Laurentian Bank of Canada Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Meny Grauman - Scotiabank Global Banking and Markets - Analyst : Hi, good morning. Just wanted to ask about the timing of the rebound in loan growth that you see for '25. Presumably, it takes time for activity to react to rate cuts and it sounds like you don't believe that rate cuts are -- have fallen enough yet to kind of stimulate the demand that you're REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 30, 2024 / 1:00PM, LB.TO - Q3 2024 Laurentian Bank of Canada Earnings Call forecasting. So just if you could help us sort of narrow the focus in terms of timing in '25, is this more of a late '25 story you're envisioning in terms of seeing loan growth come back here?

Question: Meny Grauman - Scotiabank Global Banking and Markets - Analyst : And what portfolios do you expect to be more sensitive to rates? Meaning where do you see -- where do you expect to see the reaction first? And then what portfolios might lag?

Question: Meny Grauman - Scotiabank Global Banking and Markets - Analyst : Understood. Thank you.

Question: Sohrab Movahedi - BMO Capital Markets - Analyst : Okay, thank you. Yvan, I assume the higher capital ratios are in anticipation of future loan growth, but what's the risk that some of these impairments may result in higher than modeled or expected loss given defaults? I mean, we've seen this as an issue with some other banks that are also very REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 30, 2024 / 1:00PM, LB.TO - Q3 2024 Laurentian Bank of Canada Earnings Call good lending culture, strong underwriters of credit. But they're getting surprised a little bit with recovery rates when defaults are happening. So can you give us some comfort that similar things are not about to happen at Laurentian? And then if we could just get a little bit more commentary as to what's the outlook for formations, do you anticipate continued negative migration here in the portfolio? Thank you.

Question: Sohrab Movahedi - BMO Capital Markets - Analyst : Okay. So that's very helpful, Christian. I just want to put a finer point on this. You are saying I am naive or I'm thinking too hard if I'm worried about the risk, for example, of you next quarter telling us that you were surprised about the recovery rates on some of these impaired loans.

Question: Sohrab Movahedi - BMO Capital Markets - Analyst : And the collateral is usually, what, hard real estate, or can you talk a little bit about some of the new formations this quarter and what's the collateral behind it? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 30, 2024 / 1:00PM, LB.TO - Q3 2024 Laurentian Bank of Canada Earnings Call

Question: Sohrab Movahedi - BMO Capital Markets - Analyst : But can you comment on what sort of collateral is behind it, behind the facilities?

Question: Sohrab Movahedi - BMO Capital Markets - Analyst : Okay. Thank you very much.

Question: Gabriel Dechaine - National Bank Financial - Analyst : Hi. Good morning. Thanks for all the Q4 guidance and the longer-term guidance on loan growth. Just want to -- can you tell me about the income from financial instruments? You were clear there that it was immutably high this quarter. What was the -- what is that, anyway?

Question: Gabriel Dechaine - National Bank Financial - Analyst : Okay. And I know this is a kind of a silly question because it's a line item that moves around a lot and the term normal doesn't mean anything these days. But what would be kind of a run rate number for that line item based on your historical experience?

Question: Gabriel Dechaine - National Bank Financial - Analyst : Okay. And then in response to -- I'm not sure I quite understood, but in response to some of the questions there Sohrab was asking, did you give a sense of what to expect in Q4 from -- in terms of credit performance like similar to this quarter or obviously things can happen very last day of the quarter, but how do you see things shaping up based on what you know today?

Question: Gabriel Dechaine - National Bank Financial - Analyst : Got it. Last one, just a clarification. You talked about the mortgage servicing business that you sold that closed on August 2 and you said $4 million to $5 million of revenue. Is that a quarter or a year?

Question: Gabriel Dechaine - National Bank Financial - Analyst : Oh, sorry. Yeah, yeah.

Question: Gabriel Dechaine - National Bank Financial - Analyst : Got it. And what's the bottom line contribution from that business?

Question: Gabriel Dechaine - National Bank Financial - Analyst : Got it. All right. Well, thanks, and enjoy what's left of the summer.

Question: Nigel D'Souza - Veritas Investment Research - Analyst : Thank you. Good morning. I wanted to touch on your provisions for performing loans this quarter and the reversal there. It looks like a good chunk of that was driven by this reduction in provisions for Stage 2 commercial loans. So wondering if you could elaborate on was that primarily migration out of Stage 2 or changes to your model assumptions that led to those lower provisions?

Question: Nigel D'Souza - Veritas Investment Research - Analyst : And then I guess the macroeconomic piece of this, you are seeing -- you cited weaker macroeconomic conditions. Currently, it's impacting your own growth. How is that expected to feed into performing provisions going forward? And I ask that because if you look at your PCL ratio this quarter, the 20 basis points or so, if you exclude the reversals outperforming, it would be closer to 30 basis points. So just wondering how does performing provisions trend from here.

Question: Nigel D'Souza - Veritas Investment Research - Analyst : Okay. I'll leave it there. Thank you.

Question: Doug Young - Desjardins Securities Inc. - Analyst : Hi, good morning. Just going back to the CET1 ratio and I kind of understand how it flexes with volume growth and you're sitting at a healthy level right now. But I'm just curious, why have a discounted DRIP in place given where you stand today? I'll start there. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 30, 2024 / 1:00PM, LB.TO - Q3 2024 Laurentian Bank of Canada Earnings Call

Question: Doug Young - Desjardins Securities Inc. - Analyst : And how much would that add to the CET1 ratio per quarter roughly? If I can kind of roughly think, I'm just curious if you've got that handy.

Question: Doug Young - Desjardins Securities Inc. - Analyst : Okay, that's fine. And then just on the expense outlook and going back and thinking through some of the prepared remarks and thinking of the revenue outlook over the next year before we start to see a pivot in loan growth. Is our expenses expected to remain around where we are today? Or as you kind of peel-off some of these businesses, there's obviously some cost reduction there. Or is there some other projects that are rolling off that you should get some efficiencies? I would -- just trying to think of how to think of expenses and the expense ratio in what's otherwise going to be like a flat loan growth, flat NIM environment.

Question: Doug Young - Desjardins Securities Inc. - Analyst : So expense ratio is roughly around where we're seeing them today? That's kind of what we should be thinking?

Question: Doug Young - Desjardins Securities Inc. - Analyst : Appreciate the color. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 30, 2024 / 1:00PM, LB.TO - Q3 2024 Laurentian Bank of Canada Earnings Call

Question: Paul Holden - CIBC World Markets Inc. - Analyst : Thank you. Good morning. A question with respect to the retail bank. Like when I look at deposit trends or the decline in deposits and then also the decline in the relevant loan categories, I can't help but wonder and -- if you're seeing customer attrition in terms of sort of if I think about core branch customers. So maybe you can start with addressing that, please.

Question: Paul Holden - CIBC World Markets Inc. - Analyst : Okay. And can you remind me, based on what you presented at the Investor Day sort of when you might expect an inflection in, call it, retail deposits to increase with your digital initiative? I think that's still probably maybe a 2026 story. But is there any possibility it could become a 2025 story?

Question: Paul Holden - CIBC World Markets Inc. - Analyst : Okay, thanks. And last question and it kind of follows up on Doug's question regarding the DRIP, right? Like when I look at the current valuation, still trading at less than 0.5 times book. I look at the ROE, let's call it, 6.5% give or take. Like it doesn't -- I struggle with the issuing shares at that level. In fact, I would argue why shouldn't be buying back shares. I get it strategically you want to grow in commercial loans. But the implied ROE, implied return of buying back stock today seems pretty compelling. So I think I've asked you this question before, but I'm going to ask it again, like why not go down that route? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 30, 2024 / 1:00PM, LB.TO - Q3 2024 Laurentian Bank of Canada Earnings Call

Question: Paul Holden - CIBC World Markets Inc. - Analyst : Okay. I'm sorry I'm just going to have to follow up on this for a minute. Because I guess the way I look at it, as a financial analyst, right, like I mean if you're buying back stock at roughly half book and with a 6.5% ROE that tells me simply 13% return on that capital. Are you suggesting then that you can earn something higher than 13% and by growing commercial loans? Because then that would make sense to me. So is that fair to assume you'd be expecting something higher than 13% on organic capital deployment into commercial loans?

Question: Paul Holden - CIBC World Markets Inc. - Analyst : Okay. Okay. That's it from me. Thank you.

Question: Stephen Boland - Raymond James Ltd. - Analyst : A couple of quick questions, maybe the first. There was something in your non-interest expense line that said your costs were up to -- because of higher regulatory expenses. Can you clarify what that means?

Question: Stephen Boland - Raymond James Ltd. - Analyst : Okay, that's great. And then just maybe a little bit more granularity on the construction and land portfolio. I know you mentioned developers are waiting meaning for rate cuts. Is that -- is your anticipation that that is 25 basis points or 50 basis points? Meaning you're talking to these same developers, I presume, on a regular basis. Like, is it -- again, is it 50 basis points or 100 basis points before they start moving on some of the new projects? I'm just trying to get an idea of how sensitive that portfolio is to minor moves in the rates.

Question: Stephen Boland - Raymond James Ltd. - Analyst : Okay. That's helpful. And I'll sneak one more in. Just on the impairment charges, obviously, you sold off other businesses. Is this kind of the end of it now? I know you're looking to restart growth, but is there a possibility that other non-core businesses get sold off and there's further impairment charges or restructuring charges?

Question: Stephen Boland - Raymond James Ltd. - Analyst : Okay. Thanks very much, guys.

Question: Darko Mihelic - RBC Capital Markets - Analyst : Hi. My bad. I'm sorry. I wanted to revisit credit quality and I wanted to sort of dovetail this into both questions that were asked earlier. One is on the collateral, and the other is on your Stage 2. I'm going to approach this slightly differently. So when I look at your gross impaired loans as a proportion of your loan book, at 108 basis points, that's almost doubled year over year. And last year at this time, when you were at 55, the bigger banks were at 49. So you were close to, let's say, average. And today, the others are around 66 basis points and you're at [100]. So what this tells me is that you're getting more impairments than others and it's fine that it's collateralized well. But that tells me that the probability of you eventually hitting a few files where the collateral is not maybe as well as you thought it was or it is rising. And so the chances of you having a high outsized loss is increasing over time because you're simply having more impaired loans. And therefore, I would have thought you would actually be increasing your Stage 2 despite the migration out of Stage 2. So am I thinking about this incorrectly or is it maybe perhaps that you now have a good handle on the watch list? And you see that it should be subsiding relatively quickly and that gives you comfort that, okay, no, we're not going to have a higher -- a chance of us hitting a loan or a file here or there that surprises us. Hopefully, my question makes sense, and maybe you can talk to the elevated impairments, not just the collateral, and how that's not affecting your performing provision.

Question: Darko Mihelic - RBC Capital Markets - Analyst : Okay. And so am I reading it into it incorrectly, though? I mean, the one read is you're very careful and you have good collateral. But on the other hand, because you have more impairments, maybe the ability of your borrowers to pay, maybe that side of underwriting is showing some relative weakness. Or am I very incorrect in that it's too early in the cycle or -- maybe you can just correct the way I should be thinking about that.

Question: Darko Mihelic - RBC Capital Markets - Analyst : Okay. All right. Great. Thank you.