that we have strong liquidity in capital to execute our plan going forward.
Okay. And then just one last question, if I may. When we look at the deposit, sort of, situation for Laurentian. I guess the question that comes to mind is, now that you've gone through some of this branch, let's call it, optimization. The question comes to mind is, have you lost customers? We can see the balances are barely down, but what I'm interested in is understanding is whether or not your customer count on the deposit side is actually up or down.
I think I'll ask Stéphane Therrien to comment on this.
Yes, thanks for your question. No, we have not experienced material client attrition. Nothing major. And going forward, as François mentioned, we expect that the focus on advice will result in attracting new clients.
I think I would add to that, Darko, that one of the things that we chose to do last year is to stop the referrals of mortgage broker dealers into the branch network. From a customer perspective it's -- and from a profitability perspective and from our customer cross-selling perspective, we prefer that our financial advisers and the branches focus on investments, deposits, financial health of customers instead of being the tail end of monoline type of commoditized product like residential mortgages as it has become.
Your next question comes from the line of Sohrab Movahedi of BMO Capital Markets.
Just wanted to clarify a couple of things here. To talk about higher liquidity, are you factoring in the cash collateral that's, kind of, still sitting away from the bank coming in. Like in other words, when that comes in, does the liquidity level even go back higher or do you -- will that be able to be repurposed, if I have asked the question correctly here.
I'll ask François to comment on that.
The short answer is, no, Sohrab.
So it will come in and be additive to the liquidity level?
No, it doesn't impact.
So you -- I mean you add some liquidity that is sitting with some counterparts. When you're targeting your liquidity levels, are you assuming that money is coming back or are you excluding that? And if that money then comes back, does it put you in access liquidity position relative to the targets you have set for yourselves? Or have you factored that in? And it would continue to mean higher liquidity levels then?
No, we monitor and proactively manage liquidity level given our requirement including all the requirements that we have going forward including those ones.
Okay. So those ones will be added. So when they come back to the bank, your liquidity level's going even higher.
Sohrab, are you specifically talking about the $20 million that is coming back from CMHC?
Yes.
Yes. Clearly, it's $20 million. It's inconsequential on a $26 billion bank. So that the target liquidity levels that we're having from a higher liquidity position is much, much higher than the $20 million come back.
Okay, okay. Then I guess François, the other -- I guess you've -- let's just quickly touch on ROE as well then, because one of the targets for the bank has been to narrow the ROE gap to the group. Certainly, by moving the capital targets higher, the hurdle becomes, I guess, a bit more difficult. So have you revisited your ROE aspirations for the next 12 to 18 months, basically given the outlook on expenses and the -- I don't know, the variety of ongoing initiatives that you have as you look to [ recheck ] the bank?
As I mentioned last quarter, there are some headwinds here, but we haven't. We're still working towards our 2020 target in growth and performance. We will review those in in Q4 reviews on a yearly basis. But for the moment, we're still working towards those targets. Even the investments that we're making today, are going to pay off. We're making these investments on a 7-year basis. From just -- some of the investments that we're making today and have been making, for example, of AIRB. Well, that AIRB pays off because we're -- sold the maturities, strengthening our foundations, our processes, our data gathering, our models, et cetera. Of course, these things cost more money in the short term. But we have become a better bank. And in the end, we get to, from a financial perspective, make better credit decisions for sure. And investors show up as well in how we manage RWA. And we set some market that this would have 200 basis points refund from capital and about 200 basis points of increase on ROE. This -- when we're talking about the gap was the majors, without AIRB, that gap will be very difficult to get done, right. So this is very important initiative for us. And it accounts for 200 basis points plus of the gap. So we're looking forward to that. Other investments, our improvement efficiency perspective, very important for us. So the short answer is, we are on plan. This last 9 months have been more difficult because its mortgage portfolio review has been distracting to us. I'm happy to say that today this is behind us, so that we can fully concentrate on making the moves that we need to make to get us to the right place. But from -- and the only thing where, I believe, we need more clarity is, on our labor relations front, because we do need, pardon me, to have a higher level of customers and growth coming from Retail Services than what we've had. We've done the work from an efficiency perspective, but as I said before, you can't shrink to great extent. I think that advice for our customers is good. We need to increase the number of people that help our customers with their financial health. And we're hoping that we'll get some clarity that continues for better guidance on that front in the next quarters.
Okay. And just one last one for me, François. When you and the management team and the board reviewed or revised up the target range for the capital ratio, notwithstanding everything you just said as far as the AIRB conversion we're having. Did you leave room for further revision upwards in short order or was that deemed to be sufficient with a, call it a, I don't know, 6 quarter time frame?
You should expect this to be good for that time frame, yes.
Your next question will come from the line of Meny Grauman of Cormark Securities.
Just another question on the labor issues. Just wondering about a time line or some sort of deadline or the real motivation here is, at what point is the delay on the labor front, at least push off some of your 2020 targets? Where do you have to get to in this -- for it to start to have a meaningful impact in terms of just not being able to reach some of those 2020 targets?
I'll ask William Mason, our Head of Corporate Human Resources, to give you the technical answer on that. And then I'll come back and give some comments on objectives.
Thank you, François. As you may know the collective agreement has expired at the end of 2017. We've had several meetings with the union starting in September of 2017. We're now at stage of meeting in presence of accounting years. We have had several meetings with presence of [indiscernible]. Some of the meetings are scheduled already in September. And the situation is that some changes have to be made in the collective agreement in order for the Retail Services to fully implement to their plan and improve their performance. So that's the situation level as we speak. And we expect both parties to negotiate in good faith.
I think from a time line perspective, what you're looking for is -- no, my answer would be, 2 years ago. It has got to be a prestigious year, but I mean, I really have to define the plan. And I think that we have some great leaders in Retail Services that are really dedicated to making this happen. And I'm not commenting on this in any of the fashion than to just say to you that you can't get the same efficiency ratios when you have a great number of your staff at these transactions that most customers don't want to do anything more. And we need to be able to fix that. And right now, the process is slow. And we'd like to get some more clarity on it. But I would -- so I don't know what the time line is on this, or deadline. I've been told to be patient.
And then if I can just ask on the margin, you talked about still expecting modest increase in margin. So just wondering whether we've already seen the impact of the most recent Bank of Canada rate hike in your net interest margin? And when you present that guidance of modest increase in margins going forward, what are you assuming in terms of future rate hikes?
François?
Thank you. Short term, clearly, yes, part of the increase has already started to reflect itself, and gradually will reflect itself fully. We expect over the next few quarters a couple of points in the NIM coming from our proactivity of managing our business and some of it coming from potential increase in interest rate in the next year that are already mostly priced in the market as we see it today.
Your next question comes from the line of Robert Sedran of CIBC Capital Markets.
Just wanted to follow up on the question of the collective bargaining. And it sounds like there's their discussions or schedules and all that. There's no prospect of work action in the next little while? Is there like this is going to continue to be more of a negotiation into the old collective agreement rather than something that could create some disruption in the platform?
So both parties have indicated that work stoppages would be not the preferred style going forward. They both stated that they would work to avoid any work conflict if possible. Of course, this is always something that both parties has an option 2. But that is not the way we see it today.
Okay. I wanted to ask a follow up on the margin question. I guess it's for François Laurin. When you think about sequentially, I gather and the explanation is, the greater liquidity on the balance sheet is the reason the margin was down. But with the business mix shift towards commercial, even sequentially, towards commercial and away from residential mortgage a little bit, I might have otherwise expected the margin to be up. So are there some other moving parts in there? Or is it just all that the answer is all about the liquidity on the balance sheet and we can just assume it going from there?
The major part would be from liquidity. As you remember, last year, in Q4, we had, basically for full quarter, Northpoint. So it's going to be like-for-like this year. So there might be a small increase as we move and shuffle our portfolio to profitable growth in the way we are growing our lending assets. But those are the 2 elements. But that's why we're seeing a few basis points in the quarters to come.
Okay. And just have one last point of clarification, François Desjardins. You mentioned that, I think it was Sohrab's question, for the next several quarters, that range is fine. But when you think about the transition in the business, you think about AIRB world, is it right to assume that as you think about the bank the way you want it to be, that even this current range probably ends up migrating higher over time as you become more of a loans-to-business rather than loans-to-retail?
Well, it's really comparing apples and oranges, right. Because whatever the range is, understand the methodology, which we are on today. And whatever range is required under advanced methodology is really 2 different types of ranges from the AIRB [indiscernible] are calculated from little different. So the best way to look at it is, all things being equal, whatever the range you are at, from a standard perspective, what the shift to AIRB does, is recalculate the RWA in such a fashion downwards, because you're doing a better job at evaluating your loan risks and credit risks. And we know that Laurentian is a conservative lender. This is evidenced by quarter-over-quarter. I was telling you that our provisions are low and about 1/3 of the industry. So that does have a quite bit of an impact when you move to AIRB. Our calculations today is about 200 basis points of capital that's released over time. And when you take that in, then you can use that from a growth perspective or deploy it in any way you want because your regulatory requirements are different. So the answer I gave earlier is, I think we're good to move more towards the loan-to-business customers with a range of [EPS]. We are at the higher end of the range there. I think that we want to just keep comfortable in that position. But I don't expect, in the near future, to have to going higher to get to 2020.
[Operator Instructions] And we will go ahead with our next question from Gabriel Dechaine of National Bank.
Just had a follow up on the credit performance this quarter. We did see a pretty big reversal out of the collective. And you've acknowledged that thing that your PCL ratio is going to trend higher. I just want to get a sense of any, I guess, the goalpost here, where do you think we're going to be -- what range do you have in mind for the PCL ratio?
William?
Yes, Gabriel. Thank you for the question. We think going forward, we'll be back in the range of $10 million to $12 million run rate.
$10 million to $12 million.
Yes, against the $4.9 million that you saw.
And there are no further questions at this time. I'd like to hand it back over to Ms. Cohen.
Thank you. François Desjardins will now offer some closing remarks.
Thank you for your questions today and your continued interest in our organization. Today, I'm very pleased to be able to say we're done with the mortgage loan portfolio review. But if I have one key message you, is that we're now back on track. From the start of my tenure, the general comment from the market was that we needed to address performance. So we developed the plan with strategic objectives and we're making those investments required to achieve them. This is what you're seeing. When thinking about Laurentian, there's a few key takeaways. First, the financial strength of the organization has been clearly demonstrated through conservative management of the balance sheet and with the healthy capital and liquidity profile. Second, credit quality of the organization is solid. With 97% of our loan books secured, we've been able to weather economic downturns and post-provisions that are 1/3 of the industry. Third, the dividend yield is the highest in the industry and this combined with financial strength, rewards of patient investor. Fourth, we have a strategic plan and have been delivering on key initiatives. We have done what we said we would do. This plan moves the organization in the right direction. And last, there are new additions to the leadership team. And we're attracting great experienced talent to believe in this vision. This is a rapidly changing financial services industry, which requires us to build a robust foundation, one that will last for the long term. And that is exactly what we're doing. We're building a better bank, not for the next quarter, but for the next decade. Thank you.
Thank you, François. Should you have any further questions, our contact information is included in this presentation. Our fourth quarter of 2018 conference call will be held on December 5, and we look forward to speaking with you then. Have a great day.
And this concludes today's call. We thank you for your participation. You may now disconnect your lines, and have a wonderful day.