Laurentian Bank of Canada
TSX:LB
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
24.48
29.29
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Laurentian Bank of Canada
You don't have any saved screeners yet
Good day. [Foreign Language] and welcome to the Laurentian Bank Financial Group Fourth Quarter Results 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Susan Cohen, Director, Investor Relations. Please go ahead, Ma'am.
Good morning. Thank you for joining us. Today's review of fourth quarter and fiscal 2018 results will be presented by François Desjardins, President and CEO; and François Laurin, Executive Vice President and CFO. All documents pertaining to the quarter, including the press release and investor presentation as well as the 2018 MD&A and financial statements can be found on our website in the Investors Center. Following our formal comments, the senior management team will be available to answer questions and then François Desjardins will offer some closing remarks. 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 François Desjardins.
Thank you, Susan, and good afternoon, everyone. 3 years ago, we launched a 7-year plan focused on making the Laurentian Bank Financial Group a renewed financial institution. Customers have shifted and continued to evolve at a rapid pace, sparked by advancements in technology and the globalization of banking. In response, you can find on Slide 5 the mission statement we crafted, which guides us in our journey to renew our organization and sets the tone for every decision and every action that we take. We help customers improve their financial health.On Slide 6, we outlined 3 strategic objectives: Putting words in motion, as a team, we are building a more robust foundation, growing our business strategically and focusing on improving our financial performance. Building on a long track record of disciplined management and conservative credit quality, in 2018, we invested in our foundation, people, processes and technology as seen on Slide 7. The new core-banking platform implementation is nearly 75% completed, and we migrated all B2B Bank GICs at the end of the year. As we speak, we are in the final stages of preparation for the completion of Phase 1, which will move all B2B Bank and most of Business Services products to the new platform. Moreover, this new core-banking platform has opened opportunities for a better transition to a digital environment and sets the stage for digital product launches in 2019 and a renewed customer experience. We completed the integration of the Canadian operations of CIT, now renamed LBC Capital, and implemented a new best-in-class technology platform to support growth in leasing and equipment finance. We joined THE EXCHANGE network to allow customers greater access to their accounts through a vast network of more than 3,600 ABMs from coast to coast.We made an important investment in our people by completing the build of a new corporate office in Montréal and moving teams from 9 separate locations across the city to 1 central hub. With our new Montréal office now fully operational, a strong presence in Toronto and offices across the country, we are seeing the vision of who we are becoming come to life, an investment that is already paying dividends and supporting better teamwork and a culture of performance. We improved IT governance, IT security and business continuity programs. We upgraded our liquidity management software and refined processes and practices that are the backbone of a growing organization. And lastly, we emerged from the mortgage loan portfolio review as a stronger organization as we build enhanced mortgage processes, implemented new controls and refined our oversight and governance. We are now more ready than ever to focus on profitable growth. You can find on Slide 8 that since 2016, we have been evolving the bank mix by increasing loans to business customers. We saw positive results in higher margin commercial loans, including equipment and inventory financing through LBC Capital and Northpoint Commercial Finance, and we fully intend to continue to grow these portfolios. We have also been expanding our geographic footprint. Growth is being generated across Canada, and since 2017, in the U.S. Over the past year, competition in the mortgage market intensified and house prices softened, in part, due to changes in regulation including B-20. These factors contributed to slower growth in residential mortgages as we expected. This is aligned with our strategy to evolve towards higher margin commercial loans and confirms that it is the right approach for us. We recently took a step towards advice-focused approach in our retail branch customers by opening the first advice lounge in Montréal. So far, a few weeks after our grand opening, feedback from customers has been very positive. We are confident that our new model will be successful and are eager to expand it, which we expect will result in an increase in total deposits from clients as well as in assets under administration. In 2018, market volatility, combined with the commitment to pursue our plan, motivated us to maintain healthy capital and liquidity levels, which strengthened the financial position of our organization. In fact, as you see on Slide 9, with the CET1 of 9% and a healthy liquidity profile, this organization has never been in as good a position as it is now. This puts pressure on short-term performance but ensures the financial strength of the organization and in the current environment is the right thing to do. Revenue grew, and for the first time, Laurentian Bank Financial Group reached $1 billion, a milestone. With the progress that we are making towards reaching our strategic objectives, the board has reaffirmed its confidence and has approved an increase in the quarterly common share dividend of $0.01 to $0.65 per share. 3 years ago, we said that we would accomplish 10 critical elements, and as you can see on Slide 10, we are making progress on many fronts. We said that we would invest in core banking, we did, and the implementation is almost 75% complete. We said that we would move the balance sheet towards Business Services. We are, with organic growth and acquisitions and by slowing our residential mortgage loan origination. We said that we would develop a competitive product offering. We are, by reducing the number of products, by making bold decisions to exit products or markets where we don't see value and by focusing in 2019 on launching digital banking products across Canada, opening new direct-to-customer opportunities and increasing funding diversification. We said we would build best-in-class adviser and account manager teams. We are, specializing work in business servicing and launching the advice lounge concept in Retail Services. We said that we would improve capital management. We are, with continued work towards the AIRB certification at the end of 2020, with benefits expected gradually beginning in 2021. We also said that the road would be bumpy and that short-term performance would not follow a straight line. Well, the road is bumpy and 2018 results reflect our investments in people, processes and technology, combined with the strengthening of the bank's financial foundation. Nothing that is worthwhile comes easy, as the saying goes, and the team here at Laurentian is very much looking forward to seeing in a not-too-distant future, our work create growth, performance and ultimately value for shareholders. As you can see on Slide 12, 2019 will continue to be a year of investment and looking forward, one where we are putting a lot behind us. Consequently, it will be a year where we will see the delivery of improved technology and better processes to drive future customer loan and deposit growth. It will be a year where customers will see the first tangible benefits of new digital offers, which will be gradually launched across Canada under 2 brands, Laurentian Bank and B2B Bank. This new customer base will provide a new source of funding and will represent added value for our customers, including independent financial advisers and brokers. Of course, we have said that we need more clarity on the labor relations front before making any more real estate or technology investments in Retail Services. But you will find on Slide 13 that the Laurentian Bank Financial Group is much more than just branches. In all other parts of the group, the plan marches on. In Retail Services, we will continue to rightsize the product line and improve processes, which will decrease the need for administrative work and allow us to increase the number of advice team members. It will also be a year where we will continue moving forward with the conversion of our traditional our branches to advice centers and become 100% advice-only by the end of '19. With portfolio sales behind us, 2019 should be a year of positive net growth and position us well to achieve our midterm targets, as set out on Slide 14. You will also find on Slide 15, our updated midterm performance targets, and François Laurin will say more on our results and targets in his prepared remarks. We conclude on Slide 16 that executing this plan will continue to require discipline, as we look forward to profitable growth and reaping the benefits of investments and business opportunities. In short, we are investing in the right places to support future growth and build a renewed financial institution. Not for the next quarter, but for the next decade. And with that, I would like to turn the floor over to François Laurin to provide a more in-depth review of our fourth quarter and 2018 financial results. François?
Thank you, François, and good morning, everyone. I would like to begin by turning to Slide 19, which highlights the bank's financial performance. Adjusted EPS in the fourth quarter and 2018 were $1.22 and $5.51 compared to $1.63 and $6.09 a year earlier. And adjusted ROE over the same periods were 9% and 10.5% compared to 12.7% and 12.3%. For most of 2018, the bank operated with higher capital levels, which strengthened our balance sheet but impacted profitability. As outlined on Slide 20, reported earnings for the fourth quarter included adjusted items totaling $3.5 million after tax or $0.08 per share, largely related to business combinations.Turning to Slide 21. Total revenue for the fourth quarter 2018 reached $255.9 million, 5% lower than a year earlier. Net interest income declined by 2% due to lower loan volumes and higher liquid assets. Other income declined by 10% year-over-year. In the fourth quarter of 2017, other income included a $5.9 million gain on the sale of the bank's investment in Verico. For 2018, revenue grew by 5%, and for the first time in the bank's history, exceeded $1 billion, reflecting the full year contribution to net interest income of the acquisition of NCF. Net interest margin, shown on Slide 22, was 1.7% in the fourth quarter of 2018. This was 2 basis points higher than a year earlier due to the greater proportion of higher-margin loans to business customers and increases in the prime rate that were partly offset by the higher level of liquid assets. Net interest margin for the full year was 1.78%, 10 basis points higher than in 2017, with a full year's impact of NCF being partially offset by higher liquidity. Average earning assets were $39.7 billion in 2018 or 4% higher than in 2017, reflecting the full year impact of the NCF acquisition. However, on a quarterly basis, it was a slight downward trend. This is due to managing asset growth more tightly to optimize the profitability of the product mix and the related risk-weighted exposures and included certain commercial loan sales.Slide 23 shows the evolution of our loan portfolio over the year. Specifically, residential mortgage loans were down by 8% year-over-year. This was impacted by our decision last November to no longer accept referrals from the broker network into the branch network. As well, mortgages through independent brokers and advisers were down 10%, largely due to changes in regulations, including B-20 and our decision to focus on loans to business customers. Personal loans declined by 3% over the same period, mainly due to lower investment loan balances, reflecting consumer behavior to accelerate repayment following strong capital market performance. Furthermore, we rebalanced the commercial loan portfolio, selling certain portfolios so we can focus on specialized niches. Specifically, in the second quarter of 2018, we divested the $380 million agricultural loan portfolio. And in the second half of the year, we sold $328 million of loans, mainly in the nonstrategic renewable energy and infrastructure portfolio. These transactions offset organic growth, particularly in inventory financing. Excluding these loan sales, the commercial loan portfolio grew 5% in 2018 compared to 2017. By optimizing our portfolio, we are well positioned to profitably redeploy capital in the coming months. A year ago, we indicated that we were going to review all of our portfolios to determine which ones we will maintain, grow, fix or exit. In November, we sold an additional $100 million of commercial loans. And now while we have completed the exit portion of our review in the first quarter of 2019, we will now focus on resuming growth. Looking ahead, we expect margins to trend higher in 2019. This is because we expect net loan growth to resume, the shifts in the bank's loan portfolio mix towards higher-margin commercial loans to continue and the recent increases in interest risk rates to have a positive impact. In 2019, we expect low single-digit growth in residential mortgages and double-digit growth in commercial loans. Other income, as presented on Slide 24, totaled $82.7 million in the fourth quarter of 2018 and decreased by $9 million year-over-year, mainly as the fourth quarter of 2017 included a $5.9 million gain on the sale of the bank's investment in Verico. In addition, income from brokerage activities was lower, reflecting less activity. Fees and commissions were impacted by clients continuing to modify their banking behavior and by the bank in simplifying its products. These items were partially offset by a $3.2 million higher treasury and financial market income, mainly due to net securities gains.Slide 25 presents adjusted noninterest expenses in the fourth quarter -- that's in the fourth quarter were relatively unchanged from a year earlier. Lower performance-based compensation and lower headcount were partly offset by higher technology costs resulting from operating concurrent core-banking platforms as well as higher regulatory expenses.For 2018, adjusted noninterest expenses growth was 6%, while reported noninterest expenses growth was 4%. The adjusted efficiency ratio of 66.7% for 2018 is 60 basis points above the 2017 level and trended higher in the second half of the year, given additional operating costs and lower revenue. As we continue investing in our foundation in 2019, this ratio can remain variable, whereas the impact of resuming our growth and leveraging our investments and acquisitions take hold, we expect that efficiency will improve towards our target. Slide 26 presents our well-diversified sources of funding. Deposits declined by 3% year-over-year and was relatively in line with the level of loans and acceptances. Attrition and branch deposits continues to be in line with expectations, given our branch mergers. Personal deposits sourced through independent brokers and advisers were relatively stable from a year earlier, although down 6% sequentially. As well, debt related to securitization activities decreased by 5% compared with a year earlier and stood at $7.8 billion. The decrease mostly stems from the maturity of liabilities, the repurchase of identifying mortgages loan -- mortgage loans inadvertently insured and sold as well as normal repayments. It was partially offset by $1.2 billion residential mortgage loans that were securitized during the year.Turning to Slide 27. The CET1 ratio of 9% is presented under the standardized approach and highlights our strong capital position.Our diversified loan portfolio is shown on Slide 29. Loans-to-business customers have increased to 35% of the portfolio from 33% a year ago, and residential mortgages stand at 49% compared to 50%. Within the residential mortgage portfolio, Alt-A mortgages totaled $1.4 billion and represent 8% of the total mortgage book and 4% of the total loan portfolio. As well, mortgages in the GTA represents 20% of the portfolio and the GVA accounts for 4%. LTVs remain low and credit scores remain high. Turning to Slide 32. In the fourth quarter of 2018, the provision for credit losses was $17.6 million and included a loss of $10 million related to a single syndicated commercial loan, in which we are a small participant. The loss ratio for the fourth quarter and for the full year was 20 basis points and 12 basis points, respectively. On an annual basis, we continue to expect the loss ratio to trend higher as the loan portfolio mix evolves. However, we expect increases to be more than offset by higher net interest income. Slide 33 highlights that net and gross impaired loans ratios increased sequentially and year-over-year, mostly due to the identified syndicated commercial loan. Overall, we continue to believe that the underlying credit quality of the portfolios remain good and that the bank remains comfortably provisioned, considering that the loan portfolio is well collateralized.This quarter, as presented on Slide 34, we are providing an initial view of the impact of IFRS 9 and IFRS 15, which are being implemented effective November 1, 2018. Based on current estimates, the negative impact on shareholders' equity of transitioning for both standards is not expected to exceed $20 million or 10 basis points on the CET1 ratio. Finally, I would like to return to our updated midterm objectives that François mentioned earlier that can be found on Slides 14 and 15. We are focusing on the 3 growth drivers that are most meaningful and reflect a global corporate view. Business Services has been and will continue to be a growth engine for the bank. With the resumption of profitable growth in 2019, as we redeploy capital, we expect loans-to-business customers to reach $16 billion in 2021. This reflects our decision to evolve the portfolio towards higher-margin commercial loans as we leverage our investments. Furthermore, we are managing -- as we are managing the banks more holistically, we are introducing a target for growth in total residential mortgage loans at $19 billion. Lastly, we are increasing our objective for growth and deposits from clients to $28 billion. We will no longer track publicly assets under administration for Laurentian Bank Securities and Retail Services and put more emphasis on growing our deposits from clients and focusing on our key strategies. Our 2021 ROE objective is to narrow the gap with the major Canadian banks to 250 basis points. As we plan to adopt the AIRB approach, the credit risk in late 2020, this gap reflects the initial benefit as we gradually redeploy capital. We are also targeting an efficiency ratio of below 63% and positive operating leverage. Lastly, we continue to work towards an adjusted EPS growth rate of 5% to 10% annually over the medium term. We remain as committed as ever to execute our strategic plan and work towards our ultimate goal to improve the bank's performance and achieve a profitability level similar to that of the other Canadian banks in 2022, as we reap increasing benefits from the adoption of the AIRB approach. Thank you for your attention, and I will now turn the call back to Susan.
At this point, I would like to turn the call over to the conference call operator for the question-and-answer session. Ron?
[Operator Instructions] And we'll take the first question from the line of Richard Roth with TD Securities. Pardon me, we'll take the first question from Sohrab Movahedi with BMO Capital Markets.
A couple of questions. Maybe, François, I could start off with you. I'm just a little bit confused with the medium-term objectives and the 2021 time line. Are you -- like, are you saying that, for example, the 5% to 10% annual EPS growth starting from 2021, you have a medium-term objective of 5% to 10%? Is that how I should be thinking about it?
I'll let François Laurin answer that question, and then I'll come back and give you some comments on the objectives as a whole.
Okay. The idea -- our intent is to have an annual target up to 2021 of 5% to 10% a year on an annual basis over that period of time, knowing that '19 we have -- as we mentioned, would be a softer year in terms of EPS growth given our level of expenses and investments that we have undertaken and to be implemented in 2019.
Okay. So François, just to clarify, I guess, what you -- just to interpret the 2021 date you have out there, I guess, you're saying these will be the performance targets until 2021 and then maybe you'll revisit them then. Is that maybe the fair way to think about it?
That's fair. So between today and 2021, we expect, on an annual basis, to grow the EPS by 5% to 10% a year over that period of time, knowing that '19 is a softer year.
It's François Desjardins here again. We're trying to follow the industry's guidance here in terms of midterm objectives. The banks have all kind of settled on midterm objectives that are 3 years out. I think it's useful for you to get what we're working towards on that same basis. You'll notice, obviously, that compared to last year's midterm objectives, that were for 2020, growth targets are increasing for 2021 and performance slightly as well. We are confident that we will be able to achieve those targets in the next 3 years. Before you ask, where do I think we would land in 2020? Well, from a growth perspective, we believe that loans-to-business customers and assets under administration from LBS would be surpassed based on last year's 3-year guidance. Deposit growth from customers would be at as expected. Mortgages from independent advisers and brokers would be slightly below, but not by much; and assets under admin in Retail Services would be amiss. From a performance perspective, the ROE gap target would be slightly lower than expected based on current analysts' expectation of the market for 2020. So the ROE gap would be slightly lower than the 300 basis points that we had indicated by maybe 50 or maybe a little more in terms of gap. Of course, the EPS would follow that, but that's mostly driven by the higher levels of capital that we're having and liquidity levels, but the efficiency ratio would be as expected below 65% for 2020.
Okay. Can I just ask very quickly on the one-off syndicated commercial credit that you called out? What was the -- which geography was that in?
I'll let Liam Mason, our CRO, answer that question?
Thanks for question, Sohrab. In terms of geography, it's a Canadian-based customer -- syndicated loan customer that's about $27 million in size. We've been involved in the syndicate for the past, sort of, 6 years, relatively small player for us. This is somewhat of a new news to us, and that we were advised earlier this week that the syndicate agent, the bank had uncovered or have been advised by the borrower that there were irregularities in their accounts related to the blending and some of the collateral underpinning the borrowing base. So in looking at this and the initial assessment of the revised value of that borrowing base and the collateral, we therefore booked a provision based on the best information that we have at this point from the lease bank agent.
And Liam, would you have a kind of ballpark indication of what percentage of your commercial loan book would be in syndicated-type credits?
Sure. Why don't I get Stéphane to just talk about the syndicated loan business?
Yes. The syndicated debt in commercial represents roughly 10% to 12% of our overall Business Services portfolio. So it's a very -- it's a small portfolio for us, but it's performing very well. Obviously like other banks, it allows us to participate in strong deals with major banks, where our participation is lower, i.e. in line with our size. It's a very diversified portfolio in terms of industry and it's across Canada.
And Stéphane, is like a $27 million size at the upper end, at the lower end or about an average for that size, for your syndicated portfolio?
It would be at the upper end.
We'll now take the next question from the line of Richard Roth with TD Securities.
Looking at your NIE line, we saw a pretty big sequential drop. Am I correct in assuming that a large factor for that drop is capitalization of some of those incremental expenses?
I'll ask François Laurin to answer that question, Richard.
Thank you, Richard. Clearly, quarter-over-quarter, sequentially, because of the massive investments we have, we have a bit more capitalization of labor between Q4 and Q3. The other one would be as well -- remember Q3, we had a onetime off because of the cancellation of insurance mortgages with the CMHC following the review of over $1.5 million. So that was a Q3 event that does not happen in Q4. So those would be the 2 major items from Q3 to Q4.
Okay. And so I guess, it's one of the big pieces that fell was on the comp lines. So are these same employees, but instead of going -- running them through the costs of the P&L, they're being capitalized, because you can argue or justify that the higher percentage of their time or whatever is being allocated towards capitalizable activities?
Obviously. With our 2 major projects being core-banking and AIRB, there is a higher proportion of the employees' that efforts are being put and capitalized into the project. But as we move forward, we should have the efficiency in the processes and then also in the reduction of maintenance costs from lower number of platforms to maintain and as well improve our efficiency ratio going forward, once that period is over.
Okay. And on that note, when I look in your financial statements and I look at the intangibles note, you have an other intangibles line and there was $82 million -- $81.6 million of additions. Is that where those employee costs are going on your balance sheet?
That other intangible represents -- the bulk of it are the 2 major projects, you are right. And the capitalization of labor would fit into that line, yes.
And am I correct in understanding that the amortization of that will occur as these systems come online?
You are right.
And what sort of the amortization rate? Like what I'm trying to get at is, sort of, okay, a lot of these expenses have moved into the balance sheet, but if amortization is going to be elevated in the next few years, that's going to offset a bit, so what sort of -- how should I look at that?
Basically -- sorry Richard, basically, the major project like core-banking, you could assume a 20-year period amortization. So once we're done, the cost accumulated would be amortized over 15, but most likely 20 years in the case of core-banking. So once we're done with the most, we're 75% through it. So once we do the next step of the Phase 1 with the B2B products and the remain -- some of the Business Services, then the bulk of the amortization would start. So basically we could assume somewhere into 2019.
Okay. And the last question on this front. So on the run rate basis, thinking over the next few quarters, maybe the entirety of 2019, do you expect to change the proportion or allocation of employee costs that are now capitalized? Or is what you currently at, as of October 31, the numbers you booked this quarter are reasonable expectations? Because we saw a -- we did see a move from Q3 to Q4, and I'm wondering are we going to see a move back, move further in the same direction or is it run rate?
Overall, the expenses in '19 of noninterest expenses would stay relatively in line with what we have at the moment because we still have part of the AIRB project keep going -- that keeps going. And the one thing that reduced this year in terms of year-over-year was the variable base compensation return. So that is based on the results.
Yes, I'm looking more from a quarter-over-quarter basis.
Going forward, you don't see the growth, you don't -- you just see the net in salary expenses of what's capitalized. Some of these employees or people or resources come with the projects, and once the projects are gone, they don't stay necessarily as employees of the bank. So you wouldn't necessarily see a major shift in the salary expenses because of the stopping the capitalization moving forward.
If I may add to that. This is François Desjardins speaking. Just for clarity sake, when you're doing core-banking investments and we have -- obviously, we've said this before, people from Temenos that are working on this, people from Deloitte that are working on this and some of our own people that would normally be in operations jobs, but not that many that are dedicated to this, then we have a slew of people that have been hired specifically for the project that are released once the projects are done. That gives you an overall of the workforce. Of course, everything that is done for the project gets put on the balance sheet and then gets amortized, as François indicated before.
That answers, Richard?
We'll now take the next question from Sumit Malhotra from Scotia Capital.
Just a couple of clarification questions here, maybe starting with the quarter and then going a little bigger picture. So the 2 items that really seemed to help in the quarter were expenses which we'll get back to and then the tax rate. You guys have indicated earlier this year that if anything the tax rate would be moving higher as we go forward. I won't spend too much time on this, but versus the 18-ish percent level we see today, like what is the run rate? I thought it was supposed to be materially higher. And maybe just quickly, like what's causing this move below 20%?
I'll ask François Laurin to answer.
Yes, in Q4, it's clearly the business -- the current business mix of the results of Q4. Going forward, we had explained that because of some of the government new budget measures, our taxes would grow -- would be higher going forward. That's '19 and up. So from '19 on, we should see roughly 21% to 22% based on our projections.
Sorry, 21% to 22%? Or I had a higher -- or I thought that was 21% to 24%?
Yes, but I'm giving you a bit of a tighter range now.
Okay, that's a good. And sorry, I said I wouldn't go too long on this. But when you say business mix, the bulk of your -- I know you have some operations in the U.S. now, but the bulk of your operation is under the Canadian statutory rate, I would think. When you say business mix, what specifically are you relating or referring to?
Well, clearly, from a lower-rate perspective, you have the U.S. businesses that we acquired last year. You also have the, what we call, insurance -- we have a bit of insurance -- the reinsurance business that's taxed outside Canada. And then we also have, depending on our investment income, dividend component of our revenues, which is not taxed at the high rate, not taxed at all. So when you take this plus we had lower volume proportionately, our Canadian business has been lower in this quarter compared to previous quarter. So hence a lower tax rate.
All right. And then maybe on expenses. I'll stay away from the capitalization versus expense and just kind of think about this more broadly since you've indicated you expect your efficiency ratio to improve next year. You did some reference in the release to some severance charges that were taken in the quarter and we do see your headcount has moved lower by about 3% sequentially. Is whatever was reflected in severance this quarter indicative of where the headcount is going to be going forward or is this severance charge still making its way through? And I think this question is more broadly for François Desjardins. You've indicated that there is more investments to come. So when we look in aggregate at the Q4 expense base, do you see this as more reflective of what the run rate is? Or was this a particularly good quarter from a cost perspective for Laurentian?
I think it was a fair quarter. But I'm hesitant to give you guidance a little bit on this because of more of the labor's situation. All along since 2015, '16, our goal is to convert, retrain administrative workers into more advice jobs. We've done some of that when people have applied, but not on the large scale proportion like we would've wanted. So we have -- we also -- we have the option to reduce the number of administrative workers as we implement better processes and automation. So that's what we're doing. When we're talking about going to 100% advice-only in our branches, that means that there's no tellers by the end of the year. So of course, the headcount is going down. I think the unfortunate part is, I think, there are some of these folks, I could have made it to advice jobs, and right now we're not yet where we need to be on the labor front to be able to move forward as planned. So how that's going to pan out in headcount is a little bit hard to say at this point. But I would not say that the headcount is heading north. I would -- if I was a betting man, I would say that the headcount is heading south.
All right. Last one for me...
Sumit, can I just clarify something? I think I understood that you think the efficiency ratio will be improving next year. I just want to clarify, in 2019, we still believe the efficiency ratio will kind of be variable and will start to improve past '19.
Past '19, okay. Thank you for that clarification. Last one for me, and I'll pass it off. I appreciate the disclosure on IFRS 9 and the day 1 impact, if you will. I also want to think about the impact on your provisioning levels, more on a go-forward basis. So in the last 3 years, if my numbers are right here in the model, your provisioning ratio has been around 11 basis points, as you point out, lowest in the industry. Of course, your gross impaired loans trend. Your overall credit quality has been really good. But as your portfolio shifts to products that historically have had higher loss rates than residential mortgages, under the expected loss methodology, what do you think your loan loss ratio or your provisioning ratio will look like under IFRS 9, just given the changes in the mix of your book?
I'll ask Liam Mason to comment on that.
Sumit, thank you for your question. I mean, obviously, as we're all familiar, the IFRS 9 methodology depends not only on the current year's forecast, but how responsive the out years are over the life of the exposure. So to some extent, it depends on the macroeconomic environment. As you rightly pointed out, we've been averaging 11 basis points. I think we've indicated to the marketplace and we expect that to trend up to about 20. But we believe that, as we change our business mix, any increase in our loan loss run rate will be more than offset with higher net interest income and margin. So we remain, in terms of our forecast, consistent with what we've released. That said, as you know, the IFRS 9 methodology has been leased for many other banks, is a little bit more volatile and we do expect potential higher impact from the mix.
Liam is that 20 basis points as soon as 2019 or is it more gradual depending on the changes in the economic environment?
No, that's a more gradual impact over -- as we grow and obviously, we're going to be tracking it closely with the business growth. It's not a step function.
We'll now take the next question from Marco Giurleo with CIBC.
My first question is for François Laurin. I just want to touch again on expenses and just get a clarification. I think François you said you expect adjusted expenses to be flat to 2018 levels. So that implies a better quarterly run rate of about $174 million, so not far off from where we were this quarter. So I just want to make sure that still -- is that indeed what you foresee going forward, 0% growth off these levels?
All things considered, yes, that's a fair assumption.
Okay. And then François Desjardins, you mentioned a 100% advice-only branches by the end of 2019, just wondering where are you right now in that process? And could the union negotiations that are currently underway be an impediment to achieving that goal?
I'll answer and then I'll ask Stéphane Therrien to give you a little bit more color on the progress that we're making. So your question is where are we now? I think we are at about 1/3 of the branches of the network that are advice-only. And what that means, right, is that the 4 basic transactions that are already available at the ATM, withdrawal, deposit, pay bills and have your account balance, you can't go to the cashier anymore to do that. And so the human service inside the branch is all about advice. That's what the model is. We're about 1/3 of the way there. From a perspective of the union, no, we've -- the current collective agreement allows us to reduce the services that -- and focus our service on advice. The issue, I guess, we've been having is trying to train and redeploy some of these people. And what we have been doing is, as people are leaving, just not replacing them, and there is about 40% to 50% turnover rate in cashiers. So that process is relatively fast, and that's how we've been working all along. To give you a little bit more excitement about what's happening in Retail Services, let me turn it over to Stéphane Therrien.
Yes, I think François did a good job at explaining exactly where we were -- where we are right now. The excitement part is that we feel that a lot of our -- all our employees are really excited to move to 100% advice-only in the branches, so that's one thing. And the customer feedback that we're receiving so far is very positive. This change in model is in line with their new behavior. Remind everyone that 95% of the transaction that we're doing with our customer in retail are already done electronically. So they're really excited about the new model and the -- obviously, we follow the progress of the branches that are already 100% advice and therefore, performing better than the others right now.
All right. Great. And just one last question on loan growth. We saw further contraction in both mortgages and personal loans this quarter and on the slides, you speak to a gradual decrease in mortgage originations as you focus on higher-margin in commercial. So just curious, what do you see is driving the inflection in residential?
It's a little bit voluntary and a little bit involuntary. It's François Desjardins here. I'll comment on volume growth as a whole. Of course, loans-to-business customers was higher than expected at Northpoint and LBC Capital and really good in real estate financing, but we didn't show up in the net growth numbers this year because we did some portfolio repositioning. We had said last year that we would review our portfolio to decide what to maintain, grow, fix and exit, and that's exactly what we did. So we sold about the equivalent amount of loans, the agriculture business as a whole and some nonstrategic low-margin loans in other areas and optimized the balance sheet. So one offset the other. But now that those sales are behind us, growth in Business Services should be well positioned for double-digit growth in 2019. That's really the focus of our growth and it's a strategic objective of ours. Growth in mortgages was lower and we expect -- we expected a large part of it. Two of the objectives that we has was to shift away towards the business mix, which I just talked about. But the second one was to reposition the branch network towards advice. So we made the decision to stop accepting referrals from brokers directly into the branches. We only accept mortgage broker referrals to B2B Bank now; and Retail Services is really focusing on financial advice, investments and deposits. In parallel, as you know, changes in regulation, including the impact of B-20, had some effects, market events during 2018 as well as a competitive backdrop, all contributed to a no growth in mortgages through the year at B2B Bank. However, where we're seeing pipeline return, we're focusing both on prime mortgages on the insurance side and on Alt-A, and we do expect to be able to meet our 2019 targets of $19 billion overall. It is one of the reasons why we're moving towards giving you a target for mortgages for the bank overall because we do expect B2B Bank mortgages to be very positive and -- but from a mortgage growth perspective, Retail Services to be still on the negative as some of the customers that were monoline exit. So giving you a better representation of the whole mortgage book was important to us. But still, we continue to believe we're going to see single-digit growth in mortgages starting this year and if there's any indication the pipeline is saying that, that is underway.
We'll take the next question from the line of Gabriel Dechaine with National Bank Financial.
I got a couple quick ones here, running out of time. The $100 million commercial portfolio sale, you think that's going to hit in Q1?
Yes.
Correct. That was the last part of our sales, yes.
Okay. You mentioned the $27 million commercial loan that went -- that became impaired this quarter and you took a provision. What is your single-name limit anyhow?
I'll ask Liam to answer that.
Sure, Gabriel, thank you for your question. In the commercial space, our average -- our single-name limit is $40 million, but our typical average is in and around -- as Stéphane said, in and around $20 million to $25 million.
Okay. And the syndicate, was that other banks that I would know in that syndicate or other...
Yes, absolutely you would know.
All right. Then, I guess, the shift to the commercial growth emphasis now. If I look -- let's talk about the drivers here. I guess, if I look at your growth loans and the growth that we had during the year, pretty much entirely -- and if I exclude the portfolio sales, it looks like it was all driven by an inventory finance, so Northpoint. Everything else was kind of flat or down quite substantially. What -- that double-digit growth that you want to get next year, where is that coming from? Is it still going to be Northpoint driving the growth? What Canadian categories could be maybe reversing what's been a negative trend?
I'll ask Stéphane to answer that.
Well, first, Northpoint will be our leader in terms of growth for sure. LBC Capital will also experience double-digit growth. The same in real estate for construction lending. So these will be the 3 growth drivers driving the entire portfolio by double-digit. Just to remind that the 3 years before 2018, our overall growth was all in the double-digit for Business Services. So we feel very good about the rebalancing of our portfolio that we did, and basically all teams right now in the Business Services have a mandate for growth. And with the mix, we will be at double-digit growth.
If I can add to that, the -- we forget that LBC Cap, the acquisition of the Canadian operations of CIT, we just ended mid to end this year the integration process, and that the sales prepurchase were on the negative trend. We turned that around, flattened that out, but we still have to do integration work, and that's why in my comments I was talking about the implementation of a new software. We needed to get our loans off of the CIT platform and that was completed Q3, Q4 this year. So there was quite a bit of effort from management on making sure that, that integration was successful and it is. And of course, next year, we don't have that to worry about and we can focus completely on growth.
What are the concentration limits by industry here? So if I look at this picture and I said, well, you gained -- the inventory finance picked up 600 basis points of the total percentage of your commercial book, like, how big do you want that to get? How are you managing that growth, the balance of the growth and the risk management aspects of it? Because if we're seeing growth driven by 1 or 2 categories, it can be worrisome potentially?
I would ask Liam Mason to answer that.
Yes, Gabriel, I don't find it worrisome. We have a disciplined process around our risk appetite. We look at our aggregate concentration limits. I mean, we talked about single-name limit, we talked about limit, we have limits by industry and sector. I am not worried about it and it's within our risk appetite. We don't naturally disclose the specifics on it, but overall not uncomfortable with the mix at this time.
We'll now take the next question from the line of Meny Grauman with Cormark Securities.
Question on the impact of union negotiations. So it sounds like the union negotiations are not really impacting the change in the rollout of the new branch model, that's a good thing, but what is it impacting? Because I know there's still reference to that as being an issue, but it doesn't sounds like it's having -- it's not preventing you from the branch rollout. I'm trying to understand what is going to -- what impact it is going to have?
Thank you for the question. The -- under the current collector agreement, we can reduce headcount, but really what we cannot do is move administrative work out and retrain those employees. So what it's doing is that is it doesn't stop us from removing and becoming 100% advice in the branches. But it doesn't take us 100% of the way there. I'll ask Stéphane to give you more color, but the true model that we have in the end is one where we have developed the advice lounge model, which is here at 1360 René-Lévesque, where we have about 22 advisers, no vault, no counter, no transactions at all and everything is digital. What we're talking about here is really trying to retrain administrative workers into those advice jobs, people that are in the back office or call center or support teams as time is going by. That's really what we're looking forward to doing. It's just taking a lot more time. So not according to plan part, is not according to time line. Stéphane?
Sorry, I would add that so far in the transformation plan, we said that we would optimize, obviously, the retail and we did some of it by cutting cost here and there, optimizing our branches to 100% advice and so forth. What we have not done so far is the investment in the retail sector. We said that we are delaying decision on technology and real estate investment. These 2 items are at the center of what we want to do to transform the retail sector. So the labor situation is definitely slowing us down right now. Yes, we can do the advice at 100%, but with the existing branches not. So we're transforming our branches. We're not creating one -- the new ones. And that's what we want to do. We want to invest, but right now we just cannot.
I would add to that, of course. In the last few quarters, we made the announcement that we would be launching digital products at B2B Bank and at through the Laurentian Bank brand across Canada. This portion was accelerated in the original plan because we thought that retail branch banking is a great source of deposits and funding for a bank. But if we want to have growth in Business Services or growth overall, it has to come from somewhere. And if we're not able to increase the adviser base to the level that we wanted to, it has to come from somewhere else. So going direct-to-customer from a digital perspective for transactional accounts, high-yield savings, deposits with a great brand like Laurentian across Canada was the way to go. So we're looking forward to launching that in the first half of the year for B2B Bank as financial advisers can refer their customers to us and in the later part of the year, direct-to-customer under Laurentian Bank brand.
And then if I could just ask a question, sort of, in more detail? What was the growth in the branch-originated mortgages sequentially and year-over-year?
I will ask Stéphane Therrien to answer that.
Year-over-year, the mortgages were -- in the branches were down 13%. As François Desjardins mentioned, we basically exited the referrals from broker channel. So this accounts roughly for half of that decline.
Okay. And then in terms of the portfolio sale this quarter, there was a loss on that sale and I'm just hoping you could quantify that loss.
I'll ask François Laurin to comment.
Yes, less than $1.5 million, around $1.4 million, Meny.
And in the portfolio, you talked about in Q1 that $100 million, is that -- is there also a loss associated with that sale?
No. Not to my knowledge.
[Operator Instructions] We'll take our next question from the line of Scott Chan with Canaccord Genuity.
I just want to focus on the other income for a little bit and on few specific items that have been sequentially declining. I guess, one, deposit service charges; and secondly, on the insurance side. On the insurance side, you talked about lower premiums, which kind of caused the year-over-year decline. But is there anything else to kind of think about within those 2 categories over the next 2 years?
I'll ask François Laurin to comment.
Thank you, Scott. Clearly, as we transform retail to respond to the changes in customer behaviors, we expect that the service charge revenue line will decrease. But what we firmly believe is that our expenses will also decrease so the efficiency ratio will improve over time. In terms of risk insurance, it's just -- there is lower activity. The lower level of volume, obviously, is the prime indicator of whether this insurance revenue line comes from. So it just follows the growth in the revenue and loan growth.
Is that -- is the volume expected to continue to be low over the next year? Or how do you kind of see that?
Stéphane?
The insurance should continue to be low. Yes, insurance revenue.
Okay. And then just lastly. Just on the personal loan side, you talked about investment loans kind of being detractive within that portfolio. Was there anything else in that portfolio to comment on?
Only that normally when the markets are good, the investment lending business, people cash out and when the markets are lower people have a tendency to get in. Markets have been good over the last few years and, of course, this product has lost a little bit of favor since 2008. So we've been seeing some decline in this portfolio. We are making efforts in 2019 to relaunch this product. We actually believe that this is a great loan for consumers to use their borrowing power to invest in assets rather than use their borrowing power to spend. So in line with our mission to improve our customers' financial health, using lending to borrow to, for example, fill your unused portion of RSPs, which most Canadians have not used in terms of maximizing the returns. The TFSA limit has been increased again this year to $6,000. We're now in the total limit of -- I think, it's $66,000 or something like that. We now offer TFSA loans for people that want to maximize that product. So these are things that we're looking at as we're shifting towards advice.
And that's all the time we have for questions today. Mr. François Desjardins, at this time, I will turn the conference back to you for any additional or closing remarks.
Well, in closing, I would like to thank you for your continued interest, our shareholders and investors for your continued support and trust, our team members as we finish this year, whose dedication is an inspiration to me and most importantly to our clients who motivate us every day to surpass their expectations in every way. I'll now turn it back over to Susan.
Thank you for joining us today. Should you have any further questions, our contact information is included at the end of the presentation. We look forward to speaking to you again in our first quarter 2019 conference call on February 27. All the best for the holiday season.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect your lines.