Laurentian Bank of Canada

TSX:LB

Earnings Call Transcript 2021-Q4

[Operator]

Good day, [Foreign Language], and welcome to the Fourth Quarter and Fiscal 2021 Results 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, Head of Investor Relations, Laurentian Bank. Please go ahead, ma'am.

[Susan Cohen, Director of Investor Relations]

[Foreign language] Good morning, and thank you for joining us. Today's opening remarks will be delivered by Rania Llewellyn, President and CEO; and the review of fiscal 2021 and fourth quarter financial results will be presented by Yvan Deschamps, Executive Vice President and Chief Financial Officer. After which, we will invite questions from the phone. Also joining us for the question period are several members of the bank's executive leadership team. Liam Mason, Chief Risk Officer; Eric Provost, Head of Commercial Banking; Karine Abgrall-Teslyk, Head of Personal Banking; and Kelsey Gunderson, Head of Capital Markets. All documents pertaining to the quarter can be found on our website in the Investor Center.I would like to remind you that during this conference call forward-looking statements may be made, and it is possible that actual results may differ materially from those projected in such statements. For the complete cautionary note regarding forward-looking statements, please refer to our press release or to Slide 2 of the presentation. It is now my pleasure to turn the call over to Rania Llewellyn.

[Rania Llewellyn, President, CEO & Director]

[Foreign Language] Good morning, and thank you for joining us today. We have a lot to cover with both our fourth quarter results presentation and shortly thereafter our virtual Investor Day, where we will unveil our new strategic plan. As a result, I will keep my remarks on this call focused on our annual and fourth quarter results and reserve more forward-looking comments and guidance for today's Investor Day. As 2021 comes to a close, I want to express my deep thanks to the Laurentian Bank team for their tireless work in serving our valuable customers and maintaining the bank's operations while we continue to collectively navigate through the pandemic. Together, everyone demonstrated that we are stronger when we work as one team. We continue to monitor the latest COVID variant, global supply chain constraints and high inflation and their impact on the economy. On November 23, 2021, we also announced certain charges the bank was taking as a result of our strategic review and changes that needed to be made in order to reach our full potential. We believe they will position us for long-term sustainable profitability. Turning now to our financials. On an adjusted basis, the bank delivered great results. Adjusted net income for fiscal 2021 was $211.2 million, or 53% higher than in 2020. And for the fourth quarter was $47.8 million or 13% higher than a year ago despite being impacted by provisions for credit losses of $19 million related to the strategic review of our investment loan portfolio. These results generated adjusted earnings per share of $4.57, up 56% from the previous year. For the fiscal year of 2021, adjusted pretax pre-provision income for the bank was $318.9 million and $86.3 million for the fourth quarter, both up 18% compared with a year earlier. These were primarily the result of a strong performance in commercial banking, which saw a net increase of $1.4 billion or 11% in loan growth compared to the prior year, driven by real estate financing and inventory financing.Capital markets had a record year and solid quarter, closing its largest-ever M&A advisory mandate as it continues to execute on our renewed one bank approach. On a reported basis, the bank recorded net income of $57.1 million and a net loss of $102.9 million for the fourth quarter. Results were impacted by the previously announced restructuring and impairment charges of $209 million on a pretax basis, which related to our strategic review and the impairment of the personal banking segment. The bank also continues to maintain healthy liquidity levels and a strong capital position to support our strategic plan with a CET1 ratio of 10.2%, up 60 basis points year-over-year. With OSFI lifting capital restrictions and our confidence in our future, we announced earlier today that we have increased our quarterly dividend by $0.04 this quarter or 10%, and we are launching a new 2% normal course issuer bid program that we will activate on December 15. This is part of our shareholder value creation strategy while retaining significant flexibility to continue investing in organic and inorganic opportunities. Going forward, we will review our dividend on a semiannual basis. I also wanted to provide an update on our inventory financing business. This business is a key driver of growth and has been highly impacted by the pandemic. Although there are still pressures in supply chains globally, growth resumed in inventory financing, increasing dealer credit utilization rates from 28% last quarter to 35% this quarter. This was as a result of normal seasonal demand and our sales activities that resulted in expanding our dealer network by 20% year-over-year. While we are encouraged by these results, utilization rates continue to be lower than pre-pandemic levels, and we continue to expect that supply chain disruptions and high consumer demand will remain a challenge for most of 2022.As you know, this past year, we established 3 strategic pillars that guided all our efforts and actions. From those pillars, we identified and successfully achieved our 3 key priorities for 2021. One, we renewed our senior leadership team and simplified our organizational structure. Two, we identified a number of opportunities for cost savings and executed against those initiatives, reducing our overall adjusted efficiency ratio by 410 basis points to 68.2% for the year and a 290 basis point improvement for the quarter. And three, we completed a thorough review of our operations and developed a strategic plan, which will position the bank for sustainable, long-term profitable growth by focusing on areas where we can continue to differentiate ourselves with a customer-first approach to drive shareholder value, which we will share later on today.Over the past 2 quarters, we also identified shortfalls in our mortgage business and digital offering. I will first touch on our digital offering. Last quarter, we said that we had 3 areas of focus to improve our digital capabilities. They were to close foundational gaps, enhance digital onboarding and improve the end-to-end digital experience. To that end, today, I am pleased to announce the launch of the Laurentian Bank mobile app on both iOS and Android devices. A mobile app has been the #1 requested feature from our customers and employees. The first version of this app provides customers with the most commonly used banking features, including account balances, transaction history, INTERAC e-Transfer and bill payments and has a simple user interface for ease of customer experience. This app was launched in less than 7 months from conception to delivery and truly demonstrated how we can make size our advantage by being agile and nimble in our developments. This closes a key foundational gap for the bank and will allow us to continue to grow our national presence and serve our customers where and when they want. We will continue to add more features to the app in 2022 as well as introduce new capabilities to enhance and accelerate digital onboarding and improve the end-to-end digital experience, which I will cover in more detail at our Investor Day.Over the past 3 quarters, we have also identified shortfalls in our mortgage business, including a complex customer experience, lengthy processes and inconsistent service levels. Last quarter, we identified some short-term actions to begin improving the customer experience and this quarter, we are building on those initiatives. For instance, we integrated the mortgage underwriting team into the newly created residential real estate secured lending business unit, and we strengthened our focus on retention, including the deployment of predictive analytics allowing for proactive customer engagement. We note there are no changes to our risk underwriting parameters as a result of these changes.To reposition and drive growth in this business, we are going to continue to improve our time to yes, further simplify processes and enhance the customer experience. We will share more details at our Investor Day later on this morning. Given our ongoing commitment to ESG, I would like to provide an overview of some key developments over this past quarter. We launched an ESG materiality assessment and comprehensive risk assessment, the results of which we will disclose in our first-ever 2021 ESG report, and we'll directly inform our ESG strategy moving forward. We launched our third employee resource group StrongHer. This is part of our courageous conversations initiative to create a safe space for employees to share, listen and learn about various aspects of diversity and inclusion. As part of our commitment to the BlackNorth initiative, we announced a $25,000 donation to Groupe 3737, a Montreal-based innovation hub that is making a real difference by empowering and supporting talented entrepreneurs from diverse backgrounds. To further empower employees in our retail branches and commercial banking business centers to give back to the communities where we live and work, we launched a new grassroots initiative called Laurentian Bank in the Community. This program resulted in almost 70 organizations receiving an additional financial boost to help them deliver on their important mission.I am now pleased to turn the call over to Yvan.

[Yvan Deschamps, Executive VP & CFO]

[Foreign language] I would like to begin by turning to Slide 12, which highlights the bank's financial performance for 2021. Adjusted EPS and ROE for the year were $4.57 and 8.3%, an increase of 56% and 280 basis points, respectively, compared to 2020. The improvement in profitability was mainly due to the lower provision of credit losses, reflecting the economic recovery. The adjusted pretax preprovision income or PPP was $318.9 million, an increase of 18% compared to 2020. This was driven by lower -- sorry, by revenue growth and strong cost discipline. The balance of my remarks will focus on fourth quarter results.Turning to Slide 13. Adjusted EPS and ROE for the quarter were $1.06 and 7.5%, an increase of 16% and 70 basis points, respectively, compared with the fourth quarter of 2020. Adjusted PTPP was $86.3 million, an 18% increase compared to a year ago. Higher revenues and lower adjusted expenses more than offset higher provision for credit losses which related to the impact of the strategic review on the investment loan portfolio. Compared to the third quarter of 2021, adjusted EPS and ROE decreased by 15% and 140 basis points, respectively, mainly due to higher PCL. Adjusted PTPP increased by 7% driven by lower noninterest expenses.Operating leverage was positive 4.2% compared to the third quarter and 6.4% compared to the fourth quarter of last year on an adjusted basis. On Slide 14, net interest margin was 1.83% or 1 basis point higher than a year ago, mainly due to improved funding costs, driven by increased utilization of secured funding. Net interest margin declined by 3 basis points sequentially due to lower prepayment penalties, partially offset by higher inventory financing volumes.Other income, as presented on Slide 15, a increased by 4% compared with a year ago, mainly due strong performance from capital markets, particularly in advisory services and also higher commissions from sales of mutual funds. This was partly offset by lower trading income. Sequentially, other income was 4% lower as lending fees from record high third quarter real estate financing activity softened and trading income decline. This was partly offset by improved card services revenues.Slide 16 presents noninterest expenses. On a reported basis, the quarter-over-quarter and year-over-year increase mainly reflected restructuring and impairment charges of $189.4 million in the fourth quarter of 2021 related to the bank's strategic review and the impairment of the personal banking segment. On an adjusted basis, noninterest expenses declined by $6.2 million or 4% compared to a year ago and was mainly due to lower performance-based compensation as well as lower amortization charges and rent expenses stemming from the strategic review and impairment.Sequentially, adjusted noninterest expenses declined by 6%, mainly due to lower performance-based compensation as well as lower amortization charges and rent expenses for the same reasons. The adjusted efficiency ratio stood at 65.5% in the fourth quarter of 2021, an improvement of 440 basis points year-over-year and 290 basis points sequentially. The impact of our strategic review and impairment as well as our cost discipline and cost optimization initiatives contributed to improving this key metric.Slide 17 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 funding sources.Slide 18 highlights our strong capital position. The CET1 capital ratio, which is presented under the standardized approach stood at 10.2% at year-end, 60 basis points higher than a year earlier and supports our strategic plan towards sustainable, profitable growth.Slide 19 highlights the commercial loan portfolio, which grew by 11% year-over-year, driven by growth in real estate financing of 16% and growth in inventory financing of 18%. Sequentially, the commercial loan portfolio increased by 5%, fueled by a 33% increase in inventory financing. As we have mentioned before, our inventory financing activities are seasonal with strength in Q1 and Q4 as inventory is built and softness in Q2 and Q3 as inventory is sold. We expect 2022 to follow this same pattern with quarterly variations amplified by the continued pressure on supply chains and the emergence of a new variant. This may be partially offset by the expansion of our dealer network and expansion into new verticals. With respect to real estate financing, the momentum continued into the fourth quarter with a 3% sequential growth. Slide 20 presents the pan-Canadian residential mortgage loan portfolio. Residential mortgage loans grew by 1% sequentially as we take actions to improve the customer experience, retain customers and renew growth. The bank's residential mortgage portfolio remains relatively weighted towards insured mortgages when compared to the industry at 57% and combined with a low LTV on the uninsured portfolio contributes to reducing the overall risk of this business. Turning to Slide 21. Allowances for credit losses totaled $202.6 million. The sequential increase of $19.3 million is mostly related to the strategic review of the investment loan portfolio. Even though the economy has been recovering, we remain prudent in the face of a new variant and inflationary pressures. As shown on Slide 22, the provision for credit losses was $24.9 million in the fourth quarter of 2021, including $19.3 million related to the investment loan portfolio. PCL for commercial loans declined reflecting good credit quality. The PCL loan ratio stood at 30 basis points in the quarter, similar to a year earlier. Excluding the provision for investment loans, the ratio would have been 7 basis points. Gross impaired loans on Slide 23 decreased by $15 million from last quarter. New formations were more than offset by loans returning to performing status, net repayments and write-offs. We remain adequately provisioned. I would now like to offer some thoughts on how we see the first quarter of 2022 developing. Net interest income is expected to improve in Q1 compared to Q4 due to the strong growth of commercial banking. Similarly, net interest margin is expected to be a few basis points higher. Capital markets performance is expected to remain relatively strong, but could gradually normalize. Our outlook is cautious given the recent market volatility resulting from various factors, including the emergence of a new variant and inflationary pressures. Our focus on cost discipline will continue. We aim for efficiency ratio to remain below 68% for 2022. Noninterest expenses in Q1 are expected to trend closer to Q3 level, mainly due to an increase in salaries and benefits. Q4 was impacted by lower performance-based compensation and some favorable seasonal elements, including lower payroll taxes and pension adjustments. The provision for credit losses remain difficult to predict on a quarterly basis, even though economic indicators have been moving in the right direction. Uncertainty around the economic outlook remains high for the reasons I just mentioned. For 2022, we expect the PCL ratio to be in the mid-teens. As a reminder, the semiannual payment of the LRCN is made in Q1. This will impact EPS by $0.06. I will save my remarks regarding our 2022 outlook, our mid-term financial objectives and other key performance indicators for our Investor Day. We look forward to sharing those with you soon.I will now turn the call back to Susan.

[Susan Cohen, Director of Investor Relations]

[Foreign language]. At this point, I would like to turn the call over to the conference call operator for the question-and-answer session. Please limit your questions to those related to the fourth quarter and fiscal 2021 performance. You'll have the opportunity to ask all other questions at our Investor Day. Operator?

[Operator]

[Operator Instructions] So we will take our first question from Meny Grauman with Scotiabank.

[Meny Grauman]

I wanted to ask about the inventory finance business. The performance this past quarter can't look it was better than what you had expected. And I just wanted to get a little bit more insight into why that was? Is it market dynamics that were stronger or something that you did? So a little bit more clarity on that would be helpful.

[Rania Llewellyn, President, CEO & Director]

And maybe I'll start off, Meny, and then if Eric has anything to add, we'll go from there. So thank you for the question. So our inventory financing, so yes, our utilization went up from 28% to 35% quarter-over-quarter. As you know, in terms of the underlying assets that we primarily at this point in time, focus on, they're primarily recreational assets. So there's a seasonal element to it. So as Yvan mentioned in his comments, in Q1, there is a buildup of inventory. And so that's expected and that happens on a yearly basis. So Q4, we usually see the utilization rates increase. But what I want to put into perspective is it's only still at 35%; pre-pandemic levels at the same time of year would have been 55% or higher. And so for every 1 percentage point of utilization, that generates $50 million worth of additional assets. So there's a seasonality aspect to it. But as we've also been mentioning to the market, we have been expanding our dealer network over the last 12 months. Our dealer network has expanded by 20%. So in this instance, we benefited from 2 things: the seasonal aspect as well as the dealer expansion. But from a forecasting perspective, Meny, we're still cautious because the supply chain issues are still there. There's a new variant. And so we're optimistic -- we're very optimistic about this business, but are quite cautious about its growth in fiscal 2022.

[Meny Grauman]

I understand where the caution comes from, I guess, we're still early days into [indiscernible] as you see the business developing sort of early in Q1...

[Rania Llewellyn, President, CEO & Director]

Sorry, Meny. We can't hear you.

[Meny Grauman]

Can you hear me now?

[Rania Llewellyn, President, CEO & Director]

Hello?

[Meny Grauman]

Can you hear me?

[Rania Llewellyn, President, CEO & Director]

Yes. We can hear you again. Sorry, go ahead.

[Meny Grauman]

Just a follow-up on the inventory finance. I understand the caution. I was just wondering, early -- as you see the business developing early in Q1, is the activity surprising to the upside again or is it pulling back from what you're seeing sort of in the new fiscal year as we start here?

[Rania Llewellyn, President, CEO & Director]

Yes. So as Yvan mentioned, in terms of our guidance, we think commercial will continue to have a strong -- we've already had a strong start to Q1. And again, it is a seasonal business. So Q4 and Q1 are usually stronger in the inventory financing space, which is also -- the margin is at mid-single digits. So that also helps with the NIM. And then the softening happens in Q2 and Q3, and that really happens on a yearly basis. At our Investor Day, we will talk about how we're going to try to minimize some of that seasonality and what our growth plans are for this business going forward.

[Yvan Deschamps, Executive VP & CFO]

And Meny, this is Yvan. This is along with the comment I said the NII and the NIM is expected to grow a little in Q1, and it's partly because of the inventory financing that is going to keep increasing in Q1 before as mentioned starts a decline for Q2 and Q3.

[Meny Grauman]

Got it. I just wanted to ask a question about the buyback and let me know if it's a better question for later on today. But just wanted to understand how active you're going to be with the buyback? And when I look at it, 2% buyback definitely more than what I expected, I think, than what the Street expected. Your comments earlier in the year suggested that the buyback wasn't a real focus. So I'm wondering if there's any change in that view.

[Yvan Deschamps, Executive VP & CFO]

Thank you for your question, Meny. I guess what we mentioned last quarter is that were waiting for the end of our strategic plan so that we could have a global view on how we wanted to manage the capital. So looking at it, we end the year after the restructuring charges with a strong CET1 of 10.2%. We have a good internal capital generation as well, and we're pretty confident in the plan that we're going to be presenting in an hour or so. So looking at all those, we look then at what's the toolbox of managing the capital. And we announced today the increase of the dividend by 10%, which we believe is still a prudent approach of managing at the lower end of the payout ratio. And we decided to do a small and prudent share buyback program to also return some value to shareholders.

[Operator]

We will now take the next question from Doug Young from Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Just wanted to go to the sequential increase in your residential mortgage book. I mean can you delve into what drove this? Was it a certain geography? Was it more through the branch network or through the broker network? And can you talk about or can you quantify what your retention is and how that retention has moved maybe sequentially or year-over-year to get a sense of how that has been improving?

[Yvan Deschamps, Executive VP & CFO]

Yes. Thank you for your question, Doug. The mortgage have been increasing, I would say, slightly this quarter. It's a small increase of about $0.1 billion. So I think it's a reflection of the good work that Karine and her team are doing on working the mortgage with a team that is now focusing on it. And we don't comment exactly the retention rate, but definitely retention is something that Karine is working on, and we see early benefits of the work that they've been doing. So from a geographic perspective, I would say it's throughout the same channels than usual. There is nothing specific related to that.

[Rania Llewellyn, President, CEO & Director]

So maybe, Doug, I can just add to that. Over the last few quarters, we identified mortgages as a huge growth opportunity for us because we are underpenetrated. And we've said that we don't really have a pipeline issue. We have a throughput issue. And so we mapped out the entire end-to-end processes. That was our starting point. We created a whole new residential real estate secured lending unit dedicated and focused on that business and started taking all the various separate businesses within the bank and putting it under that new leadership who is extremely experienced. So that created reductions in terms of handoffs and some of the number of steps for our processes. We also piloted a number of things. We assigned underwriters to specific files where they were accountable to track the deal from start to finish. That's improved our time to yes. And then we've also -- we've introduced a loyalty team, which is focused on retention. So we've been using predictive analytics to proactively identify those clients well in advance of maturity to ensure that they can retain their mortgages with us. We've said all along it's going to be an 18- to 24-month journey, but we're on it, and we started making some changes that we're already starting to reap benefits.

[Doug Young, Diversified Financials and Insurance Analyst]

I guess just on the retention. Is that something that you plan on potentially giving us just to get us a sense of how you're executing on this? Or when I think of retention, I always think around 90%, maybe I'm wrong. Would you be significantly different than that?

[Rania Llewellyn, President, CEO & Director]

Yes. So we're going to be presenting our various KPIs that we're comfortable to report to the Street on a quarterly basis on our Investor Day. But rest assured, I mean, there are 3 things that we're focused on no matter what business it is. Number one is retaining our existing client base; number two is deepening that client base; and number three is acquiring net new customers to the bank. And that is irrelevant of business line or product.

[Doug Young, Diversified Financials and Insurance Analyst]

Perfect. So I guess I'll wait for the Investor Day just to see some details on that. I guess on the NIM, I guess, the question really is, like you're holding more liquidity right now than you normally would. Is there plans to make any drastic changes on your liquidity? And what is -- if you are holding more liquidity than normal, is that -- what impact is that having on your NIMs right now?

[Yvan Deschamps, Executive VP & CFO]

Yes. I think, Doug, you're focusing on the portion of the liquidity related to the repo and the reverse repo. But I would say, generally, for the bank operations, the loan and all that stuff, we're relatively at the same level we have been. So it's really commercially driven in terms of opportunities for us. There is no real change to the bank operation.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then just lastly, on the buyback, maybe I'll take the opposing kind of view of the last question, but why not be more active on the buyback given where your stock is trading?

[Yvan Deschamps, Executive VP & CFO]

I would say for us, it's really a question of being prudent in this environment. So we believe that we're increasing the dividend, providing a good increase to the shareholders. And it's also something that we've not been doing over the last few years, and we're starting prudently. And we're going to execute this one over the first year. And as the economic recovery continues, we can reassess the situation. But at this point, it's a prudent approach.

[Operator]

[Operator Instructions] We will now take the next question from Lemar Persaud with Cormark Securities.

[Lemar Persaud, Research Analyst]

So bunch of my questions are probably more suited for the Investor Day. But just 1 since you had mentioned it. Turning around a mobile app in just 7 months really stands out to me. So how do you develop, test and ensure appropriate security in just 7 months, especially since you just announced a new Chief Technology Officer in Q3? It just seems like an overall a very quick turnaround. Digital is far from being my area of expertise. So anything you can offer to me -- offer to help me understand that would be very helpful.Then more broadly, and this is probably more appropriate for the Investor Day. But I'm going to throw it out there anyway. But wonder if you could talk about Laurentian's technology strategy. Is it appropriate? Like are you going to be a fast follower versus the big banks? Or are you going to use your -- utilizer your smaller size to that?

[Rania Llewellyn, President, CEO & Director]

Yes. No, that's great, Lemar. Fantastic question. Yes, we're extremely proud to be able to kind of create, develop and launch an app in 7 months. And that really speaks to 2 key things, partnerships. We've said all along that we're not looking to build internally. We're looking to partner. We already had our existing online platform, digital platform being -- that was being managed and serviced by Central One that we launched many years ago. And so Central One was our partner that we worked with here closely to develop it in less than 7 months.The other thing, too, is we've been implementing an agile way of developing our technology solutions. And so digital was kind of first for us to adopt that agile mindset. We have a new leader on the digital side as well who joined us in February under Karine's leadership. And so there's a number of things here at work. So we do believe size is our advantage. You'll have to wait to hear more about that during our Investor Day. But we've been talking about how we can leverage our size and combine that with partnership so that we can leapfrog the competition. The good thing about being late to market is it's not new. It's already out there. It's tested. Even from a security perspective, all these things have been tested. And so it just makes it a lot easier and faster for us to be able to implement it. Does that answer your question, Lemar?

[Lemar Persaud, Research Analyst]

Yes. It does. I'll probably ask more just at the Investor Day if there's a technology section, if I have any follow-ups there. And then now that you have this app, if I look at your supplemented deposits from the digital channel, is it fair to suggest that Q4 '21 would be the bottom for digital deposits on both notice and demand and term because it did decline sequentially again this quarter? So I'm just wondering.

[Rania Llewellyn, President, CEO & Director]

So Lemar, I think this is the first step of many steps. We have lots of foundational gaps that are missing. We're obviously extremely excited. I think we were tracking yesterday, 10,000 downloads, over 6,500 transactions already happening without us even starting to market the app. And so we're very optimistic that that's the first step. It's currently only going to be available to our existing client base because until we fix our digital onboarding and launch that, that will give us an opportunity to go nationally and expand our footprint for Laurentian Bank. So yes, that's definitely one of the key foundational steps for us to turning our deposits around and moving into a growth strategy.

[Operator]

[Operator Instructions] We will now take the next question from Marcel Mclean from TD Securities.

[Marcel Mclean, Associate]

I'm just going to ask 1 on PCLs here, impaired PCL specifically. They're lower again this quarter. They've been trending down for a number of quarters. I don't think I'm the only one that's surprised on this call to see these continue to trend down throughout 2021. Where do we see a bottom coming here? How much lower can they go before we have to start to see them rise? And what's the catalyst? Is it going to be once the government stops all the pandemic support? Or is there any more to it?

[William Mason, Executive VP & Chief Risk Officer]

Thank you very much for the question. We have always had a prudent and disciplined credit underwriting and reserving process, and that's reflected in our PCLs. We expect, on a go-forward basis, PCL to run in the mid-teens, subject to the evolution of the personal commercial business mix. But I would say we're in the business of taking risk, and our focus is on risk-adjusted returns. So you may see PCLs trend up. But commensurate with that, we would see the returns in excess of that.

[Marcel Mclean, Associate]

Okay. And then just secondly, on the dividend. Just wondering what the rational thinking there was? Because in 2020, you guys did cut it by 40%, and now we're starting to see it come back. But was it just to get back to the bottom end of your target payout ratio? Or was there any more to it in the conversation there?

[Rania Llewellyn, President, CEO & Director]

So Maybe I'll start and then if Yvan wants to add. Really, it's 2 parts to it. We have excess capital of over $300 million. We as part of our strategy, rewarding our shareholders, making sure we're optimizing our capital position is important. But I think it's a true testament to the confidence that we have in the future of this bank. We've had a great year on an adjusted basis. And so we just wanted to reward our shareholders for their patients as well as deliver a message to The Street that we are confident in the future of our bank.

[Yvan Deschamps, Executive VP & CFO]

And the comment I would add, Marcel, is that I'm pretty happy with the level where we stand. If you look at internal capital generation, we generate enough internally to support the dividends and the growth of the business. And last year or in 2020 with the environment, there was a mismatch, and we acted prudently on the dividend. But as we see now the growth and the comeback and the strength that we're putting together, we decided to just adjust the dividend and keeping in mind that we still run at the low end of our payout ratio, which is still prudent in the environment.

[Rania Llewellyn, President, CEO & Director]

And just to manage expectations, this was definitely a catch-up. And so future increases won't be in that same magnitude, but we will be reviewing it on a semiannual basis.

[Operator]

[Operator Instructions] And it appears there are no further questions. So I would like to turn the conference back to Rania Llewellyn for any additional or closing remarks.

[Rania Llewellyn, President, CEO & Director]

In closing, I would like to leave you with a few key takeaways. I am extremely proud of everything we accomplished in resetting and renewing the bank in 2021 as one winning team. We have had a very strong 12 months and are delivering value for our shareholders. On an adjusted basis, we delivered 53% growth in net income year-over-year. We are also returning capital to our shareholders with a dividend increase of 10% and a newly established 2% normal course issuer bid program. We continue to be prudent stewards of capital and will continue to drive shareholder value through all our actions. We have a renewed management team and employees that are focused on our customers each and every day. The commercial bank remains our growth engine. Capital markets continued to deliver solid results, and the personal bank continues to reposition for growth. We remain focused on cost management and reduced our adjusted efficiency ratio by 410 basis point year-over-year, contributing to a positive adjusted operating leverage of 5.8%. We have an extremely strong capital and liquidity position, which will allow us to continue to invest in the bank's future growth. As an organization, we have never been more determined to succeed, and we are very excited to share our new strategic plan with you later this morning. I hope to see you all at 10 a.m. Thank you for joining the call today.

[Operator]

This concludes today's earnings call. Please visit our website in the Investor Center under the Presentation and Events tab to register for today's virtual Investor Day if you have not already done so. Looking forward to you joining us this morning at 10:00 am. Thank you.