Laurentian Bank of Canada

TSX:LB

Earnings Call Transcript 2021-Q3

[Operator]

Good day, [Foreign Language], and welcome to the Third Quarter Results 2021 Laurentian Bank Financial Group Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Susan Cohen, Director, Investor Relations. Please go ahead, ma'am.

[Susan Cohen, Director of Investor Relations]

[Foreign Language] Good morning, and thank you for joining us. Today's opening remarks will be delivered by Rania Llewellyn, President and CEO, and the review of our third quarter of 2021 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; Kelsey Gunderson, Head of Capital Markets; Eric Provost, Head of Commercial Banking; and Karine Abgrall-Teslyk, Head of Personal Banking. All documents pertaining to the quarter can be found on upside 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. It is now my pleasure to turn the call over to Rania Llewellyn.

[Rania Llewellyn, President, CEO & Director]

Thanks, Susan. [Foreign Language] Good morning from sunny Montreal, and thank you for joining us today. As summer comes to a close, I hope that everyone had an opportunity to disconnect and recharge, particularly this year as the impact of COVID continues to take its toll on everyone's physical and mental health. To support our employees, I encouraged everyone to take their vacation days. And as a bank, we provided an additional 4 paid Friday afternoons off this summer. Over the past few months, we have been working to refine our future of work plans. We conducted a company-wide survey to hear directly from our employees on their work habits, expectations and preferences. One thing we've learned is that a one-size-fits-all strategy is not realistic and that we must adapt to new ways of working. That's why we will be pursuing an employee-centric strategy and adopting a hybrid model, where working from home is our first approach for all tasks that can be performed remotely. We will also not begin any mass return to head office and corporate office premises until at least January 2022. We are closely monitoring the impact of the Delta variant on the economy, particularly labor market conditions as Canada plans to phase out government income support programs this fall. We expect that interest rates will remain low and spending intentions of both consumers and businesses should create a favorable backdrop for loan growth. Turning now to our results. The momentum that we have been building over the first half of the year continued into the third quarter, delivering adjusted net income of $59 million. This represents an increase of 4% quarter-over-quarter and 25% year-over-year with adjusted earnings per share of $1.25. Our results were driven primarily by strong performance in real estate financing, lower provision for credit losses and our continued focus on cost discipline. The PCL includes releases of allowances forming loans of $3.6 million, reflecting improvements in economic conditions. I'm also pleased with another solid quarter from capital markets. Growing fee-based revenues from the equity and advisory group helped produce our second quarter on record for this business. The bank also continues to maintain healthy liquidity levels and a strong capital position with a CET1 ratio of 10.3%, up 20 basis points quarter-over-quarter and 90 basis points year-over-year. In the third quarter, inventory financing was impacted by continuing supply chain disruptions and high consumer demand for recreational vehicles, which resulted in the lowest dealer credit utilization rate on record of 28%. We expect the supply chain disruptions and high consumer demand will continue to remain a challenge for most of 2022. To counter these impacts and to position us well for the post-pandemic recovery, our business development team have expanded the dealer network by more than 20%. When credit utilization rates rebound, every incremental 1 percentage point of utilization results in $50 million of assets and a return to pre-pandemic utilization levels in the mid-50s would generate over $1 billion in additional assets. This quarter also saw some key developments that I would like to highlight. The bank purchased group annuity contracts to derisk our pension plans, which reduces our nonoperating financial risk and administrative costs. The transaction resulted in a net after-tax settlement gain of $5.2 million, which is excluded from adjusted earnings. The Real Estate Finance group had very strong performance with growth of 6% quarter-over-quarter and 18% year-over-year. The pipeline is at an all-time high level of $4 billion, which is expected to fuel future growth and profitability. While I am pleased with our overall performance for the first 3 quarters of the year, we do not expect it to be a straight line to success. You will recall from previous quarters that we've established 3 strategic pillars that are guiding all our efforts and actions. They are cultivating a customer-first culture, driving an agile and innovative mindset, and engaging and empowering our employees to work as 1 team. From those pillars, we identified 3 key priorities for 2021. Renew the senior leadership team and organizational structure, increase our efforts on cost discipline while pivoting to structural cost opportunities and conduct a thorough review of the bank's operations and develop a new strategic plan. We have made significant progress on all 3 of these priorities, and I would like to provide a brief update on each one. First, following up from last quarter where we announced a search for a Chief Technology Officer, I am pleased to announce that Beel Yaqub joined Laurentian Bank as the new Executive Vice President and Chief Information Technology Officer in July. He brings over 20 years of experience in digital technology, business transformation and data insights to the bank, and we are extremely pleased to have him on the team. Second, as I have said before, a key focus area for the bank this year is in managing our costs. While we continue to pivot towards identifying large cost optimization opportunities, we are finding low-hanging fruit and executing against those initiatives. A few examples include: consolidating vendor agreements to bring more value for the bank including an instance where the bank entered into 7 agreements with the same partner, simplifying our Visa product offering from 8 to 4 to enhance the customer experience while reducing costs, and conducting a strategic sourcing exercise to consolidate our printing service contracts resulting in cost savings for the bank. I am a big believer in every penny counts. We are looking at all opportunities that contribute to our cost savings, and this work is starting to be reflected in our results, with our adjusted efficiency ratio improving by 150 basis points quarter-over-quarter to 68.4%. Third, as you know, we are continuing to conduct a thorough review of the bank's operations. Over the past 2 quarters, we identified shortfalls in our mortgage business, including a complex customer experience, lengthy processes and inconsistent service levels. To improve the customer experience, we are ensuring we have the right people, processes and technology in place. Initiatives this quarter include: first, the creation of a new residential real estate secured lending business unit within Personal Banking. This new unit will allow for greater accountability and cross-functional collaboration in delivering a seamless experience for our customers and renewing growth; second, the implementation of DocuSign, a digital tool for ease, convenience and collection of customer signatures; and third, the integration of technology like an automated valuation management system, which enables the bank to save processing time in valuing properties from days to seconds and saves customers hundreds of dollars per transaction. While we know that this is a multiyear journey to improve the customer experience and to renew growth, we do expect to reap benefits along the way. Last quarter, we committed to completing a strategic review of our digital road map and to sharing our progress. As a result of our review, we have identified 3 key focus areas: First, we will work to close foundational gaps in our offering. For instance, we currently have 2 different experiences for our retail customers, depending on which platforms their accounts reside on. We will streamline this process and provide new digital offerings such as a mobile app and tap-enabled debit cards for all our customers. Second, we will enhance our digital onboarding, sales and servicing capabilities to allow us to expand our reach to new customers and deepen relationships with existing customers. And third, we will simplify our offering and improve the end-to-end digital customer experience. Similar to our mortgage review, we are ensuring that we have the right people, processes and technology in place. We will come back in future quarters with further updates. As you know, the bank's ESG journey remains a key priority. To further support our efforts of making Laurentian Bank a place where people, businesses and communities thrive, I'm pleased to share some key developments over this past quarter. We launched our PRIDE Employee Resource Group and Courageous Conversation Series for LGBTQ2S+ community and allies. We rolled out a mandatory unconscious bias training program for all employees. We initiated an RFP to conduct a climate risk assessment for the whole bank to better understand our impact on the environment and areas of opportunities. And we continue to be an active participant in green bond issuances. As we head into the fall, we will continue to work with our employees to ensure their safety and that of our customers remains our top priority. We will also look for opportunities to generate new business and grow revenues as the economy reopens while maintaining our disciplined management of expenses. I am now pleased to turn the call over to Yvan.

[Yvan Deschamps, Executive VP & CFO]

[Foreign Language], Rania. [Foreign Language] and good morning, everyone. I would like to begin by turning to Slide 10, which highlights the bank's financial performance. For the third quarter of 2021, adjusted net income and EPS reached $59 million and $1.25, respectively. Materially lower provisions for credit losses contributed to adjusted net income improving by 25% compared to a year ago. Total revenue grew by 3%. An improvement in economic activity contributed to an increase in lending fees and continued good performance and financial markets drove an increase in market-related revenues. Adjusted noninterest expenses increased by 3% due to higher performance-based compensation. This resulted in adjusted pretax pre-provision income or PTPP growing by 1% year-over-year. Reported net income and EPS in the third quarter were $62.1 million and $1.32, respectively, and were higher than adjusted results. The variance with adjusted results is partly explained by the bank's purchase of group annuities to derisk expansion plans. Specifically, the bank purchased $346 million of group annuity contracts from a Canadian insurer and transferred $353 million in obligations. This transaction strengthens the balance sheet, lowers the risk from pension obligation, reduces administrative costs, and further simplifies operations. It also resulted in the recognition of a net settlement gain of $7.1 million or $5.2 million on reported net income in the third quarter of 2021 and is included in the reported results adjusting items. I would now like to review the drivers of our performance that begin on Slide 11. Year-over-year, net interest income and net interest margins were relatively unchanged as improved funding costs were largely offset by lower average loan volumes. Turning to Slide 12. Other income was up 7% from a year ago. The increase was due to higher lending fees stemming from an improvement in economic activity and commissions from the sales of mutual funds. Compared to the second quarter, the 2% increase was driven by the strong performance in real estate lending. Slide 13 highlights that adjusted noninterest expenses were up $5.2 million or 3% compared to last year. Salaries and benefits increased by $4.5 million on an adjusted basis due to performance-based compensation as the bank delivered stronger results. The adjusted efficiency ratio of 68.4% was 30 basis points higher than a year ago. and improved by 150 basis points compared to last quarter as a result of higher revenues. Slide 14 presents our sources of funding, which we continue to strengthen, diversify and optimize. First, the bank increased its use of securitization over the past year by $1.4 billion. Considering this increase in loan volumes, we chose to reduce term deposits from advisers and brokers by an equivalent amount. These decisions optimize our funding costs and provide greater flexibility as growth resumes. Second, personal branch notice and demand deposits increased year-over-year by $200 million or 7%. Third, we issued $250 million of covered bonds, which is the most efficient form of funding conventional residential mortgages that will allow the bank to deliver competitively priced products to our customers. The covered bonds were classified as wholesale deposits. Finally, the bank issued $125 million of limited recourse capital notes with the proceeds used to redeem the preferred shares Series 15. Slide 15, highlights our strong capital position. The CET1 capital ratio presented under the standardized approach stood at 10.3%. This was an increase of 20 basis points sequentially and 90 basis points year-over-year, and was mainly driven by internal capital generation. Slide 16 highlights the commercial loan portfolio, which grew by 2% sequentially. The growth in real estate lending of approximately $500 million was offset -- mostly offset by a decrease in inventory refinancing of about $300 million. The soaring prices of single-family homes has created strong demand for multi-residential and condo projects, fueling the pipeline of our Construction Lending group. We continue to maintain discipline on the writing standards as evidenced by LTV on the term loan portfolio of 57% and the LTV on the uninsured multi-residential mortgage portfolio of 55%. Overall, the strength of our underwriting, good diversification and strong collateral contribute to the high quality of the commercial loan portfolio. Slide 17 presents the pan-Canadian residential mortgage loan portfolio. Residential mortgage loans slightly declined by 1% during the quarter. As Rania mentioned, we are taking actions to review our mortgage processes to improve the customer experience and to renew growth. Although improving the performance of the mortgage business will be a multiyear journey, we expect to gradually reap benefits along the way. The bank's residential mortgage portfolio remains relatively weighted towards insured mortgages when compared to the industry at 56% and combined with a low LTV on the uninsured portfolio contributes to reducing the overall risk of the business. Turning to Slide 18. Allowances for credit losses totaled $183.3 million. The sequential decrease of $2.2 million includes $3.6 million of releases of allowances on performing loans, reflecting an improved economic outlook. ACL continues to take into consideration our cautious approach given the uncertainty related to new variants as well as the winding down of government support programs. To date, we have released about half of the pandemic-related buildup of reserves and may release more over the quarter should macroeconomic conditions continue to improve. Scenario weights remain unchanged. As shown on page -- on Slide 19, the provision for credit losses was $5.4 million in the third quarter of 2021. Compared to last quarter, PCL increased by $3 million due to lower releases of provisions on performing loans and was partially offset by lower provisions on impaired loans. The PCL loan ratio stood at 7 basis points in the quarter compared to 3 basis points last quarter. Gross impaired loans on Slide 20 increased by $10.6 million from last quarter, mainly reflecting an increase in commercial impaired loans which relate to a few loans with no industry concentration. We remain adequately provisioned. I would like to offer some thoughts on how we see the fourth quarter developing. Net interest income and net interest margin are expected to be relatively in line with Q3. We continue to expect good performance in capital markets, although financial markets may gradually normalize. The commercial banking pipeline is strong, particularly in real estate lending. However, loan growth is expected to be impacted by the lingering softness in inventory financing. As previously mentioned, we now expect that supply chain disruptions and high consumer demand will continue to remain a challenge for most of 2022, based on feedback received from our customers and industry participants. In the interim, we continue to expand the dealer network, positioning us well for the anticipated recovery. We will continue our focus on cost discipline and aim to keep the efficiency ratio below 70% for the remainder of 2021. Provision for credit losses continued to be difficult to predict. The surge in the Delta variant is adding to economic uncertainty, even though economic indicators have been moving in the right direction. Consequently, we will remain prudent in managing ACL in the coming quarters, but could see further releases should the economic recovery continue. Considering these factors, we expect PTPP for the fourth quarter to be relatively in line with the third quarter. I will now turn the call back to Susan.

[Susan Cohen, Director of Investor Relations]

Thank you. At this point, I would like to turn the call over to the conference call operator for the question-and-answer period. Valerie, please proceed.

[Operator]

[Operator Instructions] And we will take our first question from the line of Meny Grauman of Scotiabank.

[Meny Grauman]

You've talked over the past few quarters about a number of changes you're making in the residential mortgage business. And I'm wondering when do you expect to see growth in balances on a sequential basis? Is it clear to you when you're going to see that? What's your expectation from your team in terms of that specific indicator?

[Rania Llewellyn, President, CEO & Director]

Yes. Thanks, Meny, for the question. So yes, over the last couple of quarters, we've really been focusing on really completing a thorough end-to-end process review of all aspects of mortgages, whether it be origination or retention, both in our B2B distribution network as well as in our branches. And obviously, that's uncovered that we really have a highly complex customer experience as well as a lengthy process and inconsistent customer service. We had highlighted in the last quarter that we've kind of launched a couple of key pilots. One of them was segmentation of our mortgage brokers, where we assigned one individual contact to follow the file from an end-to-end perspective. And early -- it's early days. It's a small pilot. What we've seen is that it did improve our funding ratio and it did increase the origination volumes. Recently, in this past quarter, we also introduced a new pilot focused on retention. So we've created a centralized retention team and that's really to proactively reach out to those customers who their mortgages are up for renewal well before then so that we can proactively manage that. And as I said in my opening remarks, we've introduced a number of other things where it's the new unit, and that's really to bring in focus and accountability under one leader who has a deep understanding of mortgages and will be responsible and accountable for the growth of that business as well as improving the customer experience and introduced a couple of new digital tools to improve the customer experience as well as speed up the process. Meny, you and everybody on this call would appreciate mortgages, it's a multiyear journey. It's going to take a lot of hard work. It's not rocket science. It's making lots of little fixes while we're looking at technology solutions and partnership opportunities for us to speed up the process. But at this point, I would say it's a multiyear journey, 18 to 24 months. It's going to take around 18 to 24 months to really start seeing some benefits, but we're hoping to reap some benefits along the way as we introduce some more changes.

[Meny Grauman]

And maybe just as a follow-up, just from the outside looking in, how should we measure success here as time goes on. Maybe if it's not balances, are there other indicators that are going to be important to track? Are you thinking about providing additional disclosure to that point?

[Rania Llewellyn, President, CEO & Director]

Yes. So I'd say, Meny, if we were to look at 2021, the theme of this year has really been a theme of resetting and rebuilding. And so our focus has been renewing our senior leadership team, which we've had significant progress, and Beel was the latest addition to our leadership team, and really focusing on ensuring that we have the right strategy to enable sustainable, profitable growth. And that's something that and -- we'll share in due course. For next year, given some of the macroeconomic concerns that we have softness that we're looking at from a supply chain disruption perspective, the Delta variant. So there's a lot of macroeconomic conditions that are beyond our control. I would say 2022 is really going to be a year of mobilization and execution. So we'll have a strategic road map, we'll have the right team, and now we need to start executing. And that will take time. I would say the commercial bank is well positioned, particularly in our real estate lending portfolio. We are also going to see growth in our equipment financing business. But again, the biggest headwind there is our inventory financing. I mean it's a high-margin business in the mid-digits -- mid-single digits, that generate some revenue. And so we're really at the mercy of the supply chain disruptions coming back, loosening up. So -- and then on the personal side, as I mentioned in responding to your previous question, it is going to be a longer road to recovery. So we're going to continue to focus on cost, cost optimization while we're building the right platforms for our future growth. I mean the other thing, too, Meny, is we don't have a mobile app at Laurentian Bank. We don't have tap on our debit cards. So those are things that we are working on, which will also generate growth opportunities once we launch them in the market to attract new customers, new business, and then we can cross-sell them on all of our products and services.

[Meny Grauman]

And then maybe just -- you touched on the commercial loan portfolio. It definitely looks like it's the real estate state side of that, that is really driving the growth that we're seeing. You talked about sort of supply shortages, but I guess when you look at the numbers and even digging deeper, what gives you confidence that it's really about the supply side, that there's nothing more fundamental here in terms of maybe more of the non-real estate side of the commercial lending. What gives you confidence that you're on track there and there's no other sources of weakness besides supply side issues that you highlighted?

[Rania Llewellyn, President, CEO & Director]

Yes. So Meny, we have 3 key specializations that are within our commercial book of business, inventory financing, real estate financing and equipment financing. And so like you said, inventory financing is the one that's really impacted by the supply chain disruptions. And so as I mentioned, every 1% increase in utilization is an additional $50 million in assets. So if we were to return to pre-pandemic levels, which is mid-50s in utilization, and currently, we're sitting at a record low of 28%, that's an additional $1 billion in assets. So that's inventory financing. And we're not standing still. Our business development salespeople are out there, and they're bringing in some more business. They've expanded -- we've increased our network of dealers by 20% year-over-year. So that's really one aspect. Real estate financing was up 6% quarter-over-quarter, 18% year-over-year. And we're optimistic in terms of that business because we have a strong pipeline of projects in our pipeline are $4 billion, and that's a 10% to 15% increase. It's higher than our 2020 and 2019 average. So we're quite confident there that the growth trajectory will continue there. And I would say on the equipment financing, again, there are macroeconomic conditions, and it is also impacted in certain respects by supply chain, but not as much as inventory financing. So we will see some growth. So I would say 2022, we'll see some growth, but really the big growth is going to come probably in the years to come once the macroeconomic conditions return to normal.

[Operator]

[Operator Instructions] We will take our next question from the line of Paul Holden of CIBC.

[Paul David Holden]

I have a few questions for you related to the digital journey you're going through. And I guess the first question I have is just noticed looking at technology costs down a little bit on a year-to-date basis. So just wondering, one, is -- why is that a number that's showing a year-over-year decrease and maybe there's some efficiencies or vendor consolidation that's benefited that line? And then two, should we expect to see higher growth in that line in 2022?

[Rania Llewellyn, President, CEO & Director]

So that's great. Thanks for the question, Paul. So maybe I'll start with kind of the digital journey, what we've uncovered and then I'll move into like technology and how technology will be an enabler for us for growth and why you're seeing like a little bit of a drop. So let me start there and if any of my colleagues want to jump in, they can. I would say in terms of the digital journey, we've identified some key foundational gaps. And like I said, it may be a surprise to everyone on the call, but we don't have a mobile app, and we're hard at work in terms of delivering that to the market. We don't have tap on debit, which is obviously restrictive, particularly during a pandemic. We have 2 platforms which gives you 2 different experiences. And so I would say if there's one theme that is a guiding principle for everything we'll be doing at Laurentian Bank, it's simplification. We need to simplify our platforms. Our technology platforms are complex. So there's an opportunity for us to simplify as we modernize. And so we're reviewing all aspects of the technology to ensure that we're spending money where we need to, to enable and drive sustainable, profitable growth. So there are 2 levers. It's either sustainable revenue growth or if there are opportunities for cost efficiencies. So with Beel joining the team now, there's an opportunity for us to continue to review all aspects and all technology projects, but it's also part of a bigger cost optimization initiative. As I said in our opening remarks, yes, we had lots of agreements with different vendors. So there's lots of opportunities, low-hanging fruit for us to simplify as well as generate some cost efficiencies as we go along. However, we will need to invest in technology. We just need to be more strategic as to ensuring we're investing in the places that are going to help us drive revenue as well as find savings, and improve the customer experience, obviously.

[Paul David Holden]

Got it. Okay. And then hearing the comments you've made on sort of some gaps in the product offering and customer experience, like how should I look at the trend in digital deposits because that's clearly not where you want it to be, again, with some year-over-year deterioration and quarter-over-quarter deterioration on digital deposits?

[Rania Llewellyn, President, CEO & Director]

Yes. So Paul, that's why mobile is absolutely crucial. So that's -- it's -- once we have a mobile app, it will definitely help and assist in terms of attracting net new deposits while returning -- retaining existing deposits. The other thing, too, is enhancing our digital onboarding, right? It's a very complex digital experience right now to get onboarded to open a bank account. So those 2 things combined will be absolutely critical for us to bring in some more deposits. The other thing, too, that we're working on is cash management digital solution for the commercial bank because we don't have one right now either. And so that's something that we're looking -- working hard in terms of scoping it to launch it. So I would say those 2 critical components. But just to keep in mind, when we're managing deposits, we're proactively managing the amount of deposits that we have in the bank relative to the growth in our assets. So that is a deliberate move that we have as well and then making sure that we're optimizing our source of funding.

[Paul David Holden]

Got it. But as I think about that equation sort of longer term, how should I think about the relative cost of those digital deposits? Because I would have thought of those as being margin enhancing over time. Am I correct in that assumption?

[Rania Llewellyn, President, CEO & Director]

So I would say -- I mean, it really depends on the customer base. It's going to attract what the product offering is, and that's going to be directly connected to the margin and the value proposition that we're offering. I think that in a mobile world, you're going to be attracting all kinds of customers, and you can leverage the platform to offer different deposit offers or is it for your core customer base that you're cross-selling, but it will definitely be a customer acquisition play for us, which will ultimately drive deposits as well as cross-sell opportunities for other products that we have.

[Paul David Holden]

Okay. And final question I have on this topic is related to open banking. I mean you're aware and probably everyone is aware on this call that the federal government wants to push through open banking starting 2023, not that far down the road. Just wondering how you're thinking about that, maybe and maybe it's too early in your process in terms of the digital review, but just thinking about the opportunity broadly in terms of open banking and how that may benefit Laurentian?

[Rania Llewellyn, President, CEO & Director]

Yes. So what I would say, Paul, is I think open banking is an opportunity for all service providers, particularly in the financial industry space to enhance the value that we can deliver to our customers. So I think it's an opportunity that we can sharpen our value proposition to our customers, work with partners to help in terms of delivering even additional services beyond financial services. I think the most important thing that all banks are thinking of, including Laurentian Bank is how do we protect the customer information and data. That is going to be absolutely paramount as we move forward with open banking. So it's definitely something that is going to be embedded in our strategic road map, whether it be from a product design, technology, partnership strategy and so on. So I truly believe it's an opportunity to enhance the value proposition and help us differentiate our offering in the market.

[Paul David Holden]

Got it. Okay. And 1 last small one for me. Just on the lending fees. I mean, it was abnormally high this quarter and that was attributed to real estate lending volumes? So I appreciate the explanation. But just trying to think about where it came in this quarter versus typical run rate, like if we assume that CRE remains strong, should we assume similar fees going forward? Or is there anything abnormal in this quarter?

[Yvan Deschamps, Executive VP & CFO]

Yes. This is Yvan. I'll take that one. So the lending fees, you're right, are pretty good and strong this quarter, and that definitely came from the performance in the real estate. So the level that you should assume in terms of run rate, it would be a good guess to look at the average year, the last few quarters that we had. So it may be a bit lower than what we had in Q4, but based on the pipeline and what we expect from real estate, it should be a good level going forward.

[Operator]

We'll move to our next question from the line of Lemar Persaud of Cormark Securities.

[Lemar Persaud, Research Analyst]

Yes. Let me start off by turning back to the residential mortgage business. I'm just wondering if there's anything you saw, Rania, through the course of your review this quarter that caused you to push out the timing of the recovery in that business? I seem to recall 12 to 18 months last quarter being the timing of the mortgage review. And I think I heard you mention it was going to be 18 to 24. Am I just reading too far too deep into your comments? Or is there something that you uncovered there?

[Rania Llewellyn, President, CEO & Director]

Yes. So Lemar, I think there are 2 different comments. One is how long it's going to take us to actually review the entire business and come up with a strategic plan. And that's why we said it's going to take almost 12 months to just figure out and come with kind of the details of that. But we've always said, I mean, anyone who's kind of run the mortgage business, it's going to take time for that shift to turn around. It's not a start-up business. It's complex. It's highly regulated. And so there's lots and lots of moving parts. We have different distribution channels. We've already, like I said, started seeing some improvements in a very minor way. But really, it's going to take 18 to 24 months for us to really start seeing the impact of our efforts. So it's not like we're standing still. We're making the changes, but it's part of our broader strategic review.

[Lemar Persaud, Research Analyst]

Okay. So there is nothing then that caused you to push out the timing throughout the course of Q3 that you uncovered?

[Rania Llewellyn, President, CEO & Director]

No. No, Lemar. No, no. I think we very quickly highlighted to you like our processes are complex and we had mapped out last quarter really just the origination journey, and now we've expanded it to the retention journey. And last quarter, it was focused on the advisory. We had mapped out just the advisory business to the B2B business. and now we've expanded it to include the branches. And I would say that it's quite consistent. The issue is we have different journeys for the B2B business versus branches. So we really need to simplify. Bringing in and creating that new unit will bring that focus and will help us really kind of come up with 1 journey for each of the applications. And then that way it'll just make it easier for us to figure out what is it that we need to automate? What do we need to digitize? How can we improve things? And so yes, so stay tuned on how we're going to move forward going forward.

[Lemar Persaud, Research Analyst]

Okay. That's helpful. And then maybe just flipping back to digital and just going to the digital deposits. Would it be fair to suggest that the digital deposits are going to coincide with the introduction of the mobile banking app. So maybe my question then blows now to when do you see the introduction of the mobile banking app?

[Rania Llewellyn, President, CEO & Director]

So we're hoping to introduce the mobile banking app by the end of the calendar year. But as you know, it's going to be -- we're building it in agile. So it's going to have -- so you're going to launch your first minimal viable product, which will have certain foundational elements. It's not going to have all of the functionality that we need. And so it's going to be a continuous release of different functionality that's going to happen over the next 12 months. And it's not one of those things where you just kind of turned it on and the deposits start coming in. So it will obviously have to be supported by a proactive sales campaign, product offering. So it's going to take some time. But yes, we are very excited in terms of closing that gap because that will be a key enabler for us to attract deposits as well as new customers to the bank.

[Operator]

And we'll move to our next question from the line of Sohrab Movahedi of BMO Capital Markets.

[Sohrab Movahedi, Analyst]

I just wanted to clarify 1 question and 1 answer and get a couple of other questions in. I think you mentioned, Rania, that if the utilization rates, I think on the commercial products were back at pre-pandemic levels, that would be the equivalent of about $1 billion in additional assets. Would that also be about the same amount of incremental RWA on the balance sheet at those utilization rates?

[Yvan Deschamps, Executive VP & CFO]

Yes. I would say it's not exact, Sohrab, but it's pretty close to assume it's roughly in line, yes.

[Sohrab Movahedi, Analyst]

Okay. And...

[Rania Llewellyn, President, CEO & Director]

And Sohrab, just to be clear, that's just for the inventory financing. So it's not the commercial. It's not just all yet. It's inventory financing within commercial, yes.

[Sohrab Movahedi, Analyst]

Okay. Okay. And so then secondly, when you're looking at the residential real estate review, I think that you've kind of articulated over the last number of quarters, is it only a process improvement review? Or do you anticipate that one of the outcomes could be that their composition or the risk texture of that portfolio may change between, I don't know, insured and uninsured or origination LTVs or something like that? Is it possible that your risk appetite may also morph as you improve on the processes there?

[William Mason, Executive VP & Chief Risk Officer]

Sohrab, it's Liam. Thank you for the question. Right now, we're very happy with our risk appetite in the mortgage review. Indeed, our product offering was recently recognized with an award. We operate both in the alt -- the prime and the insured spaces. And clients seem to like our broad offering. We don't have any change in our risk appetite. That said, we have a very high proportion of our mortgage portfolio insured as Yvan mentioned, and we have a relatively low LTV. So that will ebb and flow as we build the business.

[Rania Llewellyn, President, CEO & Director]

Yes. So what I would add to that, Sohrab, is we're obviously going to be looking at all aspects in terms of the sales process, our product construct, our end-to-end process, how we're interacting with the customer, our back-end processes, can we actually make it a lot more efficient by partnering up with somebody else? How can we make the experience a little bit more enhanced? So we're looking at all those aspects. But from a risk perspective, we're quite comfortable with our current risk appetite, and we're not anticipating any changes at this point.

[Sohrab Movahedi, Analyst]

Okay. That's perfect. And then the last one, I think we've talked a little bit about or I think you have over the last couple of quarters anyway about the core banking system and some work that maybe has been put on hold and a more thorough review over there. I mean, as you think about your digital deposit capture and some of those technology type projects here, how dependent is that on having a resolution, if you will, on what's happening with the core banking business?

[Rania Llewellyn, President, CEO & Director]

Yes. So what I'd say is a lot of the customer-facing technology can be quite separated from the back-end systems, but we are looking at things holistically. And so with Beel coming in right now, and we're in the midst of our strategic review. And so he will be coming up with kind of a technology architectural road map of how can we best deliver that in the time frame that we need to generate growth while kind of modernizing and building for the future, right? So he's coming at an opportune time. But yes, so stay tuned for more on that.

[Operator]

And we'll move to our next question from the line of Darko Mihelic of RBC Capital Markets.

[Darko Mihelic, MD & Equity Analyst]

Just first, a very high-level question for Rania, I think. I appreciate this is difficult, right? I mean, every quarter, we're pestering you for more information on your strategic view and so on. Is there going to be like a big reveal of the strategic review? And kind of what you guys -- and if so, when is that? I'm just -- I'm sort of trying to piece together every quarter kind of what we're building on here with respect to the outcome of the strategic review. Is it next quarter? Is there something sort of lined up?

[Rania Llewellyn, President, CEO & Director]

Yes. So Darko, yes, I know it's a little frustrating, and I kind of feel sometimes like I'm a broken record. But we are going to be hosting an Investor Day in early 2022. We haven't set the date yet. It's part of my closing remarks. But Yvan and I are hoping that we can provide some form of guidance at a very high level in Q4, but yes, stay tuned for more on that Darko.

[Darko Mihelic, MD & Equity Analyst]

Okay. Okay. Just wanted to make sure I had something as we sort of go. The next couple of questions are related to your position -- your capital position and the upcoming potential removal of restrictions from the regulator, whenever that may be. Your capital position is relatively strong. Your stock trades well below book value. One of your peers has now adopted like an ATM. And so the question sort of naturally that evokes is in the event that the regulator does lift the restriction on capital return, would you consider doing something similar, ripping down the ratio, buying back a lot of stock, which makes a ton of sense for shareholders, and then potentially sort of engaging in ATM should growth reappear in a much stronger-than-anticipated fashion? Or do you view -- or do you see yourself running a bit differently with a bigger cushion to the minimum capital ratio?

[Yvan Deschamps, Executive VP & CFO]

Yes. Thank you for your question, Darko. This is Yvan. I'll take this one. So as you mentioned, very pleased with the capital level that stands at 10.3% increase quarter-over-quarter and year-over-year. And the good news is that it came from internal generation of capital, which is a good sign. But our first objective remains to grow the asset base. So that's definitely where we intend to use the capital. So at this point, we don't intend to use an ATM. We definitely are focused on growing this business, and we're taking actions like we mentioned on mortgages and other products as well. So stay tuned for the end of the year when we unveil the strategic plan. We'll give you more guidance on this. And as you know, all of that is prevented at this point. So we also need to wait for OSFI before providing any more guidance on.

[Rania Llewellyn, President, CEO & Director]

But yes, just to reiterate what Yvan said, our #1 deployment strategy is organic growth, right? And so that's really our #1 where we're going to use the excess capital.

[Darko Mihelic, MD & Equity Analyst]

Okay. But it would take quite a reversal of fortune to use up capital which is just organic unless on -- but in any event, what about the dividend? Is it pretax pre-provision earnings that will guide your dividend decision?

[Yvan Deschamps, Executive VP & CFO]

Yes, I'll take that one as well. So if I keep going on the asset side, if you -- we just mentioned, by example, the inventory financing, which is over $1 billion down. So we don't see that coming in the next few quarters, but that will eventually coming back. We're pretty optimistic, and we like that business. So that's an example of where we're going to use it. As we fix the mortgages, we're going to use some there as well. So we don't manage the capital on a quarter-to-quarter basis. We do manage on a more medium-term basis where we do envision to increase the assets, as mentioned. In terms of dividend, again, unfortunately, I'm probably going to sound broken record, as Rania mentioned, but this one is prevented by OSFI. So it's reviewed on a quarterly basis by the Board. And as they lift restrictions, we will revise what we do. But if you look currently, our payout ratio, if you adjust the PCL to a more normal level, we would be relatively close to the low end of the payout range that we provided to the market. But again, we'll just wait for restrictions to be lifted and reevaluate that on a quarterly basis.

[Darko Mihelic, MD & Equity Analyst]

Okay. And the pension buyouts this quarter, is that over? I didn't quite catch or understand. And is that completely -- and what does it do for you? Does it completely remove all risks around the pension? Or is it just some sort of longevity? Or is it investment return? Can you just maybe expand a little bit upon what you did there with the pension risk?

[Yvan Deschamps, Executive VP & CFO]

Yes, definitely happy to take that one because I think it's a great transaction for the bank and really happy with the outcome of it. So what we've done, Darko, is that 60% of the obligations of the pension fund was for retirees and roughly 40% for the active employees. So what we've done is that we bought annuities from a Canadian insurer. This is locked. This is done. And pretty much what we've done is that we took those annuities for 60% for all the retirees of the bank. We now have an annuity that fits perfectly the obligations of the bank. So we took out 60% of the longevity risk, market risk related to those. So for us, we feel that's a great way of improving the risk that we can use somewhere else at the bank, not necessarily in our pension plan. And definitely, it simplifies the operations, everything around it. So it's a great transaction. And we did generate a gain out of it, which is, to be honest, pretty exceptional. So we were really pleased with the outcome of that transaction.

[Operator]

[Operator Instructions] And we'll take our next question from Marcel Mclean of TD Securities.

[Marcel Mclean, Associate]

Okay. I actually just want to take a quick look at capital markets. It looks like you guys have materially outperformed the peer group, down only 4%. But if I compare to sort of pre-pandemic levels of Q1 '20, you guys are up about 60% from those levels, which is more than double your highest peer. I'm just wondering what's sort of driving your outperformance is not a huge contributor to revenue, only about 10% for you guys, but still this -- just wondering if this is something we should expect going forward? Or what's really behind this growth?

[Rania Llewellyn, President, CEO & Director]

Yes. I'll let Kelsey answer that question. Kelsey, go ahead.

[Kelsey Gunderson, Executive Vice President of Capital Markets]

Yes. I mean, thank you very much for it as well. Very pleased with how the business has performed as you pointed out, not only in this latest quarter, but since the year began, 3 good quarters of performance, building on what was a record year for us last year as well. We are benefiting from some changes we've made over the last couple of years, in particular, the realignment of our -- really our entire capital markets franchise with the rest of the bank, something that I don't think was happening as effectively in years past. For instance, we're doing a much better job of aligning our equity and advisory to bankers our commercial lending footprint and seeing this pay off over the last couple of quarters in terms of securing mandates. But the big part of our business remains fixed income, and that business has certainly been strong of late. We've seen some good market share gains. And so it's been what I would characterize as leveraged performance, which is largely driving what you've correctly pointed out is some pretty solid performance out of the business. In terms of sustainability going forward, I think like a lot of others, we expect to see normalization of capital markets activity. We saw a little bit of that in the quarter for us as well. Although what I would say is normalization in fixed income was, for us, more than offset by good performance in our equities business. But our business mix is, as I said, tilted towards fixed income and in particular, tilted towards government finance. And I think as we all know, the provincial governments are going to need to continue to finance these deficits, and we're in an excellent place to capture that business and capture market share as we continue to build. So I'm optimistic that the performance will continue.

[Marcel Mclean, Associate]

Okay. And then just a second question here. Moving over to the PCLs. Phase III commercial PCLs jumped back up a bit this quarter. I just wondered if there's any trends that's related to specific sectors, if there's anything you want to highlight there that maybe we should be aware of?

[William Mason, Executive VP & Chief Risk Officer]

So it's Liam. Thank you for the question on the PCLs. We have seen a slight increase in our gross impaired loans, as Yvan articulated. It's -- we consider that variation within the normal course of business. And if you look, our overall gross impaired loans have been relatively stable. There's no industry concentration per se. We believe that we're adequately reserved. But we do expect that level to decrease as the economy improves based on our disciplined and prudent approach to underwriting.

[Operator]

It appears that there are no further questions at this time. Ms. Llewellyn, I'd like to turn the conference back to you for any additional or closing remarks.

[Rania Llewellyn, President, CEO & Director]

In closing, I would like to leave you with a few key takeaways. Our momentum from earlier this year continues into our third quarter. The bank's capital and liquidity positions are strong, and our credit quality is sound. This quarter also saw some significant achievements, including the recruitment of our new Chief Information Technology Officer, the establishment of our residential real estate secured lending group and the derisking of our pension plans. We also remain focused on enhancing the customer experience and driving revenue growth while continuing to identify structural cost opportunities. We will continue to provide you with updates on our mortgage business and digital road map. Finally, I would like to thank the leadership team and all employees of the bank as we continue to focus on our strategic plan and charting a new path forward. We look forward to providing you with an update on our strategic plan by hosting an Investor Day in early 2022. Stay tuned for additional details. Thank you for joining the call today.

[Susan Cohen, Director of Investor Relations]

Thank you, Rania. Should you have any further questions, our contact information is included at the end of the investor presentation. Our fourth quarter of 2021 earnings call will be held on December 10, and we look forward to speaking with you then. Have a pleasant day.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.