Laurentian Bank of Canada

TSX:LB

Earnings Call Transcript 2020-Q4

[Operator]

Good day, Bonjour, and welcome to the fourth quarter Results 2020 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]

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 fourth quarter and 2020 financial results will be presented by François Laurin, Executive Vice President and Chief Financial Officer. After which, we will invite questions from the phone. Also joining us for the question period are Liam Mason, Executive Vice President and Chief Risk Officer; and Kelsey Gunderson, Executive Vice President, Capital Markets. All documents pertaining to the quarter can be found on our website in the Investor Center. Before we begin, let me 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]

Thank you, Susan, and good morning. Today, Laurentian Bank recorded its fourth quarter and fiscal 2020 financial results. Before François provides us with an overview of our performance, I would like to share some impressions of my first few weeks at the bank and how I plan to approach the next few months. Since October 30, my first official day in this role, one of my priorities has been to meet with and listen to as many employees as possible from across the bank. I want to take a moment to convey my personal thanks and immense appreciation to everyone for sharing their time and ideas with me, and especially their efforts in serving our customers and this organization during what has been an unprecedented year of change. In my conversations with them, it has become clear to me that they share a commitment to reshaping Laurentian to become more relevant to our customers. But I have also heard that they are craving a new strategy and clarity around the path this organization will chart to achieve greater success in the future. To that end, we've launched a series with initiatives in 3 key areas. First, work is underway to strengthen our organization, beginning with the reassessment of our current priorities. We are in the process of conducting a thorough review of the bank's operations and assessing key projects, including all the previously announced transformation-related activities. This focused effort will continue over the next few months. It is an important step that will help validate that the foundation we are building upon is strong and that we are taking the right actions to position ourselves well for future growth. I'll provide a detailed overview of our strategic plan as soon as our work is completed. Second, as we reassess our long-term strategy, we are examining ways to enhance our cost discipline across the organization with a view to improving our overall efficiency. Third, we are making several important changes to our executive team and organization, including implementing a reorganization of commercial and personal banking into 2 operating units. I'm pleased to announce that Éric Provost, Senior Vice President, Commercial Banking; and President of LBC Capital, has been appointed as Executive Vice President of Commercial Banking effective January 1, 2021. This promotion is a testament to Éric's many successes during his 8-plus years at Laurentian. During which time, he played a pivotal role in several recent acquisitions, including the Canadian operations of CIT and Northpoint Commercial Finance. Personal Banking will include the Québec branch network, digital banking and B2B banking under our one retail operating unit. We will be formally launching a search for a new Head of Personal Banking, who will be based in Québec. I would also like to announce Stéphane Therrien's decision to retire from the bank at the end of December. Stéphane has been a valued leader at Laurentian Bank for more than 9 years. I want to thank him for his significant contributions to the bank and also to wish him well for the future. Looking forward, I expect 2021 to be a year of challenges and opportunities, both at a macro level with the current pandemic and within our bank. It is a year in which we will be resetting our priorities, refocusing our efforts and renewing the passion and pride of our employees to believe in and serve as one bank to provide long-term sustainable value to our customers, our community and our shareholders. These new operating units, commercial and personal banking, will join our capital markets unit as well as our corporate functions as we embark on a renewed strategic direction, centered around 3 pillars. First and foremost will be a customer-first culture, focused on how we can simplify our operating processes and improve our overall customer experience across all of our business lines. Second, we will create a more agile organization with an innovative mindset. I believe one of our competitive advantages as an organization is our size relative to the big bank. As a midsized financial institution, we have a unique opportunity to create an environment characterized by faster decision-making and more nimble implementation of changes to the benefit of our customers. And third, we will engage and empower our employees to work collaboratively as one team centered around a customer-first mindset. In closing, I want to make a commitment to our shareholders and to the investment community to work with you to ensure you are part of this journey to reset Laurentian Bank for renewal and growth. I am committed to providing all of you with operational transparency and openness regarding our internal assessments and our future strategic priorities. In the spirit of that transparency, I hope you will share with me any concerns or thoughts you may have that will help drive Laurentian Bank to the next level. I'll now turn the call over to our CFO, François Laurin, to provide an overview of our Q4 and full year earnings.

[François Laurin, Executive VP of Finance, Treasury & CFO]

Thank you, Rania, and good morning and Bonjour à tous. I would like to begin by turning to Slide 5, which highlights the bank's financial performance for 2020. Adjusted EPS and ROE for the year were $2.93 and 5.5%, a decrease of 31% and 240 basis points, respectively, compared to 2019. The variation in profitability was mainly due to the higher provision for credit losses, primarily driven by the severe economic conditions resulting from the global pandemic. Financial highlights for the fourth quarter of 2020 are presented on Slide 6. Adjusted EPS and ROE for the quarter were $0.91 and 6.8%, a decrease of 13% and 100 basis points, respectively, compared with the fourth quarter of 2019. The higher provision for credit losses was also the most significant factor accounting for the variation in profitability. As well, a reduction in higher-margin inventory financing volumes impacted net interest income. This was mostly the result of COVID-19, which caused an increase in demand for boats and other recreational vehicles and disrupted the supply chain. In addition, other income was stronger, mostly as a result of the contribution for capital market activities. Compared to the third quarter of 2020, adjusted EPS and ROE decreased 11% and 90 basis points, respectively. As outlined on Slide 7, reported earnings for the fourth quarter included adjusting items totaling $5.5 million after-tax or $0.13 per share. For 2020, adjusting items totaled $24.1 million after-tax or $0.56 per share. Restructuring charges mostly related to severance costs and lease terminations. The rest of my remarks will focus on sequential variations as the third and fourth quarters of 2020 were both impacted by COVID-19. Turning to Slide 8. Total revenue for the fourth quarter was $243.5 million or 2% lower than the prior period. Net interest income declined by 2%, largely due to the impact of a decrease in higher-yielding loans to business customers. As just mentioned, the pandemic negatively impacted inventory financing volumes. The average utilization rate of the dealers facilities during the fourth quarter was about 30% compared to the pre-pandemic rate a year ago of over 55%. The lower level of higher-margin loans to business customers also impacted net interest margin as shown on Slide 9, which stood at 1.82% compared to 1.86% in the third quarter. The diversified revenue streams included in other income, as presented on Slide 10, totaled $74.2 million, slightly lower sequentially, mainly as a result of the record contribution of capital markets in the third quarter, higher commercial lending fees and a net gain of $1.1 million on a securitization also contributed positively to fourth quarter results. Slide 11 presents adjusted noninterest expenses that totaled $170.3 million in the fourth quarter, 1% higher than the prior period and mainly resulted from increased activities as the economy began to reopen. These increases were partially offset by a decrease in salaries and employee benefits resulting from lower capital markets -- sorry, lower capital markets performance-based compensation and a compensation charge of $2.7 million related to the bank's former President and CEO retirement in the third quarter. The adjusted efficiency ratio stood at 69.9% in the fourth quarter of 2020 compared to 68% in the prior period. Our cost optimization initiative as well as a review of our strategic direction are aimed at improving this key metric. Slide 12 presents our well-diversified sources of funding. Personal deposits account for 79% of total deposits and contribute to our healthy liquidity position. We continue to optimize our sources of funding and align deposits with loans. Slide 13 highlights our strong capital ratio position. The CET1 capital ratio, which is presented under the standardized approach, stood at 9.6% at year-end. Lower risk-weighted assets and higher retained earnings were the main drivers of the 20 basis point sequential increase. CET1 also includes about 10 basis points resulting from OSFI's transitional arrangements for the provisioning of expected credit losses in line with the third quarter. Our diversified loan portfolio is shown on Slide 15. The loan mix was relatively similar quarter-over-quarter. Slide 16 highlights our high-quality residential mortgage portfolio. At year-end, 57% of the portfolio was insured compared to 55% in the prior period. At October 31, 2020, the Alt-A portfolio totaled $1.2 billion and represented 8% of the total mortgage book. The residential mortgage portfolio remains well diversified geographically. The loss ratio for this portfolio increased to 8 basis points in 2020 and mainly reflects the expected migration of some clients who have benefited from deferral programs as well as the forward-looking potential impact of the second wave of the pandemic on the housing markets. The level of insured mortgages is among the highest in the banking industry, which contributes to reducing the overall risk for this portfolio. Slide 17 highlights our commercial loan portfolio, which is pan-Canadian with a U.S. presence. While COVID-19 has impacted our inventory financing activities, the decline in assets slowed during the fourth quarter, and we now expect growth to resume in the first quarter of 2021 based on recent trends. The commercial real estate portfolio continued to grow during the fourth quarter. We have minimal exposure to industries most impacted by COVID-19. As shown on slide -- sorry, as shown on Slide 18, payment deferrals in response to COVID-19 decreased significantly during the quarter as the deferral periods are coming to an end and accounted for 0.7% of the loan portfolio at the end of October compared to 13.3% at the end of April and 5.5% at the end of July. We're closely monitoring these accounts. We also continue to work with our customers who may need flexibility in managing their loans. To consider the evolving impact of the pandemic as well as other changes to the bank's requirement, we updated our economic scenarios to assess collective provision as of October 20 -- October 31, 2020, to account for the recent second wave. Our 3 scenarios base, downside and upside were probability weighted as part of our approach to determining the expected credit losses as at October 31, 2020. The probability weighting of our 3 economic scenarios remain similar to the third quarter, which with higher weights attributed to the base and downside scenarios and a lower weight to the upside. Turning to Slide 19. In the fourth quarter of 2020, the provision for credit losses was $24.2 million compared to $22.3 million in the third quarter. An increase in the provisions for stage 1 and 2 residential mortgage loans considering the impact -- expected migration of some customers at the end of the deferral period was partially offset by a decrease in provisions for stage 3 commercial loans due to a lower level of impaired loans. The PCL ratio was 29 basis points and continues to compare favorably with the banking industry. Slide 20 highlights a small sequential improvement in net and gross impaired loan ratios. Based on our current assessment of the pandemic, the underlying credit quality of the portfolios remains good. Uncertainty remains regarding the future course of the pandemic and the performance of the economy, which makes providing guidance for all of 2021 challenging. However, all things equal for the first quarter of 2020, we expect net interest margins to be relatively stable compared to the fourth quarter. While we expect fixed income activities to remain strong in 2021, revenues from capital markets are volatile and thus difficult to predict. Noninterest expenses should be slightly higher than in the fourth quarter due to the seasonal factors, including the annual increase in salaries, vesting of share units and the reset of employer tax payroll taxes, causing the efficiency ratio to be slightly higher than in the fourth quarter. Overall, we expect pre-provision pre-tax earnings for the first quarter of 2021 to be slightly lower than in the final quarter of 2020. As we establish a renewed strategic direction for 2021 and beyond, our strong capital and liquidity position will provide a solid foundation to build on to improve our efficiency and profitability for moving forward. Thank you for your attention, and I will now turn the call back to Susan.

[Susan Cohen, Director of Investor Relations]

Thanks, François. At this point, I'd like to turn the call over to the conference call operator for the question-and-answer session. Mohnish?

[Operator]

[Operator Instructions] We'll now take our first question from Meny Grauman of Scotia Bank.

[Meny Grauman]

Just wondering if you could give us some direction in terms of what to expect for the PCL ratio for fiscal '21? And specifically, how you see the interplay between impaired and performing playing out?

[William Mason, Executive VP & Chief Risk Officer]

Meny, in terms of our expectations, for PCL, we expect that impaired loans and write-offs will increase and peak in mid-2021. Post COVID, we will return to our traditional run rate of PCL adjusted for the business mix based on our strong credit discipline and underwriting practices. Based on the gross impaired loans, we're seeing a very stable pattern versus last quarter. And we're not seeing new adverse credit formations at this time.

[Meny Grauman]

And in terms of the 29 basis points that you put up this quarter, as you look to '21, is it likely to be higher than that over the next few quarters?

[William Mason, Executive VP & Chief Risk Officer]

It depends, Meny, how it plays out, how the pandemic plays out with the vaccine. As I said, we expect an uptick in gross impaired loans, but we're very comfortable with our reserves right now. We've taken an appropriately prudent provisioning approach. There may be some timing differences in terms of realization versus release of ACLs, but we feel very comfortable with where we are today.

[Meny Grauman]

Okay. And just to clarify, do you foresee reserve releases in the performing bucket?

[William Mason, Executive VP & Chief Risk Officer]

Well, if you look at the breakdown of our ACLs this quarter, in terms of the increase, of the ACL increase of $16 million, $11 million are due to stage 1 and stage 2 and $5 million is due to stage 3. Depending on how those stage 2 credits evolve, we could see releases. But this is our best estimate given the economic scenarios we have today.

[Meny Grauman]

Okay. And then if I could just ask more on the strategic direction. I was looking through some of the materials. I saw there was a reference to the next phase of the core banking system being evaluated given management change. And I was just wondering, this is one area where I would have thought it would just be something that would go through. Just curious what the considerations are to pause something like that, that seems to be sort of an important systems upgrade and probably also important for future ARB transition.

[Rania Llewellyn, President, CEO & Director]

So I'll take that question. What I would say is, as part of our thorough review of all the key projects, we are looking -- we're doing -- conducting a review of all of the previously announced transformation-related activities. We really need to help validate that the foundation we're building upon is strong. As you know, Phase 1 was completed. And so we need to ensure that we have the right foundation, and it's going to support the right strategy going forward. And so we'll be providing more details of the overview as soon as that work is completed.

[Meny Grauman]

Sounds good. And then just the last one. On the same vein. So I know the strategic sort of evaluation is ongoing. But are there any sort of sacred cows? Are there any parts of the previous strategy that are clearly not up for discussion? I mean one area specifically that I'm thinking about is the branch strategy. How much sort of the advice-only model is -- is that up for debate, I guess, is the question? Could there be any change there in terms of the strategy on the branches?

[Rania Llewellyn, President, CEO & Director]

So what I would say, everything is currently under review. So there are no sacred cows. When it comes to the retail network, though, the advice model is really where our most financial institutions are moving toward. So as part of the strategic review and by hiring a new leader to come in and set the new strategy and direction for the retail bank, it's looking at how well our digital strategy and some of the other support functions support our advice model.

[Operator]

[Operator Instructions] We'll now take our next question from Gabriel Dechaine of National Bank.

[Gabriel Dechaine, Analyst]

My first question is for Ms. Llewellyn, new CEO, been in the job, I guess, a couple of months now. What are your first impressions of the organization? You're moving from a big bank to a smaller bank. And what do you like -- what you -- what do you like about working at new place? And what do you think needs work?

[Rania Llewellyn, President, CEO & Director]

So it's actually 6 weeks officially today that I've joined the institution. So some of my early impressions is I've had 10 round tables, met with hundreds of employees. And I would say that the employees and talent in the organization are extremely committed, extremely passionate, and are excited about a new strategic vision and direction and are creating that rallying cry. I would say the size is definitely an advantage. I've had the pleasure of running midsized operations within the large institution that I came from. And I would say that size is an advantage where we can become a lot more agile and nimble. So I do definitely see opportunities for us to be able to pivot faster, execute more efficiently. The commercial growth in the commercial business is definitely a growth engine. And we have deep relationships with our customers as well as expertise in that business, so both from a talent perspective as well as relationships with our clients and they're highly valued. Our capital markets business has had a really good run this year under Kelsey's leadership. And so I'm optimistic in terms of managing that business. And on the personal side, the personal banking side, as I said, many of the institutions and banking in general, given what's happened, COVID has really been a catalyst to driving digital adoption. And so the advice model is definitely the right model. So I'm looking forward to working with the leadership team on setting, ensuring that, that strategy supports that advice model. So those are kind of some of my early impressions at this point.

[Gabriel Dechaine, Analyst]

A very, very thorough overview. I appreciate that. You had, maybe I don't know ask is the right word, but maybe some challenges I see for the organization is relevant in the market. It might be a wrong way to put it, but along those lines. I'm looking at the deposit line. Branch raise, business deposits. If I combine them and treat those as core deposits, if you will, kind of flat growth year-over-year. There has also been a declining trajectory over the past few years. And this is coming at a time when we're seeing massive increases in deposits at other banks. So that tells me that customers are not coming to you to deposit their money and then down the road when things get better, take those deposits and spend on stuff and borrow and things like that. Like how do you -- the advice model is intended to change that, I guess. How are you planning on approaching that particular challenge?

[Rania Llewellyn, President, CEO & Director]

So again, it's early days, but deposits are absolutely core to any financial institution. And so we're going to be looking at ways to optimize it. We definitely currently have a diversified pool of deposits, and we're constantly looking to align deposits and loans to ensure that they're kind of matched up. And so we will be looking at other opportunities, whether it be through the digital or our commercial book of business as well as our retail network to continue to drive deposits into the institution.

[François Laurin, Executive VP of Finance, Treasury & CFO]

If I may add -- sorry, if I may add, François here. I would like to point out that in the past year, despite the merger of some branches, we increased the demand deposits by over 13.5% year-over-year. And the term deposits, obviously, we always seek to optimize our funding. And in the past quarter, you saw a decrease in term deposits but we've increased securitization funding. So we're always on the look out and match the assets and liabilities, as Rania mentioned, but seeking the best source of funding. So those are all elements that we manage and the term deposits is basically the leg we -- term deposit that we not play but we -- not last resort, but a resort we'll use whenever we need it. And mind you, we don't have total deposits.

[Operator]

We'll now take our next question from Darko Mihelic of RBC Capital Markets.

[Darko Mihelic, MD & Equity Analyst]

My first question for Rania is, I totally understand the need to take time to reassess, absolutely makes sense, but you've already announced a reorganization and that stuck me as a bit odd. So I wonder if you can speak to the reorganization. And simplistically, when I think of Laurentian Bank, I think the sort of 4 businesses, right? I think of commercial banking, maybe equipment financing, stuff like that's in there. Then I think of the retail bank, I think, a B2B bank and I think of capital markets. Now that's just me simplistically thinking. I'm trying to understand the rationale for the new organization and why you sort of decided to have it reorganized so quickly and why it's organized in the manner that it is.

[Rania Llewellyn, President, CEO & Director]

So maybe I can just kind of clarify in terms of how to look the organization. So that's exactly what we're doing. But rather than just have -- with Stéphane's retirement, it was just really an opportunity to kind of create more focus on those 2 units. So we used to have Stéphane, who used to be, prior to being interim CEO, had both the P&C together, reporting into the CEO, but to make sure that we have the focus on commercial, independent of retail. That's why we decided to create 2 independent operating units. And so it's not a net new strategy. It's just creating 2 positions of leadership there to ensure that we can set it up for success and focus on growing it going forward. So the business units will continue to be commercial, which includes our equipment financing, our commercial real estate, our North capital as well as the personal, we'll have the B2B and digital and retail distribution, and then you got capital markets. So those are the 3 distinct business units.

[Darko Mihelic, MD & Equity Analyst]

Okay. Fair enough. And my second question is, one of the things that you've inherited with this bank is a relatively high payout ratio. And I look at the dividend payout ratio is one. I measure it against reported. I don't really measure it against adjusted. Is that also up for discussion with the Board over the next 3 or 4 months?

[Rania Llewellyn, President, CEO & Director]

François?

[François Laurin, Executive VP of Finance, Treasury & CFO]

Darko, François here. Yes, I'll take that one. Darko, on a reported basis, our policy is 40% to 50%. This quarter on a reported basis was 40 -- 51%. So we're basically in line with our policy. And this is discussed on a quarterly basis with the Board, not just because of the -- any review we're doing on the strategic review, but every quarter this is being discussed and we feel comfortable with the level today, Darko.

[Darko Mihelic, MD & Equity Analyst]

Okay. All right. Fair enough. And then I think I'll save more on my strategic questions for your conference so I'll stop there. Just a quick question, a numbers question. With respect to the net interest margin, my sense is that many banks talk about excess liquidity as something that could help margin going forward. François, can you speak to that? Will there be any help? And can you quantify it for us?

[François Laurin, Executive VP of Finance, Treasury & CFO]

What we see going forward, Darko, is that for the moment we're relatively stable. But as our mix continues to change and the return of growth in the business services, whether real estate or inventory financing, we see the improvement in the NIM as the mix changes over the next few quarters. In terms of liquidity, we have strong liquidity. Well, we've always maintained strong liquidity, but we managed very well our cost of funding with different initiatives and we'll continue to do this on a go-forward basis. So we're always seeking opportunities. But the main driver next year to improve the NIM would be the growth in business services and asset mix change.

[Operator]

We'll now take our next question from Doug Young of Desjardin Capital Market.

[Doug Young, Diversified Financials and Insurance Analyst]

François. I've always had a lot of problems, I guess, modeling out non -- adjusted noninterest expenses, and you have bounced around quite a bit over the years. Just trying to get a sense in what you think is reasonable over the next few years? And I know there's a lot of variables that go on. And I know there's a lot of reviews that are being done right now. But $170 million, is that something that's reasonable? Is that something we should be thinking of a growth rate off of? And then severance and restructuring charges have always been a big part here as I looked historically. When will we stop seeing that?

[François Laurin, Executive VP of Finance, Treasury & CFO]

Okay. First part of the question on your referring to noninterest expenses. We feel that the noninterest expenses level that we have at the moment would be relatively stable in the next quarter or so. And as we mentioned earlier, we're undertaking an exercise of reviewing our cost structure and optimizing our efficiency. So you should see improvement going forward as we evolve in that analysis and move forward over the next quarters, not just one, over next quarters. That's the first bit of your question. The second part of the question on the restructuring charges. If you take this quarter, for example, we have $5.5 million of restructuring, $3 million of them -- $3.1 million of them related to restructuring and most of it, basically, a bit half of it is severance related to reduction of workforce that we had already announced earlier in Q2. They were affected in Q4. And $1.4 million is related to termination of lease contracts as we merge a few branches in this quarter. And you have $2.4 million, which is related to business combinations. So if I take that first portion, the $3.1 million, as we move forward in the strategic review, obviously, we'll always look at what's our best footprint forward. But most likely, going forward, it will be, as leases expire, so you will see less -- you should -- we should incur less restructuring charges to that effect. In terms of the second part, the $2.4 million that we have as adjusting items, they relate to business combinations. So they are amortization. So they'll be there for years to come because they are static from previous acquisitions. Does that answer your question, Doug?

[Doug Young, Diversified Financials and Insurance Analyst]

Yes, it does. It's more around the $3.1 million that has been elevated in the past, and it feels like there could be more maybe as part of the strategic review, but that's a number that we would hope eventually, I guess, kind of come down.

[François Laurin, Executive VP of Finance, Treasury & CFO]

Yes. The idea is it should be lower going forward for the merger of branches going in the future.

[Rania Llewellyn, President, CEO & Director]

So the only thing I would add is -- sorry, I was just going to say that -- yes. So what I would add is, again, what François was saying, based on our current operations, yes, it will likely not be increasing. But as we had mentioned, we are doing a thorough review. And so we'll be back to the market with what that strategic road map means and what impacts it has.

[Doug Young, Diversified Financials and Insurance Analyst]

No. I think François as well, I think you spent $215 million, I think, in terms of the new core banking system, correct me if I've got the number wrong. You're reviewing, I guess, the new system as part of the review process. Is there any risk of any of that being written down over the near term?

[François Laurin, Executive VP of Finance, Treasury & CFO]

We're now -- we're at the early -- first, we're at the earliest stage. Nobody is talking about writing down or stopping or not doing any core banking. What's been done is being used. So what we're looking at going forward is the thing for what's not being done for products that are not being loaded yet on core banking. That's what's left to be analyzed. The best way to go forward to do it. Not necessarily to really revisit what has been done in the past for the products we have into '24.

[Rania Llewellyn, President, CEO & Director]

Yes. As I mentioned in my comments, we just need to validate that the foundation we're building upon is strong. And so we just want to take the right actions to really position ourselves for future growth. And so that's part of the detailed review.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. Perfect. And then just on the stage 1, stage 2, stage 3 loans. And as I look at the percentages across the different buckets, it doesn't feel -- it doesn't look like there's been a huge amount of migration from stage 1 to stage 2, and you can correct me if I'm wrong. And I'm just trying to get a sense of how we should be thinking about that migration over the next year or so. And have you anticipated a migration in the coming loan ACLs? And how that would flow through, both the performing loan ACLs, but even if you can touch on what the implications on migration could be? I will stop there.

[William Mason, Executive VP & Chief Risk Officer]

So thanks for the question. A couple of notes on this. I would note that year-on-year loans class as stage 2 have actually gone down by about 21%, and that's largely driven by better levels in the mortgage and personal sectors. If you recall last quarter, I did talk about setting up our ACLs for migration. Based on the deferrals, we had taken some increase to ACLs at that time. What I would say overall on our ACL levels and the stage ratings is that our ACL models are very sensitive to the expected increase in risk due to the economic outcomes. Whereas our models used to transfer loans in -- amongst the stages are more reflective of the current risk rating rather than expected increase at risk from the economic scenario. So that drives an ACL that you'll see is very sensitive, but our shifts between stages are less sensitive. It's something that's driven by our modeling approach. I would -- I feel very comfortable with where we are on our reserving. We feel our stages reflect where we are right now, and we're looking forward to how the pandemic will play out.

[Operator]

[Operator Instructions] We'll now take our next question from Sohrab Movahedi.

[Sohrab Movahedi, Analyst]

That's my alter ego. Rania, congratulations on your appointment. When -- I appreciate it's only been 6 weeks. But when you think about shareholder value creation at Laurentian Bank, is the opportunity more on the revenue side or on the expense side?

[Rania Llewellyn, President, CEO & Director]

Thanks, Sohrab, and look forward to meeting you in person and your -- did you say your alter ego? In terms of, I would say, as we all know, there are really 2 levers, and there's revenue and expenses. And so we are going to be examining ways to enhance our cost discipline for sure, and that has to be part of our longer-term strategy for improving our efficiency. Efficiency is a key ratio, and it's something that we are going to have heightened focus on, particularly during the pandemic because the pandemic is not over yet. So it's still a long road ahead, and there's a lot of uncertainty there. So heightened cost discipline is definitely one of them but our focus is also on organic growth. And so we need to focus on the businesses that we can grow, being cautiously optimistic depending on the outlook, but we will be looking at growth in all of our various businesses as well.

[Sohrab Movahedi, Analyst]

So growth of the top line, as you think about your various businesses, is that essentially just going to be an adjustment on the risk appetite? Or are you looking to add new revenue line items?

[Rania Llewellyn, President, CEO & Director]

So I would say for fiscal '21, it's really hard to forecast because, as I said, the pandemic is not over yet. So where we can -- and Liam had mentioned in terms of where our PCLs will be. They'll kind of level off in the first half of the year. And again, all is dependent on how this pandemic and the second wave mapped out and impacts all of our customers. So the key thing that we can focus on in the meantime is the heightened cost discipline. Now we do know that, for example, in some of our businesses, we're beginning to see an uptick, for example, in our NCF business. And so from an inventory financing perspective, there has been a recent uptick, and we do expect growth. But again, it's all dependent on how things pan out over the next few months with the pandemic.

[Operator]

At this time, there are no further questions. I would like to turn the call back over to Mrs. Rania Llewellyn for any additional or closing remarks. Thank you.

[Rania Llewellyn, President, CEO & Director]

So thank you. I wanted to thank Susan, François, William and Kelsey and all of today's call participants. I want to reemphasize a few key points before we close the call. Number one, we are actively engaged in an effort to strengthen our organization, including a review of current priorities and longer-term strategic objectives. I look forward to sharing the details of our strategic plan with you when our work is completed. Number two, our cost optimization initiatives will result in near-term actions on cost discipline and ongoing expense management with a view to improving our overall efficiency. Number three, we are refocusing our efforts on meeting the needs of our customers and are determined to become much more customer-centric in everything we do. The creation of 2 operating units for commercial and personal banking will help us prioritize these businesses and position them for future growth. Thank you, again, and I look forward to meeting as many of you as possible over the next year as well as many of our shareholders in our efforts to enhance our outreach to the investment community.

[Susan Cohen, Director of Investor Relations]

Thank you for joining us today. Should you have any further questions, our contact information is included at the end of the investor presentation. Our first quarter 2021 earnings call will be held on March 5, and we look forward to speaking with you then. Wishing you a safe and happy holiday season.