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Laurentian Bank of Canada
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Good day. [Foreign Language] And welcome to the Third Quarter Results 2020 for Laurentian Bank Financial Group. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Susan Cohen, Director of Investor Relations. Please go ahead, ma'am.
Good morning, and thank you for joining us. Today's review of the third quarter of 2020 results will be presented by Stéphane Therrien, Interim 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 shareholders, investor presentation and financial supplement can be found on our website in the investor center. Following our formal comments, the senior management team will be available to answer questions. Before we begin, let me remind you that during this 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 Stéphane Therrien.
Thank you, Susan, and good morning, everyone. Today, we reported financial results for the third quarter of 2020. Adjusted net income was $47.1 million, about 3x higher than in the second quarter and 9% lower than a year ago. Adjusted EPS and ROE were $1.02 and 7.7% respectively. When compared to last quarter, a reduction in provision for credit losses from the elevated second quarter level and adjusted lower noninterest expenses reflecting the current environment and the cost control measures we have been implementing contributed to the improvement.Revenues from capital markets were also higher, resulting from strong client activity in fixed income and good market performance. When compared to last year, higher model-driven PCLs, reflecting a deterioration in macroeconomic variables used in forward-looking scenarios, overshadowed improvements on other fronts. The pandemic impacted our growth. In particular, loan to business customers fell by 6% sequentially mainly due to lower inventory financing volumes. With many Canadians and Americans staying close to home, demand increased for RVs and boats. Dealers were unable to replenish their inventory as manufacturers were impacted by production disruptions. While favorable from a credit perspective as dealers' repayments were faster than in the past, it was unfavorable from a growth perspective as the utilization rates of our customers' credit facilities were significantly lower. Growth is expected to resume in the fourth quarter, but lower inventory financing balance are expected to slightly impact net interest income and margins. Mortgage loans were stable during the quarter. Furthermore, the proportion of insured mortgage increased to 53%, and the average loan-to-value was 59%, underlying the strong credit quality of the portfolio.As we navigate through these challenging times, we have never lost sight of ensuring the health and safety of our customers and employees. More than 70% of our workforce continues to productively work from home, where most will remain into 2021. Those in our branches, business centers operation and call centers are well protected through the many measures we have put in place and are providing our customers with the financial resources and advice they need. We continue to support our customers with numerous programs, including payment deferrals. With the economy gradually reopening and individuals and businesses adjusting to the new realities, many customers who requested that deferral at the beginning of the pandemic has since resumed payments. At the end of the third quarter, the loan value of deferred payments stood at $1.8 billion, $2.6 billion lower than at the end of the second quarter. This represents 5.5% of the loan portfolio compared to 13.3% last quarter. Over the course of the pandemic, we have taken measures to preserve the financial strength and stability of the bank. Capital and liquidity have always been managed prudently and continue to be during these uncertain times. The CET1 ratio at 9.4% on the standardized basis is strong and is 240 basis points above the regulatory minimum.Our track record on the credit front is solid and is supported by our rigorous underwriting. We have minimal exposure to sectors most impacted by COVID-19 such as restaurants, travel, hotels and office towers.With respect to our transformation plan, our 100% advice model continues to gain momentum. We took the next step during the quarter and replaced non advice-based position with 70 new assistant adviser/customer service position. These employees support the client-adviser relationship and business development. We also continue to rightsize our Québec retail network as we aim to improve efficiency. We merged 14 branches with an additional 6 to be merged in the fourth quarter. At the same time, we opened the third Laurentian Bank Financial Group service point in Laval, just north of Montreal, the second most populous city in Québec. All service points or hubs host a multidisciplinary team of retail advisers, private bankers, commercial account managers and securities brokers. By helping our customers improve their financial health, we are sowing the seeds for growth. In addition to keeping the bank and our customers safe and secure, we aim to continue our transformation and we need to improve profitability. We have started to review our cost structure and our operation as well as all our lines of business and their products, segments and niches, all this to improve our performance and generate profitable growth for the bank. To all our employees, I would like to express my gratitude for their resilience during these challenging times and their dedication to serving our customer. [Foreign Language] And now I will ask François Laurin to provide a more in-depth review of our third quarter financial François?
Thank you, Stéphane, and good morning. I would like to begin by turning to Slide 5. As Stéphane mentioned, third quarter net income increased from the prior period as the provision for credit losses declined and efficiency improved.As outlined on Slide 6, adjusting items for the third quarter totaled $0.25 per share, mostly related to severance costs and provisions for lease terminations.Slide 7 highlights total revenue in the third quarter of 2020 of $248.6 million or 4% higher sequentially. Net interest income increased by $2.8 million compared to last quarter mainly due to wider prime BA spread and the additional days in the quarter. This was partially offset by the impact of lower loans to business customers due in part to the effect of the pandemic, which amplified the seasonality of our inventory financing activities.As shown on Slide 8, NIM for the third -- in the third quarter of 2020 was 1.86%, down 2 basis points sequentially, reflecting the lower volume of higher-yielding loans to business customers. The proportion of commercial loans in the portfolio stood at 39% compared to 40% last quarter.Other income, as presented on Slide 9, totaled $75.1 million. The increase from last quarter reflected the strong contribution from capital markets, which increased by $6.4 million. In particular, the fixed income business performed very well due to strong new issuances and the high level of client activity. Capital markets revenues also benefited from the strong market recovery experienced in the third quarter.Slide 10 highlights adjusted noninterest expenses of $169.2 million. The 6% sequential decrease was mainly due to lower regulatory costs as well as lower professional fees, advertising and business development costs, ensuing from efficiency measures and the current economic conditions. Partially offsetting these savings was a compensation charge of $2.7 million related to the bank's former President and CEO's retirement. We expect that noninterest expenses in the fourth quarter will be slightly higher than in the third quarter. The adjusted efficiency ratio of 68.1% in the third quarter of 2020 improved by 670 basis points from the second quarter. We expect this ratio to be slightly higher in the fourth quarter as revenues are anticipated to be slightly lower due to the lower level of loans to business customers and potentially lower revenues from capital markets and as expenses might be slightly higher. Slide 11 highlights our well-diversified sources of funds. In the third quarter of 2020, deposits stood at $24.6 billion, down 3% from the second quarter and in line with the reduction in loans. Personal deposits in our branches continue to gradually increase. Term deposits from brokers and advisers declined as we adjust rates according to our funding needs. Digital direct-to-customer deposits stood at about $600 million, relatively in line with expectations. Slide 12 presents the CET1 ratio under the standardized approach of $9.4 million -- 9.4%, sorry, at July 31, 2020, compared to 8.8% at April 30. The increase mainly reflects the $1 billion reduction in risk-weighted assets resulting from COVID-19. CET1 also includes 10 basis points resulting from the applications of OSFI's transitional arrangements, the provisioning of expected credit losses in line with the second quarter. This level of capital provides the bank with the flexibility to resume growth and support the strategic plan while prudently taking into account economic conditions. Our diversified loan portfolio is shown on Slide 14 and stands at $32.8 billion. This 3% decline compared with the end of the second quarter mainly reflects the impact of COVID-19 on inventory financing activities. Slide 15 highlights our residential mortgage portfolio. At July 31, 2020, 53% of our mortgages were insured. Our Alt-A portfolio represented 8% of the total mortgage book and 4% of the total loan portfolio. Slide 16 highlights our well-diversified commercial loan portfolio, which is Pan-Canadian with a U.S. presence and stood at $12.7 billion at the end of July. During the quarter, loans to business customers declined by $800 million, mostly related to the reduction in inventory financing volumes. In response to COVID-19, we continue to work with our customers who may need flexibility in managing their loans. As shown on Slide 17, during the third quarter, we -- new relief of $640 million were -- was authorized, $812 million was extended for up to an additional 3 months and $3.3 billion of relief expired. Payment deferrals accounted for 5.5% of the loan portfolio at the end of July compared to 13.3% at the end of April. Turning to Slide 18. In the third quarter of 2020, the provision for credit losses was $22.3 million compared with $54.9 million in the second quarter and $12.1 million a year ago. In line with our disciplined approach to modeling expected credit losses, we updated our forward-looking economic scenarios to assess collective provisions as at July 31, 2020. These scenarios -- these new scenarios consider the deterioration in economic conditions caused by the spread of the COVID-19 pandemic. They mainly reflect the steeper recession and the slower expected economic recovery. Our 3 scenarios, base, upside and downside, were probability weighted with higher weights assigned to the base and downside scenarios and a smaller residual weight assigned to the upside scenario as part of our approach to determining the expected credit losses as at July 31, 2020. Specifically, credit losses on personal loans in the third quarter of 2020 decreased by $15.3 million. This mainly relates to the increase in allowances recorded in the second quarter to reflect the significant increase in credit risk due to COVID-19. In addition, the sharp rebound during the third quarter in the S&P/TSX Index, which is a sensitive factor for modeling allowances for personnel investment loans, prompted the reversal in stage 2 and -- stage 1 and 2 allowances. Compared to a year ago, credit losses decreased by $1.5 million. Credit losses on residential mortgage loans increased by $1.6 million sequentially and by $0.9 million year-over-year, reflecting the steeper recession and the slower expected economic recovery. However, they remain at relatively low levels, reflecting strong underwriting criteria in the robust Canadian housing market.Credit losses on commercial loans in the third quarter decreased by $18.9 million sequentially. This decrease is mainly related to the increase in allowances recorded in the second quarter to reflect the higher credit risk due to COVID-19. Compared to the third quarter of 2019, PCL increased by $10.8 million, reflecting a slight unfavorable migration of the portfolio as well as individual allowances on a limited number of newly impaired loans to business customers. As shown on Slide 19, the provision for credit losses as a percentage of average loans was 27 basis points for the third quarter of 2020 compared to 67 basis points in the previous period. This ratio continues to compare favorably to the industry, reflecting our disciplined underwriting standards and the strength of our collateral. The magnitude of the COVID-19 impact on the Canadian and U.S. economies is highly uncertain. Therefore, it remains difficult to predict whether the increase in expected credit losses will result in significant write-offs or if the bank will need to recognize additional increases in expected credit losses in subsequent periods. Impaired loans are shown on Slide 20. Gross impaired loans totaled $274.3 million, up $39.1 million sequentially. These -- this -- sorry, the increase mainly resulted from a few commercial exposure as well as from a slight deterioration in personal loans. Short term, a lot of uncertainty remains regarding the future course of the pandemic and the performance of the economy. But as the economic wanes and we gain greater clarity, we will update our medium-term objectives. Thank you for your attention. And I will now turn the call back to Susan.
Thank you. At this point, I'd like to turn the call over to Nicole for the question-and-answer period.
[Operator Instructions] And we'll take our first question from Meny Grauman from Scotiabank.
Question, in the MD&A, there's a line that talks about how reduction in loan levels may add revenue pressure in the near future. And I'm just wondering if you could elaborate on that and what kind of revenue pressure are you anticipating?
The revenue pressure?
I'll ask François Laurin to answer.
Basically, well we -- because of the lower level of loan -- given the lower level of business loans in Q3, we expect a rebound in this. But because of the lower level, we expect a lower NII in Q4 for that reason.
As you look out to 2021, is it also the expectation that revenues will be impacted by lower loan levels next year?
It's Stéphane. We -- as we explained, the -- a lot of it is coming from Northpoint. And right now, just to give a bit more flavor, our dealer line utilization in Northpoint are seasonal with average utilization in summers 2018 and 2019 ranging between 53% and 56%. Winter season utilization for 2018 and '19 ranged between 59% and 63%, respectively. This summer season was strongly impacted, as we said, by COVID-19, changing customer behaviors with increased discretionary spending being redirected toward RVs, trailers, marine asset, driving line utilization to a historical low for Northpoint of 37.4%. So with the OEM manufacturer efforts and production to respond to this increased demand as well as an expectation that the fall season will slow down the purchase cycle, we can expect credit line utilization increasing to a more normalized level in Q1 of 2021.
And just as a follow-up, you talked about the seasonality. I'm wondering about how you're thinking about the fall off in government support, especially in the U.S.? And also just some, I think, tax payments are due. What impact do you think that will have on demand? And then also from a -- if you could address that from a credit point of view, how you're thinking about the risk there from those events.
I'll ask Liam Mason to comment.
So as you rightly point out, the government support was appreciable. We had over 8 million Canadian receiving the SERB and they just obviously recently announced a slight extension to that. So we have taken into account that government support as we evaluate our credit perspective with our retail customers. I would note that we're adequately reserved for that drop off. We do look, as part of our adjudication framework and our disciplined underwriting standards, at how the -- what customers receive that support and we factored that into our considerations around the reserves. What I would say, though, is that -- and I would note the OSFI announcement on guidance for the banks recently released speaks to keeping your loans that have deferrals in stage 2. What we've done in terms of the clients receiving deferrals is that we've factored in migration of those loans within our reserves and we have an overlay to address that migration. So I would not anticipate a material impact on our reserves from that migration, assuming the economic scenarios play out as expected.
And then if I can just ask about your branch closures, I think you talked about 6 more planned for Q4. And so I'm just wondering on the timing there. And then in terms of the outlook going forward beyond that, is the intention to keep the branch count stable after that? Or is it still an open question? Curious about that.
Okay. This is Stéphane. I'll take this one. The -- as we mentioned before, the bank regularly reduces its Financial Clinic network in order to optimize our geographic presence to better response to its customer behaviors, who are moving away from branch visit to self-service platform.This, as you mentioned, this has resulted in the decision to reduce the number of clinics by 14 to 69, and we expect to merge an additional 6 in Q4. All these cancellations that we've announced represent locations that are within 2 or 3, 2 to 3 kilometers from each other. So far, clients are reacting very well to our 100% advice focus. And going forward, we're taking individual decision based on lease that are -- need to be renewed and also a desire to change the -- our -- the design of our branches to a more modern look. So this is what we're doing right now.
In terms of the ability to retain those customers and specifically those deposits, do you have any data that you can share on that? You've a lot of -- you closed a lot of branches and merged a lot of branches. So I'm wondering if there's any sort of insight you can provide on how that
Yes. Hold on.
And the experience has been?
Lately, in the last year, I would say that the experience has been very positive in terms of the retention of our deposits and clients. Again, we're doing this in line with the desire of our clients to visit less the branches and do more transaction over the phone and with the self-service platform that we have. I don't know if, François, if you have anything to add on this one?
No, I wouldn't add. I don't have anything else to add to this, Stéphane.
Our next question comes from Gabriel Dechaine from National Bank Financial.
Just want to talk about the loan growth issue there, and thanks for all the detail on what's going on in the inventory finance business, makes sense. And I'm just wondering about the rest of the portfolio because where you see commercial growth evolving here because -- in the big 6, anyway, we saw flat growth quarter-over-quarter after years of double-digit growth. And it did seem to be obvious that businesses have confidence issues right now, and then that's suppressing demand. Is that something that could weigh on your growth into 2021?
Yes. We're not immune, right? It's -- I think the particularity of our portfolio is definitely Northpoint, as you pointed out. The growth, we're seeing pipeline being built up right now in real estate, commercial real estate. So we feel good about, again, this portfolio. Our portfolio in our leasing arm will build as the economy stabilize. So we feel good with this portfolio as well. For the rest of the bank, with respect of our residential mortgages, our portfolio has been stable for the last -- past 2 quarters. The environment has been highly competitive, and our appetite is for profitable growth, but still it has been stable for the last 4 -- 2 quarters. So we feel good about this. But as we navigate through the pandemic, all line of business are focusing on where they can win in order to resume growth. And for your question in terms of business services, we still feel very positive about our current portfolio. We're not active in industry that had been mostly impacted by COVID-19, obviously, with Northpoint, but it's kind of a negative, positive type of news. So we feel good about our future ability to grow in business services but also stabilizing the rest of our portfolio.
Okay. Now moving on to the credit discussion here. You mentioned a few commercial accounts drove that -- those formations in the quarter. Can you tell me what sectors they were exposed to or operating?
Let's get Liam to answer this one.
Yes. Gabriel, when we look at the uptick in jilt in the specific files that drove individual provisions, there's no specific sector. I think you asked some questions last quarter.It's similar considerations. It's one-off. They're driven by commercial accounts, largely cash flow files, impacted in terms of their revenues by COVID, and that's really what's driving it. But no specific sector. It's rather diversified.
Okay. So how many accounts are we talking about?
In terms of the individual allowance, it was 2 or 3 files.
Okay. So those belong to a specific sector out there?
Yes. I think we've talked in the past about some stuff in biomass, and we've also -- there's some stuff in pharma that have impacted. But again, these are -- in terms of the aggregate, it being an aggregate theme beyond those individual files in the broader portfolio allowances, I'm not seeing it.
Okay. And then the other -- my last question here is on the classification of loans. So I'm hearing the -- when you talk about the provision, the performing provision expense and how you're increasing the probability of the worst-case and base-case scenarios, and that's building conservatism. But when I look at how you're classifying your loan book, I see total, but it's commercial and personal, total stage 2 balances, which are the higher-risk performing loans. They're down sequentially, and that makes sense. It's a reflection of government's support programs, but they're down materially from last year. And last year, COVID wasn't even on the radar. It doesn't seem to make sense. And it does diverge with what I'm seeing elsewhere.
I'll pass it to Liam.
Just since we're -- thanks, Stéphane. Gabriel, we're very comfortable with where we are. Obviously, the government advice in Q2 had us putting loans with skip payments into stage 1. We have reserved for a migration of those accounts into stage 2 and thinking about it longer term. And business deferrals right now are really quite -- they're only 3% of or about $360 million in terms of skip payments. We have a very strong portfolio. It's 98% collateralized. Also, we've seen, in terms of the blip last quarter, it was really driven, as François described in his remarks, on the volatility in the equity markets and the investment loan piece. But overall, the stages reflect the high credit quality of our portfolio.
Right. I get that. But we hear about management overlay, and this area seems where you could proactively put some accounts into stage 2, take --compelled you to take a higher provision, but I'm seeing the opposite here. We're in a very, very different situation.
Well actually -- yes. No, well said, Gabriel, and I would note, as I just said, we have taken for 100% of the clients in the mortgage book on second deferral. And we, unlike some of the other banks, did sort of a 2 stage. We gave 3 months' worth of skip payment capability, and then we allowed another 3 for those that met the criteria. But we have reserved for 100% of the clients that are on their second deferral migrating to stage 2. It may not show up in stage 2, but we have applied an overlay. And for 50% of the mortgages that are insured and in -- sorry, are in stage 1, we've taken a reserve against those.I also would note that our loan-to-value on our mortgages in the mid-50s as was described. So we are already taking a management overlay against that, away from that on the personal book. We don't have a lot of deferrals. Mind you, our Visa book and the rest is slight.And as I said, our business deferrals are really quite small at only 3% of outstanding. So yes, it is important to take an overlay. We don't want a cliff effect. We've done that within our reserves and feel comfortable about them.
Maybe we'd talk about that off-line because it's interesting to see how -- I mean, you can't really see that overlay in these numbers, but I get what you're saying.
No. We have to follow the OSFI guidance in keeping them at stage 1, but we have -- so you're right, Gabriel. The stages don't really reflect that, but we have taken an overlay.
Our next question comes from Doug Young with Desjardins Capital Markets.
Just on that point, can you actually -- and one of the other banks has done this, but can you actually describe or quantify the percentage of your performing loan ECL that is from the overlay? Is it 10%, 15%? Is there any way to kind of give a quantification of that?
I don't have that to hand, Doug, but just to give you a context within the mortgage portfolio. Our loan-to-value is in the mid-50s on that. And 50% of the mortgages that are deferred are insured. So like it's not big numbers, right? It's not big numbers for us. And even with the modest piece that we have in all our loan-to-value is well below 50%. And so we're not talking big numbers.
And then just kind of keeping on with the ECL theme, like the impact from migration, sounds like you've looked at the deferral book, and you've kind of put aside into the performing loan ECLs, your expectation that there's going to be migration down to stage 2 for those loans that are in deferral. Have you gone through your entire corporate book, your business loan book and updated your expectations for that book as well?
Absolutely. We have -- our process involves both models. And obviously, some of the challenge the industry's had, I'm sure all of you would agree. It goes back to sort of Meny's question on the government support. You have to layer in that government support into your models. We think about it in terms of the impact to unemployment and impact in terms of how things play out. So we've absolutely looked at the commercial book. We're highly collateralized, and our process involves driving out the model, which -- but we did a business-by-business overview with the business, with credit going file by file. We've done some re-rating of a lot of our commercial accounts over the past while. That's reflected in our numbers. We're very comfortable with the reserve. So absolutely. And in this environment, you have to do that. It's only prudent. The key question is really how it plays out from here. And if the economic scenarios play out as expected, we'll be fine. If not, we'll have to adjust our reserves accordingly.
And then just last one on the ECL side. And what would your ECL be for performing loans if you were 100% downside scenario? And I don't
That's
Closure of the other banks.
Yes. The key to this question -- it's not normally information that we disclose. But I want to give you a sense of the quantum. And I think -- I believe this is in our MD&A. If you look at the actual weighted scenario results, and you compare them to the results on the base scenario, and as François Laurin described, we had very high weights on the pessimistic and base scenario and a low weight on the optimistic. But that difference is about $23 million or 1/3 higher. Now that doesn't give you the 100% pessimistic scenario, but it does give you a view of the quantum.
Okay. Yes, just other banks give it, and I just find that to be a useful way to kind of look at the banks across the group. I know all the models differently and whatnot. But -- and then just François, just a few number questions. The $2.7 million related to the severance or not the -- to the former CEO leaving, was that backed out in the unusual items? Or is that $2.7 million in the adjusted mix?
No, it's in the core -- and it stayed in the core numbers, Doug.
It stayed in the core. And then you mentioned that you expected mix to go up next quarter. I get the whole lower capital market revenue and all the other items, but I didn't get a sense of why mix would go up in the fourth quarter. Is just as a seasonal adjustment as we head into Q4 that there's some true-ups to be made? Or is there other items that are going to weigh on expenses in the fourth quarter?
First, the revenue side, because of the lower level of the book, especially commercial, will bring a lower NII in Q4 until we rebuild the -- like for the inventory finance gets rebuilt. So that's one part. And the other part on the expense side, it's mostly the seasonality of the salaries and benefits. We see an uptick in Q4 for certain elements from Q3. So when you combine the whole, we foresee a slight uptick on the efficiency ratio for Q4.
So an increase in the efficiency ratio, but do you expect your -- you also expect mix to be higher from the $169.2 million. Is that right? So I get the efficiency part, but...
Yes. The expense side will be a bit higher because of the seasonality, especially on the salary and benefit line, probably by $3 million.
Our next question comes from Sohrab Movahedi with BMO Capital Markets.
Just a couple of quickies, hopefully. Maybe for Liam, I don't know. Can you give a little bit more color around geographic breakdown of the mortgage relief? And specifically, more details around I think the 250, 260 that you say were new release in the quarter.
So I don't have to hand sort of the geographic distribution, Sohrab, on the relief file. But I would say, predominantly, most of our mortgage business is in Ontario and Québec. We have about $1.4 billion of our aggregate portfolio in Alberta and other elements across the country. And what I would say is the likely distribution is commensurate with that concentration in Ontario and Québec, and we are predominantly focused on urban areas with our mortgage lending. So the deferrals, I think, reflect that demographic.
So just to be clear, Liam, you're saying you're not seeing any disproportionality, if you will, geographically around the relief?
That's right, Sohrab. I mean obviously, with the COVID situation, one of the things we talked about with the real estate team was it's going to slow immigration, and that will have an impact potentially looking forward on growth, say, in the Vancouver market. It's something we're looking at. But there's nothing necessarily in terms of the relief geographically. I think it's more affecting individuals in certain industries as certainly hospitality has been more impacted.
And Liam, that would -- those comments would also apply to the new relief provided during the quarter?
Yes, they would.
Okay. And then I just wanted to go back to the balance sheet trends, generally speaking. I think aside from the Northpoint dynamics that you were talking about, if I would just look at your residential mortgage balances. I guess I think you said something along the lines of stable is comfortable for you. But the market is growing. I think the markets you participate in are growing. So I was just curious to get a sense of how much more, I guess, market share you're willing to give up? Or what will it take for you to want to start growing with the market?
This is Stéphane. I'll take this one. We -- yes, this is a very competitive market as well. And we have appetite for profitable growth in certain areas of this market.So for us, short term, having being able to stabilize the portfolio is the first step. I'm not saying that we will not want to grow, but we want this growth to be profitable.
So it's not inconceivable that the balance sheet trends that we've been seeing, both outside of the Northpoint, could continue to see stable, maybe even shrinking balance sheets still. While -until you get, I guess, the profitability that you're targeting?
Well my comment on the profitability -- the comment that I made on profitability were aimed at the mortgage business. I would expect that all of business services will soon go back at the growth pace that they had before. Other segment that we have, including investment loans, have been stabilizing a bit in the last quarter or so. So that's another area that we would like to grow. But at the end of the day, we want to grow where we can win, and we want to have profitable growth. But obviously, our goal at the end will be to grow our overall portfolio.
Okay. And one last -- just one last one on the net interest margin. I apologize if you mentioned this, and I missed it. But did you comment as to what the outlook for that line item is over the, call it, foreseeable quarters?
François Laurin?
So in terms of NIM, you're referring to NIM, for Q4, we expect it to be a bit slightly lower in Q3 because of the situation we explained with the lower-yielding inventory financing volume at the end of Q3 to start Q4.
Okay. And then I guess, François, just to put a final point on it. Hopefully, eventually, when heading next year, you start growing mortgage book again.
Yes, again.
That will be a net headwind to NIM, correct?
We expect -- well it's a bit premature to make bet for next year in this low interest environment, but we have been able to maintain our margin sequentially. And if the portfolio mix improves for the higher yield and the business growth, as Stéphane mentioned, definitely that would help. That should be a positive factor on the NIM going forward in '21 and beyond.
And if the mix of the growth, if the secured stuff starts growing, which obviously is lower risk, but lower margin, I guess, that would be an offset as far as margin expansion or NIM expansion is concerned?
Yes. But we foresee more growth in the business service book than the other books.
[Operator Instructions] We'll move on to our next question from Darko Mihelic with RBC Capital Market.
Sorry about that. I have a number of questions. So well maybe just ask a couple and then I'll re-queue, just to be fair. The first very simple question, Stéphane, is, could you remind me the status of the CEO search? You have the interim title. When is the Board going to announce the forever CEO?
Thanks for the question. I'm not sure I've got the forever, but I'll comment on the interim.The Board of Directors is progressing within the search of a permanent CEO as you mentioned. And it's -- their intent is to take the time needed to select its next leader. It could be an internal candidate as well as an external candidate. So more to come, I would say.
Okay. But there's no time frame or?
There's no time frame.
Okay. And I just wanted to pick up on the commercial growth. So if we exclude Northpoint, you mentioned that you expect commercial growth to come back. When would that be? Like what does the pipeline look like? What are your expectations around that kind of growth in terms of timing and magnitude?
Thanks. I'll take this one, Darko. Yes. We expect growth to come back next year, and we're seeing pipelines being built. The real estate, which is more than half of the portfolio in business services, has had a decent, I would say, last 3 months. Their pipeline is -- went back to the level it was pre-COVID-19. So that's positive.In terms of the other bit half of the portfolio in commercial, obviously, Northpoint we've commented. The leasing portfolio, 50% of this portfolio is in transport. So obviously, right now, it's a big headwind in that sense. And the rest, so the SME and the syndication portfolio, because we're not active in the most affected industry, affected by COVID-19, we feel that growth should come back in 2021.
Okay. And what kind of growth do you think you could reasonably target in 2021 for commercial?
I will glad to share it at the next call. We'll give guidance at our next analyst call.
Okay. Fair enough. Maybe just a question on deferrals. Is the -- is your portion of deferrals more or less also representative of the amount of insured versus uninsured mortgages?
I'll ask Liam to comment.
Darko, in the mortgage space, we've got 50% of the deferral is insured and 50% uninsured. And it is down, as François alluded, down to only 9.2% of our portfolio. We're very comfortable with the reserves on this, and we are factoring those deferrals into our allowances.
And on the deferrals -- sorry, go ahead?
No, that's similar to our existing portfolio. We're insured 53% in the portfolio. So there's no much difference between the deferred book and the total book, Darko.
And then on the commercial side, Darko, as I mentioned, business deferrals are only about 3% of our book at an outstanding of $364 million. Those were down 80% from the Q2 number. And we've only seen sort of $25.4 million of those balances on a second deferral. So very comfortable with that. 70% to 80% are in equipment finance, with the balance in real estate as I mentioned. So the business deferrals are in real good shape.
Okay. And maybe just on the mortgage portfolio, just a couple of other questions around it. And I promise not to talk about it anymore, but how many are actually unemployed and receiving SERB?
It's a big question. I've been talking to the team over the past while in terms of it. I've got a variety of numbers from the business. I don't want to give specifics. What I will tell you, though, is that we have looked at it and factored it into our evaluation of the potential migration of those customers. But I'm sure you appreciate, for the industry overall, as you guys have asked questions to the other banks, how the SERB plays out, how the relief plays out and how we, the industry deals with the migration back to business as usual are key issues for us. But what I would say is with our underwriting standards and the approach of the deferrals and reserves, we feel we've appropriately positioned for that migration. And we do take that into account when evaluating the credit quality of our customers.
Okay. Fair enough. And I'll promise to ask just one last question, and then I'll move on. There is another cohort that -- another cohort of mortgage borrowers where I have a little concern, and that would be the group of people that have asked for a deferral. They have not lost their job, but they are earning significantly less than before. Think of small business owners, maybe some entrepreneurs and maybe just others that are simply trying to struggle through this but have not lost their job and therefore, are not on SERB. Any idea how big that cohort is within the deferral program?
As I -- I don't from -- when we talk about business for self-type people, again, where we factor that in, when we're looking at a person, small trades, their ability to operate within COVID, if they're making their payments, we're going to have to look how it plays out based on the economic scenario and how it works. But I don't have that to hand, Darko.
And there are no further questions in the queue at the moment. So I would like to turn the call back over to Stéphane Therrien for any concluding remarks.
Thank you. As we navigate through these challenging times, I, along with the management team, are most appreciative of our employees for their dedication, our customers for their loyalty and our investor for their support. To conclude, Laurentian Bank's cash flow position is strong, and it holds a healthy level of liquidity. Its credit quality is sound with disciplined underwriting, well-collateralized portfolio and no material exposure to sectors most impacted by COVID-19. As such, the level of provision is prudent. The operational flexibility that we have built is allowing us to continue our transformation and progress towards our goal of improving the bank's performance. Thank you.
Thank you for joining us today. Should you have any further questions, our contact information is included at the end of the presentation. Our Fourth Quarter of 2020 Conference Call will be held on December 4, and we look forward to speaking with you then. Enjoy the long weekend.
And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.