Welcome to the Laurentian Bank Quarterly Financial Results Call. Please note that this call is being recorded. I would now like to turn the meeting over to Andrew Chornenky, Vice President, Investor Relations. Please go ahead, Andrew.
[Foreign language] Good morning, and thank you for joining us. Today's opening remarks will be delivered by Éric Provost, President and CEO, and the review of the first quarter financial results will be presented by Yvan Deschamps, Executive Vice President and Chief Financial Officer, after which we'll invite questions from the phone. Also joining us for the question period are Liam Mason, Chief Risk Officer, and Kelsey Gunderson, Head of Capital Markets. All documents pertaining to the quarter can be found on our website in the Investor Center. I'd 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 two of the presentation.
I would also like to remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Éric and Yvan will be referring to adjusted results in their remarks, unless otherwise noted as reported. I'll now turn the call over to Éric.
[Foreign language] Good morning, and thank you for joining us today. Over the past few months, I have had the opportunity to meet with many Laurentian Bank team members, and I consistently hear the same things. They are committed to this institution, they are driven to improving our operations and simplifying our structure, and they are dedicated to serving our customers. Throughout the quarter, we have remained focused on three priorities: customer focus, simplification, and strategic investments to improve our technology infrastructure. I would like to thank every Laurentian Bank employee for their efforts while also supporting the organization in our strategic planning exercise. While Yvan will provide further details during his remarks, I wanted to offer some high-level thoughts on our overall performance.
I am pleased to report that the bank strengthened its capital position in a time of continued macroeconomic uncertainty. We have managed our funding to our book of business, and given the reduction in loans due to the current environment, we executed on our planned deposit reduction activities while maintaining a strong level of liquidity materially above the industry average. We are comfortable with our commercial portfolio and are well-positioned for a rebound later this year as business conditions improve. This quarter, revenues were slightly down compared to last year and grew by 4% on a sequential basis. Net income and EPS were both down year-over-year and quarter-over-quarter as expenses remained high. This increase included costs related to the mainframe outage last year, which impacted EPS by CAD 0.04 this quarter.
We know there is more work to do to reduce our expenses, and that is why simplification is a key part of our plan going forward. While overall loan growth was negatively impacted by macroeconomic conditions, including business and consumer sentiment, our NIM was up 4 basis points to 1.8%. This quarter also saw a small rebound in capital markets related businesses with stronger trading results in fixed income. The businesses' results also benefited from recent rightsizing actions. Our credit performance remained strong, with a small increase in PCLs compared to Q1 last year and stable versus last quarter. We remain confident in the portfolio and are adequately provisioned. Dealers and manufacturers in our inventory financing business remain cautious. Inventory levels are not rising to the levels seen in previous years, and as a result, utilization was at 50%.
This is lower than the mid-50s utilization rate we would typically see at this time of year. Given macroeconomic conditions, dealers and manufacturers are working together on floor planning programs. This shows strong partnership and provides us with significant confidence as we look forward to the remainder of the year. We expect an increase in utilization starting in the fall if interest rates adjust according to projections. Turning now to commercial real estate activities. We have seen a slowdown in construction start, which remains in line with our expectations as developers continue to adjust to the current cost environment. We have seen no cancellation of projects, and our portfolio is in line with our credit appetite. The majority of our portfolio is in multi-residential housing, which continues to show resiliency as demand remains stronger than supply.
As a reminder, we deal with Tier One and Tier Two developers with significant experience through the cycles. We're pleased with how both commercial portfolios are performing. Our specialized approach gives us confidence as we continue to face uncertainty in the macroeconomic environment. As I mentioned earlier, this quarter also saw a planned year-over-year and sequential decline in deposits, and there are a few points I would like to make. First, we manage deposit and loan activity on a relative basis. That's why we have executed on planned deposit reduction activities. This included, includes actions such as more conservative pricing in our broker deposit channel to maintain our focus on profitability, contributing to our NIM expansion. Second, strategic partnership deposits function like conventional demand deposit products.
Recent quarters have witnessed these deposits behaving like typical demand deposits, with funds being redirected towards market activities and other term deposits products, consistent with our expectations. Third, personal deposits sourced through our retail channel are stable quarter-over-quarter, and personal deposits overall represent 86% of our total deposits, contributing to the bank's sound liquidity position. In fact, this quarter, we enhanced our Action GIC, an equity-linked product, with a competitive minimum rate guarantee, which saw good pickup. We also held a very successful Black Friday campaign, where total GIC sales exceeded last year's performance in the same period, further solidifying our funding sources. Operationally, we have, we have a number of developments to share from this quarter. Beginning with our people, I'm pleased to announce three new appointments to my executive team.
First, we have promoted Macha Pohu to the position of Chief Human Resources Officer. Macha succeeds Sébastien Bélair, who held this position for the past three years, allowing him to better focus on his role running retail and corporate operations. Macha joined the bank in 2022, and has more than 25 years of experience in the financial services sectors, in distribution, information technology, and human resources. Second, I'm pleased to announce that Benoit Bertrand has joined the bank as our new Chief Information Officer this month. Benoit is an accomplished technology and digital transformation leader with almost 30 years of experience. He has a history of managing large and complex IT programs, as well as architecting and delivering innovative solutions. His mandate will be to align the bank's IT strategy with our overall business strategy, ensuring that our technology initiatives directly support our organizational objectives.
Third, it is the creation of our Strategy and Transformation Office, which will be led by Marie-Christine Custeau, who has almost 20 years of experience in financial services, including sales effectiveness, change management, and business process optimization. This new office will oversee the development, implementation, and evolution of the strategic plan, identify organizational priorities, and ensure a steady pace of decisions that enable us to deliver value for our customers quickly. The office will work closely with finance to monitor the budget and maximize transformation goals. The bank also announced 3 new appointments to our board of directors: Dr. Johanne Brunet, Mr. Jamie Hubbs, and Mr. Paul Stinis. These appointments are part of the board's commitment to ongoing renewal to enhance overall effectiveness and ensures an appropriate balance between skills and experience and a diversity of perspectives.
Their backgrounds are varied and include marketing, risk management, capital markets, and business development. Looking forward, we are fully engaged on the revamp of our strategic plan. This plan will refine our focus on the areas where we can win to increase our competitiveness, while always maintaining our objective of improving the customer experience. As part of this refresh, we have launched an end-to-end review of all our products, projects, and processes to help inform our decision-making as we look to simplify our operating model. This work is ongoing, and we will make appropriate decisions about products and projects as we progress through this exercise. I will now like to turn the call over to Yvan to review our financial performance.
[Foreign language] I would like to begin by turning to slide 8, which highlights the bank's financial performance for the 1st quarter. Total revenue was CAD 258 million, down 1% compared to last year, and up 4% quarter-over-quarter. On a reported basis, net income and EPS were CAD 37.3 million and CAD 0.75, respectively. Adjusting items for the quarter amount to CAD 6.9 million after tax, or CAD 0.16 per share, and include amortization of acquisition-related intangible assets and restructuring charges of CAD 6.1 million, or CAD 4.5 million after tax, resulting from the previously announced simplification of the bank's organizational structure and headcount reduction. Details on these items are shown on slide 22. This quarter, an LRCN biannual interest payment had a CAD 0.06 impact on our EPS.
The remainder of my comments will be on an adjusted basis. EPS of CAD 0.91 was down year-over-year and quarter-over-quarter by 21% and 9% respectively. Net income of CAD 44.2 million was down by 19% compared to last year, and 1% compared to last quarter. The bank's efficiency ratio increased by 360 basis points compared to last year, and by 100 basis points sequentially. This uptick reflects our ongoing investment in strategic priorities and the remaining expenses related to the mainframe outage in September 2023, which totaled CAD 0.04 this quarter on an EPS basis. Additionally, and as previously guided, there was a seasonal increase in salary and employee benefits. Our ROE for the quarter stood at 6%.
Slide 9 shows net interest income down by CAD 1.9 million, or 1% year-over-year, mainly due to lower interest income from lower loan volume. On a sequential basis, net interest income was up by CAD 2.4 million, or 1%, mainly due to lower liquidity levels and lower funding costs, partly offset by lower loan volumes. Our net interest margin was up 4 basis points sequentially to 1.8%, mainly for the same reasons. Slide 10, highlights the bank's funding position. Following a period of elevated liquidity, we gradually reduce our deposit bases, considering the loan volume reductions and our previously stated objective of reducing our liquidity position. On a sequential basis, total funding was down CAD 1 billion dollars. Strategic partnership deposits decreased by CAD 500 million dollars as customers allocate funds back into market activity or term products.
Deposits from advisors and brokers were also down by CAD 300 million, mostly due to the natural runoff and our intentionally less competitive market rates. Despite the reduction in liquidity, the bank maintained a healthy liquidity coverage ratio through the quarter, which remains materially above the industry average. Slide 11 presents other income, which was relatively unchanged compared to last year. Higher income from financial instruments was mostly offset by lower lending fees due to tempered commercial real estate activity and lower income from mutual funds. On a sequential basis, other income increased by CAD 8.5 million or 13%, as a result of higher income from financial instruments due to more favorable market conditions and higher service charges, as two months of fees were waived during Q4 2023. This was partly offset by lower lending fees.
Slide 12 shows non-interest expenses up by 4% compared to last year, mainly due to higher technology costs as the bank is investing in its infrastructure, as well as higher professional and advisory service fees related to mainframe outage that occurred last quarter. This was partly offset by reduced head count and lower performance-based compensation. On a sequential basis, non-interest expenses were up 6%, mainly due to seasonally higher vacation accruals, employee benefits, and performance-based compensation, partly offset by lower advertising fees. This quarter, the remaining expenses related to the mainframe outage in the 4th quarter totaled CAD 0.04 on an EPS basis. Turning to Slide 13, our CET1 ratio was up 30 basis points to 10.2%, due to a reduction in risk-weighted assets.
Slide 14 highlights our commercial loan portfolio, which was down about CAD 1 billion or 6% year-over-year, and was down CAD 500 million on a sequential basis, mostly due to slowing real estate market activity and our inventory financing dealer base being prudent in the current macroeconomic environment. Slide 15 provides details of our inventory financing portfolio. This quarter, utilization rates were 50% and are lower than historical levels, as dealers have been taking a more conservative approach to inventory. We expect utilization rates to follow the usual seasonality, which includes a reduction in the spring and summer periods before starting to increase in the fall. Commercial real estate, our unfunded pipeline, has been impacted by market trends, but remains healthy.
We have seen some developers slow down the starts of projects given the current macroeconomic environment as they navigate through this period of high inflation and interest rates. However, demand in residential real estate continues to exceed supply. As seen on slide 16, the majority of our portfolio is in multi-residential housing, and only around 3% of our commercial loan portfolio is in office. Our office portfolio consists of Class A or B assets, and we find our recourse to strong and experienced sponsors. As we have said over the past few quarters, the majority of the portfolio is in multi-tenanted properties with limited exposures to single-tenanted buildings. Slide 17 presents the bank's residential mortgage portfolio. Residential mortgage loans were up 5% year-over-year and 2% on a sequential basis.
We maintain prudent underwriting standards and are confident in the quality of our portfolio, as evidenced by the high proportion of insured mortgages at 58% and low LTV of 51% on the uninsured portion. It's also worth noting that more than 80% of our residential mortgage portfolio is fixed rate, of which more than 80% will mature in 2025 or later. Allowances for credit losses on slide 18 totaled CAD 218.5 million, up CAD 15 million compared to last year, mostly as a result of higher allowances in the commercial portfolio. Allowances for credit losses increased by CAD 3.7 million sequentially, mostly as a result of higher allowances on commercial loans due to credit migration, partly offset by write-offs in the commercial and personal loan portfolios. Turning to slide 19.
Provision for credit losses was CAD 16.9 million, an increase of CAD 1.5 million from a year ago, reflecting higher provisions on performing loans. PCLs were essentially in line with last quarter. As a percentage of average loan and acceptances, PCLs were unchanged at 18 basis points. Slide 20 provides an overview of impaired loans. On a year-over-year basis, gross impaired loans increased by CAD 73.9 million and were up CAD 16.5 million sequentially, mostly in the commercial portfolio, which is well collateralized. We continue to manage our risk with a prudent and disciplined approach and remain adequately provisioned. As we look ahead to Q2, I would like to note a few key points focused on the next quarter.
We expect our loan book to continue to be impacted by macroeconomic conditions, as dealers continue to be prudent in restocking inventory and due to lower level of activity on real estate projects. Adding the impact of the lower number of days, we expect a low single digit NII reduction for Q2. NIM is expected to remain relatively stable. We are committed to reducing our efficiency ratio and will share more details with you later this year as part of our revamped strategic plan. For the 2nd quarter, we expect a slight increase of our efficiency ratio due to the pressure on revenues I just mentioned, and as we incur expenses to support the review of our strategic plan. Given the macroeconomic environment, PCLs are expected to be in the high teens or low twenties. Capital and liquidity levels are solid and expected to remain strong for Q2.
I will now turn the call back to the operator.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by a one on your touch-tone phone. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. And if you would like to withdraw from the question queue, you will need to press star followed by two. Please go ahead and press star one now if you do have any questions. And your first question will be from Meny Grauman at Scotiabank. Please go ahead.
Hi, good morning. Just a question on the strategic review. Any more you can provide us with in terms of a timeline for when we should expect to hear a more fulsome plan from you?
Yeah. Good morning, Meny. It's Éric. In terms of timeline, we indicated that we're aiming spring, and I would clarify later spring. So, team is working real hard to make this happen, and more to come there.
Okay, I appreciate you highlighted. Well, it was highlighted at the end here, that there would be more on expenses at that time. But I'm just wondering, sort of more conceptually, it feels like given the step down in expenses that's required, like, it seems hard to believe that this can be accomplished without further restructuring charges. So I'm wondering if you could comment on that, like, how organic can this expense management process be? You talked a lot about simplification. It sounded like the things you're looking to do will require restructuring charges. They sound more dramatic, so I just wanted to get your thoughts on that.
Well, Meny, as you noticed, like we already started last quarter with a reduction of 2% of workforce. And, part of our analysis and then trying actually to simplify this organization, I would say yes, th ere will be need for further restructuring charges. Now the depth of it still need to be worked and addressed when we come back with the strategic plan.
Okay. And, and then maybe just related, I mean, I think the, the good news is obviously your capital position is, is quite strong and, and stepped up again this quarter, CET1 at 10.2%. You took a less defensive posture in terms of liquidity. I'm wondering how that translates into your outlook for, for capital and, and your view of excess capital and, and where your CET1 ratio should be. So any thoughts there in terms of how much flexibility you have there? Are you, are you looking at your capital ratio different- differently now that it is at 10.2%?
Well, Meny, a great question there, and we've indicated in the last quarter we'd be managing 10% and above. And then right now, where we stand at that, at 10.2%, we feel pretty good versus the overall macroeconomic situation. And we're still monitoring the evolution both of inflation and the behavior of interest rate going forward. So, we feel good where we are right now.
Thank you.
Thank you.
Next question will be from Sohrab Movahedi at BMO Capital Markets. Please go ahead.
Okay, I'm just gonna follow up on Meny quickly for a second. I assume part of the reason why the capital ratio is drifting higher is because loan growth is lower, RWA consumption is a little bit lower, and you anticipate that's going to rebound. Is that the right way to think about it?
Yeah. Sohrab, this is Yvan, so I'll take this one. So, you're correct. So the increase of the capital essentially came from a reduction of the RWA.
The reduction of the RWA is because utilization rates are lower?
Exact. So, as you see, there's been a reduction of commercial. Commercial is a big consumer of capital from an RWA perspective, so that's essentially coming from that impact, yes.
Okay. I mean, I think, Yvan, I'll just reiterate Meny's point here. I mean, or Éric, sorry. We need, like, over the last five quarters, I mean, the earnings, even if you adjust for some one item, one-timers, you know, are ranging anywhere from CAD 40 million -CAD 50 million. That's a wide swing or a wide range, and we need this strategic review to have an understanding of what sort of an organization Laurentian Bank is going to be, so that what sort of an earnings potential it's going to have going forward. So I guess the sooner you could give us some of that, the better. It's not a question, it's a statement, but I, I just, you know, I feel like it's hard to make an investment case not knowing exactly what we're paying for. Thank you.
Thank you for that, Sohrab. And like I said, we are working hard to come to market in the right manner so that we have all the analysis in play. And the big thing will be about making sure that this organization has a very, very strong focus on its customer base, understanding where we can win, simplifying our structure and product shelf, while maintaining our investments in our foundational technology to run the bank, but also to make sure that we generate additional revenue for the various platforms.
Thank you. Next question will be from Gabriel Dechaine at National Bank. Please go ahead.
Good morning. Just want to talk quickly about other income. One, it looks like the service fees and, well, particularly, yeah, service fees that you had, maybe cut or refunded last quarter because of the IT issues, look like that's stabilized or we're, we're through the worst of it, I suppose, or that's gone completely?
Yeah, exactly, Gabriel. There was two months waived in Q4 for about CAD 2 million, and that's the difference in the improvement this quarter. It's relatively stable, excluding the waive of the fees that we've seen in Q4.
Okay. And then the, what is it? Investment income or, investment instruments, whatever it's called, the big, the CAD 12 million figure. What was behind that spike?
Hey, Gabriel, it's Kelsey Gunderson here at Capital Markets. You know, I think we typically give, you know, kind of guide to between CAD 6 million and CAD 9 million in that line, and you know, clearly had a good result this quarter. I think that's reflective of, you know, obviously, much more constructive markets for us. You know, traders were in a good position for it, and we're able to participate in, you know, what were better markets. So, you know, I wouldn't read that into any kind of change in strategy. I would sort of read that into a good quarter on the trading desk.
Okay. Liquidity has been, you know, you're reducing liquidity. We don't have a LCR ratio we can look at to kind of track that. I know we talked about this last quarter. There's this internal measure that you have access to. But I just get what I can see is the loan to deposit rate, deposits ratio, you know, it's nearly 150% now. Is that are you comfortable with that level? And could we see it even going higher? And there's a bit of a, you know, expectation that loans to deposit ratios go down, not up, and, you know, in the current market context and probably into the future as well.
Thanks, Gabriel. So the way we manage the funding of the bank is, we look at the deposits plus securitizations, which are long-term, very cost-efficient funding as well. So if you take those two compared to the loans, we try to maintain them relatively in line. If you look at that based on this quarter, we're at 1.03. So that's the way we manage it. It's not only a question of deposits versus loans, it's really a question of securitization plus deposits versus the loans. And we're currently, I would say, in the positive territory, because we intend to manage that around 1.
Okay. And then, well, speaking of, deposits, and this is another NIM question, I guess. You did talk about lower funding costs and, you know, the, you know, when I see loans going down, it's not like I'm, you know, clapping and cheering, but the silver lining to it is that you can be more selective in your funding and, you know, let some of the higher cost, you know, sources kind of shrink. Just wondering, when I look at your, your funding chart, I forget which slide it is, but, you know, which one of those would you point to as being the most beneficial to NIM this quarter?
And then, just to drill down a bit into the strategic partnerships, I know this predates the, you know, current management team's responsibility or however you want to put that, but, you know, it was part of the funding structure that was announced with a bit of fanfare previously, and now it's off, you know, about CAD 1.5 billion. I'm wondering what the, you know, the shift is there, if any, in that strategy.
Thanks, Gabriel. I'll take that one, too. On the NIM side, as you mentioned, the improvement of 4 basis points came from the reduction of liquidity we had this quarter that we actioned and we had guided you last quarter. But it also comes from, you know, probably, I would say still some, a little bit of catch up of the stabilization of rates that we had to incur, and that's what's been happening. I would say most of it is now in the bag. But as you mentioned, we've been prudent in terms of loan outstanding, so definitely it's good on the margins while you're prudent in terms of development as well. So that explains, I would say, most of that. And definitely the fact that we've been less aggressive on the deposits, that plays on the margins of the products for sure.
If I discuss about the strategic deposits or partnership deposits, those we have to keep in mind are demand deposits.
Okay.
They are idle, idle money, technically, that are waiting for better markets, and that's what we've experienced recently.
Okay.
So we see definitely the same trend of that money going back to market investments and, you know, higher return, GICs or other kinds of investments. So this is expected, and you should expect that this line is gonna continue to go down, unless, you know, there's a big swing in the market. But if, as we see the market getting better, this line just behaves like other demand deposits and the rest of the industry.
Got it. That makes sense. And you say demand deposits, but they're not zero cost. I would assume they're probably like high interest savings account type?
Yeah, exactly. And the difference—and we could simply just reclassify that as normal demand deposits. Happy to do that if we want, but the key element here is that we sign, you know, some multi-year agreements with some customers, and we're managing on their behalf, their demand deposits of the idle money of their customers.
Okay, last one, and sorry if I missed this in your comment. I probably did miss it, but just to get a bit more, you know, clarity on the, you know, the equipment inventory finance balance trend and, and the outlook. A, you know, what was the seasonality impact this quarter? And B, end user demand probably going down, so that means, you know, less, you know, less growth or negative growth for that, that category? How would you put it?
Yeah, Gabriel, yeah, Éric , I'm gonna answer this. It's a good question, and we definitely saw our dealer base being more cautious in the restocking season. So you mentioned seasonality. Usually at this point in the year, we are more mid-fifties, in terms of line utilization. When we closed the quarter, we were showing 50%. So lines are utilized below normal trends in this particular time of the year because dealers see a market where there's still some uncertainties, both in terms of the interest rate and the inflation rate. I actually was at the boat show last few weeks ago in Miami, and you can see and feel like the dealers are seeing customers. Consumers are out there for the products, but the products will be slower to turn. And we like the approach of the dealer base being more cautious in terms of restocking.
So we would hope if interest rates go down later on this year to see an increase of that utilization of credit lines later this fall.
Okay, perfect. Thank you, and, well, enjoy the weekend, although it's Thursday.
Thanks again, yeah.
Next question will be from Nigel D'Souza at Veritas. Please go ahead.
Thank you. Good morning. Apologies if you already covered this, but, do you have a breakout of the categories within your commercial portfolio that drove, the higher provisioning for commercial loans this quarter?
Good morning, Nigel, it's Liam Mason, CRO. It was a broad general migration across the portfolio. Obviously, as Éric articulated, we're seeing a slower environment in commercial real estate, and we are seeing pressures in that space. But for our portfolio, broad general migration across the commercial portfolio. And we've been disciplined around our reserving, Nigel, across all those categories, and that's reflected in our PCLs this quarter.
Any comments on the contribution from inventory financing to provisions this quarter?
It would be, just it's part of the portfolio, and, we're pleased that our dealers are being prudent, with regard to their restocking, as Eric remarked. But a degree of migration, as you'd expect at this, point in the economic cycle.
Okay, and if I could switch gears. Just wanna make sure I understand the deposit dynamics and the liquidity comments as well. So my understanding would be that if there's a decline in deposits, that would reduce your stressed cash outflows, so that should improve your liquidity coverage ratio. Or are you implying that you're also taking down your high-quality liquid assets in conjunction with lower deposit levels? Just trying to understand the interplay between deposits and your LCR.
Thank you. Totally. First, the LCR includes deposits, includes the funding, the general funding of the bank, and definitely, as you mentioned, the other liquidity baskets that we have. So it's a general trend. I think I just tried to make it easy by talking about deposits, which is probably the simplest element to the equation. So when we take all that into account, we are still managing a pretty high level of LCR. We are materially above, you know, the industry average or the Big Six. So we were elevated. We had built a war chest in terms of liquidity, seeing the macroeconomy change, as well as based on the recent events that happened. So we're still very well positioned and very safe from a liquidity perspective.
When I mentioned, the deposits decrease, this quarter, I just reaffirmed that we manage securitization and deposits, depending on, of how the loans are going. The difference this quarter is, as stated, we had an objective to reduce it. We've been less aggressive on the deposits, on the rates of the deposits, and that's exactly, what it created. The biggest impact of that, you can see, is broker GIC that reduced by CAD 300 million because we've been less aggressive on rates.
Okay, and just one point of clarification. Put simply, if your deposit balances continue to decline, is that going to increase your LCR ratio, or is it gonna remain stable? And is there any cost to keeping an elevated LCR ratio? Because it doesn't seem you need it in order to meet the deposit outflows.
As you increase the deposits, your LCR increase. As you decrease the deposits, your LCR decrease. But it's not only a question of deposits or liquidity. LCR is also a question of the flows that you need for the next three months as well. So it does depend on the volumes, it does depend on the commitments we have. So there's many aspects impacting the LCR, and you have to put all that in the pudding and just remain cautious, and that's what we've been doing in terms of the LCR.
Okay. That's all for... That's it for me. Thank you.
Thank you.
Once again, as a reminder, if you do have any questions, please press star followed by one on your touchtone phone. Your next question will be from Darko Mihelic at RBC. Please go ahead.
Hi, thank you. And I just have a couple of simple, straightforward questions, I think, so bear with me. The first question is, this quarter had fees from the mainframe outage. There was professional fees and other expenses. Can you just provide some color around that? And is that part of your view into next quarter and beyond? Essentially, what I'm trying to gather here is whether or not more consultants or more work needs to be done simply on that, and if that's part of the pressure on expenses going forward, or is the expense pressure really tied to other things?
Yeah, thanks for the question, Darko. Will allow me to clarify that item. So as you know, the outage happened in the last few days of September, first few days of October. So the remediation work, you know, has been done pretty much in October and early November. So what we see right now is the remaining expenses related to that outage remediation. So this will not flow or continue in Q2. In Q2, level of expenses is expected to remain roughly in the same ballpark because of other elements, including some spending related to the strategic plan that were ongoing. But definitely, what we incurred to remediate the outage was something that we've done in October and November that impacted in expenses, impacted Q4 by CAD 3 million, impacted Q1 by CAD 2 million, but should not impact Q2 anymore.
Okay, but I understood that, and maybe I'd have to go back to my notes and check, but I thought previously it was the waiving of fees. But this is different. Am I, or am I thinking of this incorrectly?
I'll take it and open to my colleagues if they want to complete. But last quarter, we had 2 months of waived fees for CAD 2 million. But in addition to that, we had about CAD 3 million of expenses to remediate and correct, you know, what we had to correct last quarter. So in total, what I mean, if you take both quarters together, we had CAD 2 million of fees waived, and that was only in Q4, not impacting Q1. We had CAD 5 million of spending, including professional fees and expenses. CAD 3 million of that was in Q4, and CAD 2 million of that was in Q1. So technically, total of CAD 7 million, and that's now passed.
Okay. Okay, that's. Thank you very much for that clarity. I apologize. I just didn't have my notes at my fingertips. And so, now, after the fact, has there been any work on, you know, the customer experience, given the outage, and further remedial steps that are necessary?
Yeah, Darko, Eric, good morning. I just, well, pleased to announce this morning that, we have a new CIO joining in, Benoit Bertrand. And in terms of, customer, experience on our side, like, it's a continuous improvement, so we're, we're continuing to make some, some foundational investment in our technology to improve. But after that, it's gonna be a, a matter of simplifying how we actually address customer needs. And, and this will be all blend together within our, our, our strategic review, our strategic plan. So, so more to come in, in the spring there.
Okay. Okay. And then lastly, I just wanted to also get back to the guidance for the PCL, specifically for next quarter, high teens, low twenties. Is it something that we see in the watch list or is this kind of related more to a performing reserve build in Q2? Just any color on that would be helpful.
Sure, Darko. Liam, Liam Mason on that. Just maybe take you back a little bit and talk about the history we've done with regard to ACLs. If you recall, post-COVID, we've been systematically building our reserves based on the forward expectation on our performing portfolio. When we can—we have continued to systematically build against performing, to position ourselves for the macroeconomic conditions. So I would say it's both in the performing as well as within the watchlist portfolio. And we're very disciplined in terms of how we set individual reserves on the watchlist, and the workouts. The broad industry has seen some pressures within real estate, as we've articulated and as other players have. But we're very disciplined within our reserves, both with regard to performing and specific watchlist files.
Okay, thanks very much for that.
Thank you. Next question will be from Doug Young at Desjardins. Please go ahead.
Hi, good morning. Just hopefully a few quicker clarifications. Just back to the dealer inventory financing. I mean, you say utilization is 50%, probably goes down the next few quarters before coming back up in the fall. Yeah, I guess where I'm trying to understand is where does that 50% go in Q2, Q3? And then sequentially, what does that do to your loan book in terms of total dollar loans? I'm just trying to understand how much more contraction in the next few quarters we could see.
Yeah, Doug, Eric there. Just in terms of utilization, what we expect this summer is, consumer will still be prudent in their approach in the market. So as you know, the various products that we serve in various industries are quite seasonal. So we should expect a small reduction still in the utilization, but to what extent will really depend on the macroeconomic in terms of inflation and the behaviors of the policy in terms of interest rates. So we have a prudent consumer out there. So we would expect small reduction, but to which extent, it's too early in the season right now to guide towards that.
In terms of the impact, in terms of dollar amount on the loan book, are you also adding like, is there offsets here, so utilization on your existing goes down? Are you adding new portfolios or new dealers in here, that, that would potentially be a bit of an offset? Or is this a status quo, like you're not doing that type of expansion right now?
Yeah, Doug, it's an excellent question. Actually, we've been indicating that we are in a pursuit of diversifying the overall portfolio in terms of industry mix. So the team has made efforts to grow in the ag, construction, technology, which are less seasonal and can also provide great diversification. And I'm glad to say that the team with his efforts was able to grow dealer base just over 400 dealers, about 8% year-over-year. So yes, we continue to see organic growth in our dealer base, and that will definitely create more momentum in organic growth, diversified dealer for the future.
Okay, and then just, maybe just back to credit. I apologize again if I missed this, but on the performing loan bill, that was all credit migration, in the commercial book. Was there model updates? Was there anything else that's underneath the hood there?
Thank you, Doug. It's Liam again. No, no model updates. I know some of our competitors did mention that. We are very disciplined in terms of how we set our macroeconomic conditions and for the forecast. We benchmark those to the industry and also to the Bank of Canada. So what's really driving it is migration and the forward view on the macroeconomic conditions.
Okay. And then just on expenses, lastly, did I hear it right? You know, essentially excluding restructuring charges and so adjusted the adjusted expense base, the anticipation is that it will be relatively flat in Q versus Q1. Did I, did I get that messaging correct?
Yeah, you did, Doug.
Okay. Okay. Thank you.
Thank you.
Next question will be from Stephen Boland at Raymond James. Please go ahead.
Oh, thanks. Just, the first question, actually, Éric, was, just on you had talked before moving into different verticals in the inventory finance, and you've added these dealers, in those different verticals. I'm wondering if you've gotten the same type of protection or covenants that you have in the, the, the traditional, silo that you've been in, and, you know, in terms of guarantees, in terms of, you know, actual credit protection. Just wondering if there's any changes, in that?
Yeah, Stephen, it's a great question there, and the approach is always the same in our operating model. So we always start with the OEM, trying to secure, and we have 95%-96% of OEM repurchase in place, whatever the industry we're chasing. And after that, it goes down to financing the asset at the whole sale price, getting PG and dealer guarantees for the overall line utilization, and all linked, of course, to that repurchase to the OEM. So yes, we maintain the same discipline approach, whatever type of industry we're chasing.
There hasn't been any pushback from the OEMs or at the dealer level in terms of some of these covenants, or is it just that's the way it, that's the way it is if they want access to your financing?
Well, well, for us, this is, this is the disciplined approach we gave ourself, and then, and we, we remain, true to it, and, that's what, that's what we believe allows, good companies to go through cycles. So we are, we're quite consistent in our approach, so that's, t hat's the way we do business. Yeah.
Okay. And my second question, I apologize if this is obvious. I'm not sure, Yvan, you mentioned this, but just in terms of you've given some guidance. I think last quarter you talked about the loan book being stable throughout 2024, meaning year-over-year. First, was that correct? And has that changed now? Like, you know, obviously a big reduction in Q1, but is it still expected to be stable for throughout at the end of 2024 over 2023?
Stephen, I don't recall having said that it would be stable 2024 versus 2023. I think I usually guide to a quarter at a time. What we expect for the next quarter is probably a slight reduction of the loan book due to the fact that, you know, we remain prudent and our customers remain impacted by the current economic environment. And we mentioned, you know, on the inventory side, they're being prudent with restocking inventory. And on the commercial real estate side, we see promoters are delaying some projects, waiting or expecting reduction of rates. So that is expected to impact slightly the next quarter. Not in a material way, but just a slight reduction.
Okay. Thanks for clarifying that for me. Thanks.
Thank you, Stephen.
Thank you. That's all the time we have for questions. I would now like to turn the meeting over to Éric.
Thank you for joining the call today. As we head into Q2, our focus remains on our three strategic priority: customer focus, simplification, and strategic investments to improve our technology infrastructure. We continue to work to revamp our strategic plan and look forward to having more to say later this year, including further details about our upcoming investor events. Thank you.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.