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Edited Transcript of LB.TO earnings conference call or presentation 28-Feb-20 2:00pm GMT

Q1 2020 Laurentian Bank of Canada Earnings Call

Montreal Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Laurentian Bank of Canada earnings conference call or presentation Friday, February 28, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Backman

Laurentian Bank of Canada - EVP of Personal Digital Banking

* François Desjardins

Laurentian Bank of Canada - President, CEO & Director

* François Laurin

Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO

* Stéphane Therrien

Laurentian Bank of Canada - EVP of Personal & Commercial Banking

* Susan Cohen

Laurentian Bank of Canada - Director of IR

* William Mason

Laurentian Bank of Canada - Executive VP & Chief Risk Officer

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Conference Call Participants

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* Mario Mendonca

TD Securities Equity Research - MD & Research Analyst

* Meny Grauman

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* Robert Sedran

CIBC Capital Markets, Research Division - MD & Head of Research

* Scott Chan

Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst

* Sohrab Movahedi

BMO Capital Markets Equity Research - Analyst

* Sumit Malhotra

Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services

* Will Flanigan

National Bank Financial, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, Bon Jour, and welcome to the Laurentian Bank Financial Group First Quarter Results 2020 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.

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Susan Cohen, Laurentian Bank of Canada - Director of IR [2]

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Good morning and thank you for joining us. Today's review of the first quarter of 2020 results will be presented by Francois Desjardins, President and CEO, and Francois Laurin, Executive Vice President and CFO. All documents pertaining to the quarter, including Laurentian Bank Financial's news release, investor presentation and financial supplements can be found on our website in the Investor Centre. Following our formal comments, the senior management team will be available to answer questions, and then Francois 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 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 Francois Desjardins.

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [3]

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Thank you, Susan, and good morning, everyone. This quarter we continued executing strategies across all businesses with the ultimate goal of building a better and different banking experience for our customers. With a lot of work already behind us and a renewed energy across the organization, we are beginning to see real progress in our foundational work, growth in our customer base, and concrete advancement towards improving customer experience.

In terms of our financial performance, Laurentian Bank Financial Group reported adjusted earnings of $36.9 million, diluted earnings per share of $0.79, and a return on equity of 5.8%. Several elements impacted our performance this quarter, including lower net interest income in part due to the low interest rate environment, competitive pricing, and customer growth initiatives, higher expenses in part due to the investment in our digital platform, and higher salaries and benefits to recruit and retain talent, and higher provisions for credit losses, mainly due to commercial loans.

We are disappointed with this quarter's financial results and are addressing both the revenue and expense side of the equation. After a period of asset attrition where we are building growth engines and making good progress towards stabilizing our loan portfolio, we expect to return to net positive personal loan growth by the end of the year. Loan and deposit growth, combined with efforts to improve efficiency and implement new technologies is the path we are on and we are confident that this will lead to better performance.

Consequently, we remain committed to meeting our midterm targets. More details on our financial performance will be presented by Francois Laurin. But first, I will report on key areas of the business.

For personal customers, we launched LBC Digital, our newest direct to customer channel, expanding our personal customer reach from coast to coast. We welcomed thousands of new customers and accumulated over $1 billion in deposits. Digital deposit is not our end goal, but rather a first step in acquiring new customers. For the moment, the offering is limited to checking, high interest savings accounts, as well as GICs. But our goal is to broaden and deepen the relationship with customers and use this platform to build out a more complete suite of higher value, convenience driven products over time, with the next product being a credit card.

In the Advisor and Broker channel, renewed business development efforts combined with expanded Alt-A mortgage programs are gaining traction with brokers. We expect to see positive trends throughout the spring and summer homebuying season.

In Financial Clinics, the momentum is changing. We are originating new business with growth in gross sales of mutual funds and mortgages, demonstrating that customers do appreciate the value of the 100% Advice model. Every day, our professionals are having productive conversations with customers, accompanying them through the lifecycle as they buy a home, save for personal goals, and plan for their retirement.

For business customers, the portfolio of loans to business customers grew by 7% year-over-year and by 2% sequentially. We continue to see profitable growth and we are on track to deliver low double-digit growth again in 2020.

In real estate financing, we are continuing to build opportunities and drive growth. The pipeline is strong, although we experienced a high level of loan retainment in the first quarter. Commercial will also see benefit this year from the core banking initiatives. We are developing a new online banking platform which will provide better self-service and cash management solutions for small business customers.

In Equipment Finance and Inventory Finance, the growth that we are achieving on both sides of the border has been exceeding our expectations. The 2 acquisitions that we made helped us become better leaders in this niche market where we can truly meet the unique and diverse needs of customers.

For Institutional customers, capital markets had a good quarter with stronger results compared to both last quarter and last year. Strength in fixed income as well as improved activity in equities were key contributors. With a fresh perspective, we expect new growth opportunities.

With respect to transformation overall, I began my remarks by mentioning that a lot of work was already behind us. This is true. We have been making strategic investments in the business to meet the demands of customers for digital solutions and in technology to continuously improve governance, risk and security, and in our people so that they embrace a culture of performance. The bulk of the investment related to this transformation is behind us. What we have put in place are the technology, people and processes necessary to manage growth in this ever-evolving environment. And what we have built is a stronger financial institution than ever before. Stronger capital, a healthy level of liquidity and an industry loan/loss ratio partnership us well for the future.

But we are not done just yet. Our teams are working on finishing the core banking replacement for Financial Clinics, and once complete, this will not only allow the organization to decommission legacy IT systems and improve efficiency, but offer a greatly improved customer experience. At the end of 2020, we expect that all new customers will be onboarded digitally and we will have started migrating existing customers' accounts to the new platform so that by mid-2021, all our personal banking customers will enjoy the same experience in managing their accounts and day to day transactions.

As we have previously stated, we fully expect to deliver improved financial performance in the second half of this year and to resume growth in our loan portfolio. Growth and efficiency. This is the focus of our teams. This was a challenging quarter in terms of financial results but we must remember that one quarter doesn't make a year. Growth is returning and performance will follow.

And now I will to turn the call over to Francois Laurin to provide a more detailed review of our first quarter results. Francois?

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [4]

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Thank you, Francois. Good morning, everyone. I would like to begin by turning to Slide 10, which highlights the bank's financial performance. As Francois just mentioned, our results in the first quarter of 2020 were lower year-over-year and sequentially. Reported earnings for the first quarter were affected by adjusting items as outlined on Slide 11, totaling $4.7 million after tax or $0.11 per share, and are largely related to severance charges and amortization of acquisition related intangible assets.

The drivers of our performance begin on Slide 12. Total revenue in the first quarter of 2020 amounted to $238.7 million, a decrease of 1% compared to last quarter and last year. Net interest income fell by 2% compared to a year ago and 3% sequentially, while other income was unchanged and increased by 2% over the same periods.

The year-over-year decrease in net interest income was mainly due to lower loan and deposit volumes partly offset by an improved business mix as well as a wider Prime/BA spread and a normalized level of liquidity. The sequential decrease in net interest income was mainly due to the impact of the adoption of IFRS 16 on November 1, 2019, the launch of digital high interest savings accounts, and a lower Prime/BA spread.

As shown on Slide 13, NIM in the first quarter of 2020 was 1.81%, up 1 basis point compared to a year earlier mainly due to the change in the loan portfolio mix. The proportion of commercial loans in the portfolio stood at 39% versus 36% a year ago as we are successfully executing our strategic plan to evolve the bank mix towards higher margin commercial loans. Compared to the fourth quarter of 2019, NIM decreased by 3 basis points. The impact of IFRS 16, the launch of the digital high-interest savings accounts, and the lower Prime/BA spreads each accounted for a decline of about 1 basis point.

Other income, as presented on Slide 14, totaled $69.9 million, relatively unchanged from a year ago. The largest year-over-year variances included market related revenues that increased by $1.5 million, and were mostly driven by strong results in fixed income activities and the recovery in revenues from Advisory and Equity operations. And service charges that decreased by $1.2 million, mainly a result of the ongoing changes to the Retail Banking environment and consumer banking behavior.

Sequentially, the largest variance was market related revenues that increased by $5.4 million for the same reasons I just stated. As mentioned last quarter, the fourth quarter of 2019 included a $3.8 million loss related to the revaluation of trading securities.

Slide 15 highlights adjusted noninterest expenses of $182.8 million, which rose $3.5 million or by 2% year-over-year. Salaries and employee benefits increased by $3.2 million, partly as a result of share-based and performance-based compensation, including a portion related to brokerage operations as well as other sales driven compensation. Taking into account IFRS 16, rental costs improved slightly. Sequentially, adjusted noninterest expenses increased by $10.8 million. The increase is explained by share-based grants, higher performance-based compensation related to improved results in capital markets, higher employee benefits including payroll taxes and regular salary increases.

Adjusted other noninterest expense decreased by close to half a million dollars year-over-year and sequentially largely due to lower advertising costs and lower professional fees.

The $15 million of cost savings initiatives were substantially completed over the last 12 months. However, despite the implementation of these measures, the adjusted efficiency ratio of 76.6% in the first quarter of 2020 remains high as we pursue investments in our foundation, processes and technology. Nonetheless, we are striving to improve both revenues and expenses and continue to grow loans to business customers and resume growth in the mortgage portfolio in order to achieve tangible efficiency gains throughout the remainder of 2020.

Slide 16 highlights our well-diversified sources of funds. In the first quarter of 2020, deposits stood at $25.2 billion. Personal deposits totaled $20.1 billion including $1 billion of digital deposits and a stable level of deposits at our Financial Clinics. Given the successful launch of our newest digital direct to customer channel, we reduced GICs from third parties and wholesale funding.

Furthermore, our liquidity position continues to be strong and above regulatory requirements and our liquidity portfolio is largely highly rated government securities.

Slide 17 presents the CET1 ratio under the standardized approach of 9% at January 31, 2020 and highlights our strong capital position. Our diversified loan portfolio is shown on Slide 19 and stands at $33.5 billion, close to the yearend level. The residential mortgage loan portfolio is also close to the yearend level and loans to business customers increased by 2%. Personal loans declined 5% from yearend reflecting the reduction in the investment loan portfolio.

Slide 20 highlights our residential mortgage portfolio. We are maintaining our strategy to seek profitable niches, and to that end, recently enhanced the breadth of our Alt-A offering. At January 31, 2020, our Alt-A portfolio totaled $1 billion and represented 6% of the total mortgage book and 3% of the total loan portfolio. Overall, this portfolio is high quality as evidenced by very low loss ratios and low LTVs as well as high credit scores.

Slide 21 highlights our commercial loan portfolio, which is Pan Canadian with a U.S. presence. At $13.2 billion, as of January 31, 2020, this portfolio grew 2% sequentially. Strong growth in inventory financing and equipment financing was partly offset by repayments of commercial real estate loans. The portfolio is well diversified and is positioned for sustainable profitable growth.

Turning to Slide 22, in the first quarter of 2020, the provision for credit losses was $14.9 million compared to $10.5 million a year ago and $12.6 million in the prior period. The year-over-year increase was mainly due to a few loans in the commercial loan portfolio. However, economic conditions as well as the good overall underlying credit quality of our loan portfolios continued to result in an industry loan loss ratio of 18 basis points.

Impaired loans are shown on Slide 23. Gross impaired loans totaled $186.7 million, up $11.6 million sequentially, mainly due to an increase in the commercial loan portfolio. The allowances for loan losses against impaired loans increased by $5 million from year-end, mainly from commercial loans. Allowances for loan losses against other loans amounted to $57.9 million, down $1.6 million, as a result of improvement in risk ratings of personal loans and the decrease in loan volumes. The net impaired loan ratio stood at 42 basis points, up 2 basis points from yearend. The bank remains comfortably provisioned, and the loan portfolio remains well collateralized.

I would now like to provide an update on how we expect the remainder of 2020 to unfold. NIM should improve slightly from the level in the first quarter of 2020 as our loan portfolio continues to evolve towards higher margin loans to business customers. The efficiency ratio is expected to gradually improve throughout the year. The loan loss ratio is expected to be in the mid-teens, and the tax rate should be moved towards the mid to high teens. In light of the weak first quarter results, adjusted EPS for 2020 is now expected to range from 5% below to being in line with the 2019 adjusted EPS.

As we speak, there is growing uncertainty in the macroeconomic environment as well as increasing volatility in capital markets globally. This evolving situation has the potential to impact our outlook and performance. To conclude, despite the challenging quarter, we remain committed to execute our strategic plan and work towards the medium-term objectives that we have set. Thank you for your attention, and I will now turn the call back to Susan.

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Susan Cohen, Laurentian Bank of Canada - Director of IR [5]

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At this point, I would like to turn the call over to the conference call Operator for the question-and-answer session. Angel?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Meny Grauman of Cormark Securities.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [2]

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First question, just wanted to follow-up on the guidance in terms of the net interest margin. You're talking about an improvement and I'm just wondering what you are assuming right now in terms of Bank of Canada rate moves.

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [3]

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We are assuming, at the moment we're taking the view of the forward rate that exists at the moment.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [4]

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So that's 2 cuts baked into --

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [5]

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We're doing sensitivity analysis and stress this thing regularly. But at this point, we're waiting to see. We haven't built in a reduction at this point.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [6]

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If I could just ask, in terms of the credit, just wondering about the increase in the commercial provisions on the impaired side. If you could, give a little more detail in terms of what drove that increase. Is there any pattern there? Is it a few specific accounts?

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William Mason, Laurentian Bank of Canada - Executive VP & Chief Risk Officer [7]

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Meny, thank you for your question. There were a few loans in the commercial loan portfolio that did become impaired. It amounts to about $5 million in provisions. Beyond the macroeconomic environment pressures, we don't see anything systemic in our portfolios. At this point, we believe that these loans are adequately provisioned and they are not tied back to any previous loans.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [8]

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In terms of the recovery in Stage 1 and 2 in the personal loans, just wanted to get more insight into what was moving that. Is that just migration or a change in economic assumptions?

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William Mason, Laurentian Bank of Canada - Executive VP & Chief Risk Officer [9]

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In terms of the personal loans, we did see favorable migration overall in that portfolio. And in my view, this is just normal variation, ebbs and flows. We've talked about that in past quarters.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [10]

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Okay. Then just a final question for me is just in terms of the high interest savings accounts and sort of the promotional rates there, do you expect that promotion to continue to weigh on the margin in Q2 and beyond? And how confident are you that the clients that are taking those promotions aren't just rate shopping? Like how sticky do you believe those clients are?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [11]

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Well first of all, having diversified sources of funds is a real strength for the bank and that includes deposits obviously. With respect to personal customer deposits, we're pleased that now we have 3 channels instead of 2. Financial Clinics, where we had a few quarters of stable deposits now, Advisors and Brokers, and now we have LBC Digital, our digital direct to customer channel. We're really pleased that we have gathered $1 billion of deposits through this channel which gives us access to many new customers all across Canada, and this will provide cross sell opportunities. I'll ask Craig Backman to give some more color on that.

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Craig Backman, Laurentian Bank of Canada - EVP of Personal Digital Banking [12]

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Sure. We just announced to customers that there will be a reduction in rates to 2.8% from 3.3% effective March 1. We believe this remains a competitive offer. Over the next quarter, considering the reduction in the interest rate, we would not expect material variations in the volume. We will continue to dynamically monitor rates and volumes according to needs of the bank and market conditions.

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [13]

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If I may add, Meny -- Francois here. The impact on profitability is not expected to be material in 2020 and longer term to be profitable.

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Operator [14]

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We'll now take our next question from Sumit Malhotra with Scotiabank.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [15]

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Maybe you can start with a qualitative one first on your shift to the Advice based model. I know that it's obviously still early days since you've migrated to this new structure. Just wanted to ask you, and some of this might be conceptual, maybe there is numbers around product offerings you can share with us. Obviously you talked about some of the revenue challenges that are still visible, but as far as the interaction with customers and what you're seeing in terms of product sales, cross sell, those types of measures, is there any tangible wins you could talk to us about as to how that is being received in your marketplace?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [16]

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Thanks for the question. Yes, well as I said in my remarks, we're seeing gross sales in both mutual funds and mortgages which is very encouraging. And also, stable in deposits. I'll ask Stephane Therrien to give more color on the interactions that we're having with customers.

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Stéphane Therrien, Laurentian Bank of Canada - EVP of Personal & Commercial Banking [17]

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Thanks for the question. We're really happy about the reaction from our customers. Just a reminder that all of these changes were aligned with the evolving customer needs of our customer. So spend -- having more time dedicated to have a longer discussion with our customer advising them on their future is all positive for the customer and their reaction so far is really positive. The good thing as well is during the first half of our transformation plan as you mentioned, a lot of our time was dedicated to simplifying our offering, preparing our customer for the new model, and also preparing for potential (inaudible). All of this is now behind us. We are now in a growth mode as Francois just mentioned. We are getting back to basics. Our Financial Clinics are now full with customer meetings. There are dedicated advisors to improve their financial health.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [18]

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Getting a little bit more specific into the quarter here, if you go back to your commentary, Francois Desjardins, after the new contract with your workforce was resolved, it certainly seemed to open the door to the efficiency improvement and expense outlook getting better for the bank. To be fair, expenses are only up 2% year-over-year on an adjusted basis and clearly the revenue piece plays into efficiency. But I get the feeling from some of your commentary that the aggregate level of expenses this quarter, you used the term disappointing for how you viewed Q1. Is expenses a part of that? And more specifically, what are some of the areas that might aid this line going forward in 2020?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [19]

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I'll ask Francois to give some specifics on those numbers, and then I'll double back on the end, all right?

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [20]

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Okay. On the expenses side, most of the increase, sequentially, most of it comes from salary and benefits, to the tune of $10 million or so. Basically, $6 million or 60% of this, Sumit, is related to seasonally higher limits including higher vesting of share-based compensation and other seasonally higher employee benefits like higher payroll taxes. So half of those we don't feel that they will recur. We clearly don't expect to recur in following quarters. The other part of the increase is $2 million of it is related to higher compensation reflecting improved, better performance in the capital market business compared to previous quarter and business services growth. So assuming those limits stay, so those expenses will come with the success of the units themselves. And the remaining $2 million is related to favorable adjustment to pension cost in the previous quarter. So that we don't expect going forward. So when we take all of these expenses from salaries and other expenses, we expect to gradually improve our efficiency ratio in the year by 3 to 4 basis points, 300 and 400 basis points coming from the salary benefit that I just mentioned, and other expenses that we see coming down like professional fees for the rest of the year. That's the expense portion, Sumit.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [21]

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Francois, you wanted to circle back?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [22]

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Yes. So obviously we're not happy with the quarter for obvious reasons. But putting this into context, we are recovering from a period of decreasing assets due to labor relations environment. I'm encouraged by what I see on the momentum on the growth side. Business services has never stopped and we see the growth there. From a mortgage perspective, I'm really encouraged by what I see, we're increasing momentum there. Business is coming in more than it was last year for sure. We're putting in place new programs with major brokers across Canada. We're increasing our business development activities. And basically, we're originating more mortgages. There's still work to be done there. I'm expecting more from this. And we also have to address the personal loans and credit card businesses, but all in all, we need to be in growth mode. From an expense perspective, we had a quarter where we had some nonrecurring expenses, so obviously doesn't help, but as Francois explained, we need to work on the efficiency ratio and we expect the efficiency ratio to go down to more, to decrease from now to the end of the year. A combination of both the revenue and expense side of the equation.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [23]

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Last question for me is on the commercial loan portfolio. You made it very clear since you took the role, Francois, that that's really where the focus of the bank is going to go. And the numbers we see this quarter in terms of balances up 2% sequentially, 7% year-over-year, certainly solid. There has been, as we've gone through this earnings season, there has been some differentiation in the commentary from the various banks on how they're approaching the commercial market in Canada. Some seem to be taking their foot off the gas, whereas others continue to go. If I look at your numbers this quarter, and I'll say it again, 2% on the quarter, 7% on the year, is that a reasonable expectation for what you think the bank can deliver when it comes to commercial? And are there any situations from a credit quality perspective, maybe a pricing perspective, that give you any pause in pursuing growth at this level?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [24]

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I'll ask Stephane to give some commentary on growth in the sector.

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Stéphane Therrien, Laurentian Bank of Canada - EVP of Personal & Commercial Banking [25]

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Thanks for the question again. We still feel very good about our specialization strategy. So I think if 100% of your salesforce is specialized by industry, they are really close to the highs and lows of the industry. They are aligned with our credit team as well. So we feel good about the current structure that we have in place and we feel good to continue to grow by double digits in the current year.

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Operator [26]

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We will now take our next question from Mario Mendonca of TD.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [27]

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Forgive me if some of these questions have been addressed in other calls, I'm still familiarizing myself with some of the nuances of your bank. Could we talk first about the sensitivity the bank has, the sensitivity to the 25-basis point rate cut in Canada, what that might mean to your NIM over say a 12-month period?

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [28]

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Sure. All things being equal, Mario, a 25 bps decrease in interest rate would result in approximately $4.6 million reduction in net interest income annually. All things being equal with no change in any of the other variables. To that I would say we still expect, even if that would occur and when it does occur, we still believe that our NIM is expected to be positively impacted by the volume growth and the explanation that Stephane just gave us. We deploy our capital and evolve the mix of our portfolio to higher yielding commercial loans. That would be partly offset by any decrease in interest rate that could occur. But we still see this, our evolving mix, to be a positive thing on revenues and NIM going forward.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [29]

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You also referred to lowering the rate paid on certain deposits from say 3.3% to 2.8%. I think you made the point that you don't expect this have any effect on profitability in 2020. As there's 8 months left in the year if you do this on March 1, is the logic here that the rate -- that this essentially is just offsetting the decline in your realized yields on other securities and other assets? Is that the logic behind suggesting that it won't have an effect on profitability?

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [30]

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It's more from a funding perspective, the overall funding perspective. As we lower this rate, when you look at the various options that we have to fund our business in our plan, lowering the rate by 50 basis points at this point, we see this as not materially impacting our profitability going forward.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [31]

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Okay. Then finally, I think on Page 14 of your presentation, when referring to the decline in service charges, you said that was a change in retail banking behavior. That 12% decline seems like an awfully large amount reflecting customer behavior, because I never think of customer behavior changing in such a big way. Could you talk about what you're really seeing there?

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [32]

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Francois here. Clearly as we moved our Financial Clinics to fewer transactions, obviously many services you had at counter before are just totally disappeared. So now, it is financial advice to the customers and new products, and Francois explained that sales of mutual funds and other products are getting some growth since we moved it to the new model. And that's what we mean by the behavior. We have -- before we made the switch basically, less than 4% of our transactions were done at the counter by clients. So already that was started enough to come and have services being taken at the counter, but we had the costs before. So now we moved the Financial Clinics to service and advice, so we eliminate many of the costs to provide services that were not sought after by customers. So that's why we see on the revenue line, clearly on the revenue line you see a decrease. But the decrease in expenses is part of our total expenses, other expenses, salaries and everything, that you don't identify to the Financial Clinics per se, but the revenues are.

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Operator [33]

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(Operator Instructions) We will now take our next question from Scott Chan of Canaccord.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [34]

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Just on the (inaudible) with other expenses, (inaudible) from the line items that hopefully you can help me out with. If I look at line 2, property taxes, this quarter was $6 million and it's been tracking at $11 million for a while. Could you explain why it kind of dropped so much? And is this run rate still a good guide to use?

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [35]

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Sorry, Scott, are you talking about the rent?

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [36]

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Yes, the rent and property taxes line in other expenses.

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [37]

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The rent, with the event of IFRS 16 that started November 1, the rent expenses, basically there's no more rent. We need to capitalize most of the rent. So you have a major decrease of rent by I think it's $5.8 million or $4 million, $5.8 million. But you have an increase in amortization of $4 million. So you have a change between the lines. So you have a decrease of rent expenses by $5.8 million, you have an increase of amortization because now you have to capitalize the leases. And then you have the interest portion, the interest cost portion of $1.2 million. That's part of the NIM. So when you take those 3 elements compared to the previous rent expenses, we're basically a bit less expensive. We have some savings compared to previous periods. So that explains that, the rent, the operating rent expense.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [38]

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That's helpful. And Francois, you talked about the end markets for personal getting back to positive territory by yearend. Did you refer to just personal in isolation that was down 15% or does that include credit cards and mortgages as well?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [39]

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The goal of getting to positive loan growth by the end of the year is an overall comment. I'm really encouraged by what I see on the mortgage side. I'm seeing new loans coming in at a much higher pace than what I've been seeing, so that is very encouraging. We still have work to do to do the same on the personal lending side, and the VISA credit card portfolio is rather stable and we need to put more efforts in terms of growth and cross selling to our existing customers. So that would be the task that's before us, but I'm encouraged by what I see so far.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [40]

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So it's a combination of those 3?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [41]

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Correct.

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Operator [42]

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We'll now take our next question from Will Flanigan of National Bank Financial.

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Will Flanigan, National Bank Financial, Inc., Research Division - Associate [43]

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I just have a couple of questions. So just going back to the digital offering, I'm just wondering if you guys are seeing clients transferring balances from your other deposit products to (inaudible)?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [44]

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Obviously the LBC Digital offering was launched only outside of Quebec, so given that our Financial Clinics are in Quebec, we saw very, very little crossover from one clientele to the next.

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Will Flanigan, National Bank Financial, Inc., Research Division - Associate [45]

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Great. Then turning about your early thoughts on OSTI's new proposal for cap regulations for the small and medium sized banks, is there anything you're seeing there? Anything that might impact business from that?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [46]

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I'll ask William Mason to comment on that.

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William Mason, Laurentian Bank of Canada - Executive VP & Chief Risk Officer [47]

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Thank you for your question, Will. In terms of OSTI's white paper on proportionality, we do believe that OSTI is taking a step in the right direction by addressing proportionality for small and medium sized banks and attempts to reduce complexity in the capital space while allowing institutions to compete effectively and taking reasonable risks. It is a bit early to assess the impact as the consultation with our OSTI colleagues is evolving. But we view OSTI's moves in this direction as positive.

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Will Flanigan, National Bank Financial, Inc., Research Division - Associate [48]

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Okay, great. Then my last question is just touching back on the commercial loan book and the provisions there this quarter. Would you be able to provide any detail on the regions or specific sectors that we saw some of the trouble there this quarter?

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William Mason, Laurentian Bank of Canada - Executive VP & Chief Risk Officer [49]

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In terms of the specific areas, I don't really want to get into the specifics but they were within our syndicated loan portfolio. They were in the energy and telecom sectors.

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Operator [50]

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We'll go ahead with our next question from Robert Sedran from CIBC Capital.

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Robert Sedran, CIBC Capital Markets, Research Division - MD & Head of Research [51]

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Francois, you talked -- I just want to come back to the performance-based compensation for a moment. You addressed it in your prepared remarks and I think in Sumit's question as well. But I'm still a bit confused when I see that large of a jump both quarter-over-quarter and year-over-year. Fees on securities brokerage commissions looks flat, in fact, down sequentially. Fee income is down sequentially, you're now guiding for the full year EPS to be flat to down. So I'm not sure from where this magnitude of an increase. With seasonality, it's up even more year-over-year on than it is sequentially. So can you maybe just try one more time to help me get to where, what's driving this number up so much this quarter?

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [52]

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Sure. When you take -- basically, it's mostly in the performance-based compensation. About 60% of the increase there is performance-based compensation. If you look at this in the supplementary information, we have about $4 million or $5 million. About 60% of it relates to share based compensation that will not recur in the rest of the year. Basically, this is the time of the year when units and options are granted, and sometimes people achieve the divesting period and we need to put this in expenses on the P&L. So that's always basically from Q1 to Q1 you have this. Obviously, we have a bit more this year then we had previously. So that's one. Then the second one is, 40% of it, is related to the higher compensation. Because the capital markets, if you recall last quarter, we had a $3.8 million loss on some financial instrument that hit clearly the performance-based compensation of those people. And this year you have in this quarter, compared to the other one, you have an increase of basically $5 million in the results. So that, basically those people are anywhere between 30% to 40% compensated on those revenues. So that's why I say this one is based on the results going forward. Then you have the growth in business and people in that sector, based on their profitability and their volume have access to compensation and that obviously they are doing well as we saw from the increase in loans in that sector. So that's why despite the lower revenues overall in the portfolio, that these 2 sectors have done better than they did the previous quarter.

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Robert Sedran, CIBC Capital Markets, Research Division - MD & Head of Research [53]

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Maybe just to clarify, that first component, is it about -- it's not about great bigger grants, it's more just about more vesting and equivalents I guess in employees that are eligible to retire and so you have to take that charge into Q1. Is that more what it is rather than people getting paid more?

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François Laurin, Laurentian Bank of Canada - Executive VP of Finance, Treasury & CFO [54]

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Exactly. Exactly, Robert.

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Operator [55]

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We will now take our next question from Sohrab Movahedi of BMO.

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Sohrab Movahedi, BMO Capital Markets Equity Research - Analyst [56]

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Just wanted to get a couple of clarifications here. On the service fee charge with the customer behaviors, is that line going to go close to zero over the coming call it 7 or 8 quarters?

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Stéphane Therrien, Laurentian Bank of Canada - EVP of Personal & Commercial Banking [57]

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Yes. Obviously, moving to 100% advice and having a lot less transaction gradually, if you add that as well into the fact that we are going digital, this line will continue to go down for sure.

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Sohrab Movahedi, BMO Capital Markets Equity Research - Analyst [58]

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But is it going to be going to zero like quicker than let's say a million or so a quarter? Or do you think that's about the right kind of run rate for it to be going down?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [59]

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If I might add here, only the transactions that are in the Financial Clinics done by human beings are the charges where this reduction has occurred. Other fees that are related to things that are done online or things that are on other products or transaction fees, don't disappear. So the move to 100% advice meant that we're not doing these transactions by human beings anymore. We don't have the revenue, we don't have the costs.

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Sohrab Movahedi, BMO Capital Markets Equity Research - Analyst [60]

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I was speaking specific just to the service charge line which I think was discussed earlier.

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [61]

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Yes, yes, I know. It should not go down as quickly because what is left is transactions that are not done by human beings. It will, as Stephane said, continue to decrease slightly.

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Sohrab Movahedi, BMO Capital Markets Equity Research - Analyst [62]

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And you've talked about the commercial loan growth and the pipeline and the like. Are these syndicated credits?

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William Mason, Laurentian Bank of Canada - Executive VP & Chief Risk Officer [63]

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As any other banks, obviously we're using syndication desks, both in commercial and in real estate. Our overall syndicated desk for business services only accounts for 10% of our loans.

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Sohrab Movahedi, BMO Capital Markets Equity Research - Analyst [64]

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But it accounted for, I think it accounted for all of the impairments, right? This quarter? Is that what William said, that these were syndicated on energy and telecom, that went back?

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William Mason, Laurentian Bank of Canada - Executive VP & Chief Risk Officer [65]

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Sohrab, the increase was driven by 2 syndicated loans.

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Sohrab Movahedi, BMO Capital Markets Equity Research - Analyst [66]

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Right. So are the syndicated loans good quality, is I guess what I'm trying to figure out here.

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William Mason, Laurentian Bank of Canada - Executive VP & Chief Risk Officer [67]

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From an overall quality perspective, we're happy with the quality of our syndicate loan portfolio. You do have ebbs and flows, as you know, in this space, sorry, on specific situations, but we're very comfortable given our underwriting standards with the overall syndicated loan portfolio.

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Sohrab Movahedi, BMO Capital Markets Equity Research - Analyst [68]

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Okay. And Francois, maybe I'll just finish up with you. I think on a number of occasions on this call you've said you weren't happy about the quarter. Can you be a little bit more specific about which aspect of the quarter you are unhappy about? Was it the expenses? Was it the revenue? What was it that you are unhappy about?

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [69]

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All of it, a little bit of everything. We are recovering from an asset reduction, so a decrease in the top line. I'd like to see a flattened-out loan portfolio, we're working on that. Obviously, having to take a few provisions on specific loans in this quarter did not help. And having some expenses related to growth in our digital and others, this combination gave us the results that we have. Obviously, I'm not happy with any of it. I'm happy with the strategic investment that we're making. Happy with the fact that we're going and getting customers across Canada now. Happy with the fact that we welcomed thousands of customers in. Just not happy with the end result this quarter. What I am looking forward to is, by the efforts that we're making, going and getting that growth, like I said last year, was difficult to do. This year, it's all boots on the ground. I'm seeing results in that and as soon as we see growth, we will see performance. Like Francois said, from a loan loss perspective, we had a couple of hiccups this quarter. But that doesn't mean that we're expecting that to go forward every quarter. And from an expense perspective, we are working on getting our efficiency ratio down, like Francois mentioned earlier, 300 to 400 basis points is what we're looking at from that to the end of the year. I'll be a lot happier when that occurs.

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Operator [70]

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(Operator Instructions) And we have no further questions. At this time, I'd like to hand it back over to Francois Desjardins for any closing remarks. Actually, we do -- oh no, please go ahead, Mr. Desjardins, for your closing remarks.

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François Desjardins, Laurentian Bank of Canada - President, CEO & Director [71]

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It is when we have a challenging quarter like this one that it is most important to remind ourselves why we undertook this transformation, why we are working on or working through such an ambitious undertaking. Transformation can be bumpy, but it is worthwhile. Overall costs are under pressure through transformation, but this is not a permanent run rate and when we get a quarter like this, it looks even worse. But the heavy lifting is coming to an end. We also need to remind ourselves that a substantial proportion of the transformation is already behind us and even if it's not yet tangible, we are making progress towards growth, efficiency and future performance. We're on a plan, we're on a mission, we're going to get it done. We're working on growth and efficiency. The year is not over. We're building something great. I will now turn the call back to Susan.

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Susan Cohen, Laurentian Bank of Canada - Director of IR [72]

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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 second quarter 2020 conference call will be held on May 29th. We look forward to speaking to you then. Have a good day.

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Operator [73]

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This concludes today's call. We thank you for your participation. You may now disconnect your lines and have a wonderful day, everyone.