Bank quarterly financial results call. Please note that this call is being recorded. I would now like to turn the meeting over to Raphaël Ambeault, Head Investor Relations. Please go ahead, Raphaël.
Bonjour à tous. Good morning, and thank you for joining us for the Laurentian Bank 2024 second quarter result presentation. My name is Raphaël Ambeault, and I'm Head Investor Relations. Today's opening remarks will be delivered by Éric Provost, President and CEO, and the review of the second quarter financial result will be presented by Yvan Deschamps, Executive Vice President and CFO, after which we'll invite questions from the phone. Also joining us from the question period is Liam Mason, Executive Vice President and CRO. 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 2 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 will now turn the call over to Éric.
Merci beaucoup, Raphaël. Bonjour et bienvenue à notre appel conférence pour les résultats du deuxième trimestre. Good morning, and thank you for joining us. Later today, we'll be unveiling our revamped strategic plan, where we will outline our path forward. But first, I want to start by thanking our employees for their ongoing resilience and commitment to serving our customers and shaping the future of the bank. Today's plan will provide a strong direction forward, with a focus on all of us relentlessly executing against the new plan. In our new strategy, commercial banking will remain our growth engine, we will reduce complexity in personal banking, and capital markets will support our customers across the bank. I would also like to thank our customers. We are taking steps to build an even stronger bank with a greater focus on the customer experience.
Before discussing the second quarter results, I'd like to address two recent announcements. In April, Kelsey Gunderson made the decision to leave the bank to focus on personal interests prior to establishing the next phase in his professional journey. I would like to sincerely thank Kelsey for his contributions to the bank over the last five years, including navigating our capital market business through multiple periods of market volatility. This month, we've announced the forthcoming retirement of Liam Mason, Executive Vice President and Chief Risk Officer. Liam has been an invaluable asset to the bank since 2018, significantly shaping our risk-aware culture and driving sustained business success. Under Liam's guidance, the team excelled in credit origination, displaying strong education practices, prudent loss reserving, and effective credit portfolio management. Liam will remain with us until the end of the fiscal year to ensure a seamless transition with his identified successor.
I personally extend my heartfelt thanks to Liam for his numerous contributions and unwavering dedication. I wish him all the best as he pursues his personal interests in the future. As for our second quarter results, they were aligned with previous quarter on an adjusted basis. Loan volume continued to be impacted by macroeconomic conditions, and as a result, we managed deposits accordingly. Commercial loans have decreased slightly, mostly from our commercial real estate portfolio. We remain disciplined, but still enjoy a strong pipeline, which will support the expected rebound in growth once rate reductions occur. As for inventory financing, dealers and manufacturers continue to exercise caution, given the current macroeconomic environment. This quarter, utilization was 49%, below historical average. Going forward, we expect the utilization to follow standard seasonality and reduce during Q3 before rebounding in the final quarter of the year.
However, we do expect it to remain below historical levels. Expenses remain elevated as we continue to enhance our technology and digital capabilities, along with other strategic initiatives. Coupled with lower revenue, our adjusted efficiency ratio was 73, 73.8% this quarter. Our revamped strategic plan will address the actions we plan to take and will outline the medium-term targets. NIM remained stable at 1.8% sequentially, and our CT1 capital ratio was up twenty basis points to 10.4%, mostly due to the reduction in loan volumes. Finally, we maintain a prudent and disciplined approach to credit, with PCLs materially lower than the big six banks. This quarter, we focused on simplification, and I would like to share some details regarding our adjusting items. After careful consideration, we decided to suspend the AIRB project to prioritize investing in strategic initiatives.
This project was not due to be delivered before a few years, but we need to focus and prioritize to deliver on our strategic plan objectives to be outlined later today. The unused assets in development stood at CAD 23 million and were written off. This decision and other factors triggered an impairment test and resulted in an impairment charge of CAD 156 million on the personal and commercial banking segment, including mostly goodwill elimination and intangible reductions. Furthermore, we have decided to rightsize our footprint at the 199 Bay Street corporate office. This decision was driven by our hybrid work model and low occupancy rate at less than 20% on average. Our corporate employees in Ontario have the ability to work from home or our Toronto and Burlington offices. This last October, we have had to make difficult decisions regarding workforce reductions.
Considering the actions taken, we have now decreased our workforce by close to 4%. We have also continued to streamline and simplify our capital market business, including the upcoming sale of assets under administration of our full-service brokerage business to Industrielle Alliance Private Wealth. This transaction supports our strategic focus on simplification and concentrating on areas of business where we can win and be more competitive. In line with this approach, we also announced that we have discontinued our institutional equity research. Altogether, including the Q3 items, these initiatives amount to charges of CAD 161 million after taxes, with an impact on regulatory capital of 10 basis points, and are aligned with our goals and strategic roadmap.
The estimated annual savings are expected to be about CAD 20 million, a portion of which will be reinvested to improve our profitability on a sustainable basis in the medium term. We will provide more color as part of the unveiling of our plan this afternoon. These actions demonstrate our conviction and ability to execute on our strategic plan. We will concentrate on core strengths, execute with precision, foster accountability, and seek partnerships to expedite our progress. We will provide more comprehensive details later today, and we hope you will all be able to join us. Before I conclude my opening remarks, I would like to congratulate Raphaël on his new appointment and thank Andrew Chornenky, who is leaving the bank to continue his professional career in the financial service sector.
Over the last few years, Andrew has played a key advisory role in all external actions that the bank has taken and ensured a smooth transition. We wish him all the best in his future endeavors. I would now like to turn the call over to Yvan to review our financial performance.
Merci, Éric, et bonjour à tous. I would like to begin by turning to slide 8, which highlights the bank's financial performance for the second quarter. Total revenue was CAD 253 million, down 2% compared to last year and last quarter. On a reported basis, net income and diluted EPS were negative CAD 117.5 million and negative CAD 2.71, respectively. As Éric mentioned, we've recorded adjusting items for the quarter, which totaled CAD 158 million after tax, or CAD 3.61 per share, and include P&C Banking segment impairment charges of CAD 126 million after tax. Restructuring and other impairment charges of CAD 30 million after tax, and amortization of acquisition-related intangible assets of CAD 2 million after tax.
Additional details are available on slide 22 and in the second quarter report to shareholders. The remainder of my comments will be on an adjusted basis. Diluted EPS of CAD 0.90 was down year-over-year and quarter-over-quarter by 22% and 1%, respectively. Net income of CAD 40.5 million was down 22% compared to last year and 8% compared to last quarter. The bank's efficiency ratio increased by 410 basis points compared to last year and by 80 basis points sequentially. This uptick reflects our ongoing investments in strategic priorities and lower loan volumes. Our ROE for the quarter stood at 6.1%. Slide 9 shows net interest income down by CAD 4.6 million, or 2% year-over-year, mainly due to lower loan volumes.
On a sequential basis, net interest income was down by CAD 5.6 million, or 3%, mainly reflecting the negative impact of two less days in the quarters. Our net interest margin was stable year-over-year and sequentially at 1.80%. Slide 10 highlights the bank's funding position. Following a period of elevated liquidity, we have been gradually reducing our deposit bases, considering loan volume reductions and our previously stated objective of managing down our strong liquidity position. On a sequential basis, total funding was down CAD 300 million. Strategic partnership deposits decreased by CAD 400 million as customers continued to allocate funds back into market activity or term products... This was partly offset by a CAD 300 million increase in cost-efficient long-term debt related to securitization activities.
Bank maintained a healthy liquidity coverage ratio through the quarter, which remains materially above the industry average. Slide 11 presents other income, which was unchanged compared to last year. Higher income from financial instruments was offset by lower lending fees due to tempered commercial real estate activity. On a sequential basis, other income also remained stable. Higher income from financial instruments was offset by lower credit service revenues, which had seasonal high first quarter. Slide 12 shows adjusted non-interest expenses up by 4% compared to last year, mainly due to higher regulatory expenses and other costs related to various compliance projects, as well as higher expenses to support strategic priorities.
On a sequential basis, non-interest expenses were down 1%, mainly due to lower salaries and employee benefits from the 2 less days in the second quarter, partly offset by higher other non-interest expenses, as I just described. Turning to slide 13, our CT1 ratio was up 20 basis points to 10.4% due to a reduction in risk-weighted assets. The impairments and restructuring charges had an impact of 8 basis points on the bank's CT1 ratio in Q2. Slide 14 highlights our commercial loan portfolio, which was down about CAD 1.4 billion or 8% year-over-year, and down CAD 100 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 49%. This is lower than historical average, as dealers take a more conservative approach to inventory due to macroeconomic conditions. We expect utilization rates to follow the usual seasonality, which includes a reduction over the summer months before inventories begin to build in the fall. Our commercial real estate pipeline remains healthy, but we continue to see developers slow down the start of projects, awaiting expected rate reductions. As seen on slide 16, the majority of our portfolio is in multi-residential housing, and our exposure to the office segment remained at 3% of our commercial loan portfolio. As we've said over the past few quarters, the majority of the portfolio is in multi-tenanted properties, with limited exposure to single-tenanted buildings. Slide 17 presents the bank's residential mortgage portfolio.
Residential mortgage loans were up 2% year-over-year and slightly down by 1% 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 59% and low LTV of 50% on the uninsured portion. Allowances for credit losses on slide 18 totaled CAD 225 million, up CAD 13.6 million compared to last year, mainly due to higher provisions on commercial and personal loans due to credit migration, partly offset by write-offs. Turning to slide 19, the provision for credit losses was CAD 17.9 million, an increase of CAD 1.8 million from a year ago, reflecting credit migration in commercial loans with higher provisions on impaired loans and a release on performing loans.
Sequentially, PCLs were up CAD 1 million for the same reasons. As a percentage of average loans and acceptances, PCLs increased by 2 basis points, 20 basis points. Slide 20 provides an overview of impaired loans. On a year-over-year basis, gross impaired loans increased by CAD 119.5 million and were up CAD 59.1 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 Q3, I would like to note a few key points focused on the next quarter. We expect our loan book to reduce, mostly due to the seasonal reduction in inventory financing in the summer months. This will partly offset some of the increase in NII due to the additional number of days.
NIM is expected to remain relatively stable, potentially slightly down, due to the expected inventory financing volume reduction. We are committed to reducing our efficiency ratio, and we'll share more details with you this afternoon as part of our revamped strategic plan. For the third quarter, we expect a slight reduction of our efficiency ratio based on a portion of the cost reductions linked to the impairment and restructuring charges outlined previously. These savings will be partly offset as we reinvest to support our strategic plan. Given the macroeconomic environment, PCLs are expected to remain in the low twenties. Capital and liquidity levels are solid and expected to remain strong for Q3. As a reminder, an LRCN interest payment is due next quarter, which has an impact of CAD 0.06 on our EPS. We'll now turn the call back to the operator.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your touch tone phone. You will hear 3-tone prompt acknowledging your request, and your questions will be queued in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Meny Grauman with Scotiabank. Your line is now open.
Hi, good morning. Thanks for taking my questions. I wanted to start off by just talking about, or asking about, the goodwill and intangible charge in the P&C banking business. If you could give us a little bit more color in terms of why you decided to take those charges this quarter. What's really driving those charges, which really are the bulk of the charges that you're taking?
Yeah, thank you, Manny. This is Yvan. I'll give a bit more color. So there is a few items. Every time you have material changes in the business, and currently we have the new strategic plan we're going to discuss this afternoon. We decide to suspend the AIRB, and there's a few other elements, like having the stock price being about 45% of the book value. So all those elements led to an impairment testing, and as part of that, there is a general reduction of the value in terms of the bank. And then how it works technically from an impairment perspective is that you start first by reducing the goodwill you have left on your balance sheet.
So we took CAD 84 million down, so we're pretty much, now we have eliminated the goodwill, and then the rest of the charges are attributed to the intangible mostly, and a little bit in premises and equipment. You should not see that goodwill and intangibles being anywhere specific to anything. It's really just the result of the impairment test, and that's technically how it's applied in the business.
Okay. Thanks for that. And then, I just wanted to ask about, in terms of the, the fee income, financial, income and financial instruments. We've seen two quarters in a row now of strength there. Just wanted to better understand, you know, what's going through that line and, and is that sustainable at these levels here?
Yeah, thank you for your question. So definitely, we have a good quarter in terms of income from financial instruments. So the markets have been better, as you know, for the last two quarters or so. So we had a good performance this quarter. Thank you for the team for making that happen. We do believe that it's sustainable, but obviously this is all related to the markets and the mood. And currently, you know, we can sustain that level, but must admit that this quarter was extremely strong.
Thank you for that.
Your next question comes from Gabriel Dechaine with National Bank. Your line is now open.
Good morning. First question is on the credit. Just the increase in impaired loans on a sequential basis. Can you, sorry if I missed it in your disclosures, but was that transportation related? Because everybody's getting into, you know, some issues there or some other sector.
Thank you, Gabriel. Good morning. It's Liam. I'm very happy actually, with where we are on the GILs. It is not transportation related. There's no specific sector. It's
Okay.
- across our book. Just a couple of notes. Our PCLs are running half the industry.
Yep.
Overall, if you look at our GILs for the last 12 months, they're in line with the broader industry as a whole. So we're very comfortable with our current portfolio.
Yeah, no, fair enough. I'm just asking what industry? So you're saying multiple industries or, how many, how many-
Across the book, but coming from commercial, as Yvan outlined.
How many files, like?
It's a few files. I mean, remember, Gabriel, 95% of our loans are collateralized, so when you see a notional increase for Laurentian, it's not the same as looking at the other banks.
I know, I know. I just wanna educate myself here. Then on the expense side of things, I saw the, you know, there's a mention of a CAD 7 million dollar figure, and that's included in your, your core expenses, if you will, associated with regulatory and compliance costs. I'm wondering if this was something embedded in your run rate before, you're just highlighting it, or if it's something new and it's tied to the IT issues maybe last September. Maybe you can shed some light on that, please.
Yeah, thank you, Gabriel. This is Yvan. So no, this has nothing to do with the outage or the IT issues we had last fall. In fact, yeah, there is some of that that relates to supporting strategic priorities. But as we mentioned, there is increased regulatory expenses and compliance projects right now. You can, you know, just to name a few, you can think about B- 10, 13, 15, 20, and I can keep going because there's a lot of those, including stuff in Quebec in the federal budget as well. So we just want to make sure that we invest and that we're good on the compliance side. So there's definitely a burden of that, and you should expect that we need to invest for the next few quarters as well, related to those elements.
Is it like a catch up or, you know, how would you describe it? Because it doesn't sound normal. Would it have been a smaller number last year, and you're just being more proactive and accelerating that type of investment, or?
Yeah, in fact, many of the elements I just mentioned were new over the last 12 months, so definitely there's a timing aspect of ramping up those projects. So definitely that's the key driver. There's, you know, nothing special in those outside the fact that there is a lot of regulatory changes, and we just need to make sure we're on top of it.
Gabriel-
Yep.
It's Éric, it's Éric, if I may, like, this afternoon, you're gonna hear me repeat, and talk about investing into our foundational technology.
Mm-hmm.
Like, this is gonna be core for us to make sure that we simplify our technology stack and have better ability to address those changes, more efficiently in a future state. So, we'll provide more details this afternoon, but all relates back to how we are structured in terms of our technology stack.
It's not fun stuff to spend on, but you know, investors don't want underinvestment in that, so I'm sure it's good. My last question is on the dividend. This is a pretty pivotal quarter for you. You know, big big transformation for the company. You know, under what conditions would you revisit the dividend. Your capital position's fine, 10% plus on a standardized basis. You know, but you know, the internal capital generation might be weaker because of investments, because of loan growth declining. You know, so there's a perhaps a need for you know, capital build to you know, invest in you know, the future direction of the bank.
What conditions would need to be present for you to, you know, take another look at the dividend and maybe, you know, alter it?
In fact, Gabriel, if you take a look, the dividend quarter, the dividend decision is taken every quarter, so we always look at what the payout ratio of the bank. Currently, it's higher than where we'd like it to be, especially in a context where we have an impairment charge in the quarter.
Mm-hmm.
But if you look at the capital of the bank, as you mentioned, we're really well positioned at 10.4. If you look at standardized, in fact, it's gonna be one of the, of the slides this afternoon, so I'm giving you that in advance, but you're gonna see that we're well-placed there versus the rest of the industry on apples-to-apples basis. But we do expect that as rates go down, we're gonna see a catch-up and a rebound in our volumes as well. So overall, right now, if you look on an adjusted basis, we're at 52% payout ratio. It's slightly higher than where we would like to be.
Mm-hmm.
That's why the board decided to stay at 47%.
Yep.
This afternoon, you're gonna hear a lot about execution, efficiency ratio that we need to improve. We have a plan to increase the profitability of this bank, and that's gonna support the dividend going forward.
All right, great. Thank you. Have a good day... Well, I guess we'll talk later today.
Thanks again, Gabriel.
Your next question comes from Sohrab Movahedi with BMO Capital Markets. Your line is now open.
Thank you. Yvan, can I just follow up on Gabe's? When do you think you will probably do dividend increases again? Are you moving to some sort of an annual cycle?
We don't necessarily have a cycle, Sohrab. We really look on a quarterly basis. We've, over the last few years, increased every six months. Right now, the payout ratio is relatively high in the context of the charge. As mentioned, we just decided to hold on this. So if there is no specific dates of increasing the dividend, we're gonna take it quarter by quarter. And as I mentioned, we're looking to increase profitability, but in the short term, we'll discuss this afternoon, but we have to invest if we want to make sure that there is a sustainable increase of profitability. So we're gonna be careful with the dividend for sure.
Okay. If I can just clarify a few other comments that you made. I think you said you expect PCLs to remain in and around, I think, current levels. I think you said low 20 basis point range. I mean, obviously that is, that's a ratio, and it's unclear, I think, where utilization rates are gonna be. Can you give that PCL guidance more in dollar terms?
In dollar terms, in fact, if you look at this quarter, we have CAD 17.9 million. It is 20 bps, so it shouldn't be that far from that level. We're just, you know, being careful of not guiding too low for the next quarter because we see the industry, there's been some credit migration. So we believe that the level where we are is probably close to what we should expect next quarter.
Okay. Yvan, you had also mentioned some savings, and I think you mentioned the twenty—I think you said CAD 20 million dollars of savings. Was that an annual number or is that a per quarter?
I would like it to be on a quarter, but that's on an annual basis, Sohrab. So, what we announced in Q2 and what I, when I described, in fact, your CAD 20 million is accurate for the next 12 months. But it does include some restructuring and severances that we have in Q3. So we outlined, I don't recall which slide of the presentation, but you're gonna see there's CAD 7 million of additional severances in Q3 for what we actioned in May. But if I include the annual savings of that restructuring, so Q2 and Q3, what we've done to this point is about CAD 20 million of annual savings. Unfortunately, from a savings perspective, a big portion of the impairment relates to elements that were not depreciated, like goodwill or ARRV impairment.
The CAD 23 million was just an asset that was sitting and not depreciated. So it's in fact CAD 20 million on about 40% of that impairment charge, because about 55%-60% of it didn't have any expense, like goodwill being the main one.
... So, I mean, Éric talked about, you know, taking a hard look at the foundational tech stack. Is CAD 20 million enough, Éric, to kind of get you to the upgrade you need, or will you have to spend more than these savings?
Well, thank you, Sohrab, for asking. We'll go in better clarification, I believe, this afternoon. But for sure, like, we already have a pace in terms of investing in our technology. So, what we're gonna be saying is we're gonna accelerate this pace, and part of this CAD 20 million is a portion, but also we will keep on simplifying and taking the right decision to simplify even further the organization. So hopefully generating more savings and position us better on a profitability standpoint.
Okay, one last question from me. Yvan, can you just remind me what the goodwill that you wrote off was associated with?
Yeah. I'll start by saying, Sohrab, you should not necessarily see this as an impairment of that specific goodwill. Again, it's applied to the goodwill of the bank overall, no matter what it was coming from. But the goodwill that was left on the balance sheet came from the equipment and inventory financing acquisition that we had done in 2016 and 2017. So it was on the commercial side. But again, this has nothing to do with the value of the commercial strength and the value of the business, which is, you know, the biggest strength probably we have at this bank.
I'm sorry, I haven't looked at it, but you're saying that you don't have any more goodwill left on the balance sheet. Is that correct?
Exactly. The first thing you do with an impairment, which impact, the whole bank, is to eliminate the goodwill first, and that's what we've done. So we're left with no goodwill.
Okay, thank you very much for taking my questions.
Thank you, Saurabh.
Thank you, Saurabh.
Your next question comes from Paul Holden with CIBC. Your line is now open.
Thank you. Good morning. First question is with respect to the inventory finance business, and not so much from a credit perspective, because I understand the layers, the multiple layers of protection you have from credit. But just want to know the health of those dealers you're dealing with, and that's more of a, you know, do you get a full recovery and loan growth when rates actually do come down? You know, reading a number of things that dealers are struggling because demand is low. So just wondering how you're viewing the health of the sort of the customers you have across that platform.
Yeah. Thank you, Paul, for the question. It's Éric. Well, we're very comfortable actually with the current behavior of our dealer base. Of course, the market has normalized, and then, for sure, it's a softer market in terms of consumer demand, but this is why our dealer base have been prudent in terms of restocking their inventory during the fall and the winter season. So, right now, line utilization stand at 49%, when actually, historically, at the end of Q2, those lines should be higher 50s. So, our dealer are behaving as we would expect in terms of being more cautious, not restocking too much. And right now they are turning some products, so we'll see during the season.
But we expect those level of assets to act as they did last season and continue to reduce, and should expect a bounce back in Q4. But again, not back to historical. Like, until we see interest rate easing in the U.S., we believe that the dealer will keep a prudent approach towards rebuilding their inventory.
Okay, so I think that's clear. When we do see lower rates in the US, whenever that's gonna be, you would expect a full recovery in those, in those lines, because the dealers are gonna be, they're healthy enough, they're gonna last through the sort of this soft patch, if you will.
Yes, and then we've always kept a prudent approach in terms of how we underwrite risk, how we structure our credit appetite during those, those, around those dealers, and like, we, we haven't changed our approach. So, so we keep that prudent pace, and, we keep growing our dealer base, and we'll be ready, for the rebound to actually, increase those, those assets level.
Got it. Okay, that's great. And then, I guess sort of similar line of questioning on the retail lending portfolio. I mean, some modest upticks in PCLs and impairments there, but wondering what kind of insights you can give us into how you feel about the health of the Canadian consumer. Like, big, big topic of discussion, I think for obvious reasons. So any data points and observations you can provide there would be helpful.
Thank you, Paul. It's William. Our client base is, you know, we have seen some uptick in terms of delinquency being on the margin. But for our portfolio, we're really well positioned. I think Yvan went through the mortgage portfolio in terms of the 59% insured, low loans to value. Even our old portfolio, which is near prime, is behaving very well. And on some of our other key assets, like investment loans, we're seeing with the uptick in the markets, good performance there. So for us and our customer base, although there are broader pressures in the economy from an interest rate perspective, our portfolio is holding up really well.
Okay, great. And then, last one from me on the multi-residential loans. You know, it seemed to me like there's a good level of support and demand there, and seeing some peers putting up very healthy growth numbers. Just wondering if there's different, some difference in the composition of your portfolio there, or basically trying to get it to, like, why, why, why aren't we seeing better growth in multi-residential loans, given the broader growth in that, in that category?
Yeah, thank you, Paul. It's Éric again for the question. Our commercial real estate portfolio, year-over-year, has actually decreased by 8%. And then, this is explained in larger parts, because we have a specialty that tackles construction in terms of a mix of that real estate portfolio. And actually, the mix between our tier one developers that actually are waiting for needs an interest rate to relaunch new projects, and the fact that we've been paid out in terms of construction projects that have completed in that multi-residential housing segment. But usually, like, in terms of the economics for us to take to take those stabilized assets into our balance sheet, like, don't quite make sense on the economic standpoint.
For us, it's just to feel well positioned out there with the team. We believe that once we see that ease in terms of interest rate, we're gonna see those housing projects start back again at a better pace. The team is positioned to keep onboarding those at the construction level.
Okay. Okay. Again, helpful. All right, thanks for the time, and I will see you later today.
Thank you, Paul. See you.
Your next question comes from Doug Young, with Desjardins Capital Markets. Your line is now open.
Hi, good morning. Just maybe continuing with that, you know, I think we've heard this from a lot of financial institutions, that, you know, there needs to be an ease in interest rates. And so I, I'm curious, when you think of the multi-residential properties or your dealer network and dealer loan book, you know, what level of ease really is gonna have an impact on the growth? Is, is 25 basis points, 50 basis points, or, or does it need to be more drastic?
It's a great question, Doug. Éric again. You know, we believe that it's gonna build momentum as soon as we start seeing some easing, because I believe that's gonna send a signal in Canada, I'm talking about, in terms of to the consumers. It's gonna provide more clarity in terms of the directional, of those interest rates. So, so we believe that with the shortage we're experiencing across Canada in terms of housing supply, this could be the start of a signal for our developers to relaunch projects, and again, to have a better sense of the economics and the type of profitability they can generate launching those projects.
So again, not clear in terms of how quickly the relaunch will occur and how deep of a cost reduction we need to get to, to actually go back to a very sustained level. But for sure, like, just an ease will provide some positive inflow to that sector.
Okay. And then just a few other ones. You know, going back to just these, hopefully are relatively quick, but, the income from financial instruments, like, what, what runs through that? Is that just interest income on your liquidity block? Like, what's actually in that line? Because you talked about the market impacting that. Just specifically, what market?
It's, in fact, composed of two elements, so pretty much the trading aspect to it, and also the return you get on that portfolio. It's mostly composed of, you know, fixed income elements, as is aligned with our capital markets business. So this quarter is really a good quarter from that, and we expect that if the market sustain, we're going to continue doing good. Maybe not at the same level, because again, Q2 was exceptional. But we have a great team that is driving those revenues, and we would expect under good market conditions to continue.
Is it half and half, trading and interest income, or is it two-thirds, one-third? Just trying to get a sense.
In fact, it's gonna depend on a quarterly basis, so it depends how is the market, if we do more trading versus conditions in the market. So I don't want to necessarily pinpoint the percentage, because that may evolve, depending on the quarters.
Okay. And then back to credit, I'm just trying to understand the release in performing loan allowances, and it's mostly commercial, you know, and this is despite the uptick in impairments in commercial. And I think on the commercial book, your PCL rate in the quarter is 35 basis points, and that was 24 in 2023. So we're definitely seeing an acceleration there. So I'm just trying to understand the release in commercial as it relates to the uptick in the impairments.
Yeah. A couple of things. Net, net, obviously, we've got migration to the positive, write-offs and cleanups of some files in commercial. We've been very pleased with our workout results for that in terms of recoveries. But the improvements and release was really within the personal book, as we've seen investment loan products and investment markets improve slightly, and that's given us a better position with regard to ACL on the investment loans.
Have you made big changes to your FLIs or to your weightings in the sector in the different categories, or is it just a natural evolution of the models going, like, punching one quarter forward? Just any other detail you can provide?
Yeah, no, it's a good question, and I just wanna remind everyone that we have been very disciplined over the past few years in terms of maintaining and building our reserves. We never, you know, a few years ago, and I've spoken this in the past, we didn't release. We've maintained it. We have a consistent and prudent reserving standard. We haven't changed those. And I'm really pleased with where we are, because over the past year, while our ACLs were up 11%, the industry was up three times that. And that reflects that our PCLs run about half the industry and the overall strength in our underwriting and credit standards, as Éric alluded to earlier.
Okay. Just last, yeah, going back to the write-offs on the balance sheet. I think there's another CAD 186 million of software and other intangibles. There's another almost CAD 87 million in premises and equipment. What do those, you know, relate to? And then, obviously, you went through a full impairment test, so I don't imagine those get written down next quarter. But, you know, is it at risk if things don't unfold as your plan, as you planned, that there is additional risk to some of these asset classes to be written down? Just hoping to get some color.
Yeah, the first, the first element, I think it's a, it's a good question for clarification for everybody. So first, an impairment testing is usually done to validate the value of goodwill on the balance sheet, so we won't have any goodwill anymore. So then it's gonna become, you know, an assessment of each specific elements. But what you find in those, intangibles on the balance sheet are mostly composed of two elements: IT investments that we've been doing in our systems, which are systems we use, so as long as we use those systems, we're gonna keep them on the balance sheet. And there is also customer relationships through the acquisitions that we've done, and those are in solid businesses as well. But overall, it's mostly related to IT development and investments in our system going forward. So again, it should be relative.
You should not expect a big variation or impairment charges going forward, unless there's specific projects on one of... But I don't have any right now, but there's no big other charges that should be coming.
I appreciate it. Thank you.
Thank you, Doug.
Your next question comes from Lemar Persaud with Cormark. Your line is now open.
Yeah, thank you for taking my questions. I won't ask about specific details about the restructuring, since I'm sure you'll talk about it at the Investor Day. But just on that, can you talk about the potential for additional restructuring charges? I did see that you're calling out some additional severance in Q3, but I'm just wondering if this is the first of many, or if this is a one and done type of situation. Anything you could do to help me think through that?
Thanks for the question. I'll skip the impairment portion or specific charges. We have some-
Mm-hmm
... severance charges in Q2. We have some, we have some in Q3 as well that comes from reduction of workforce we've done in May as well, so we outlined that in the presentation. We're gonna continue to evolve and transform that business with an intent to make it more efficient overall. That's gonna be a big theme that we're gonna discuss this afternoon. So there may be some others that are gonna come, but if they come, they're gonna come with improvements overall on a sustainable basis for the bank.
Anything on the potential magnitude? Like, should we expect, like -- or is this, like, the, the, the initial one that we-- you've taken this quarter, so the, the, the CAD 40 million is, like, the big chunk, and then we could go back to more kind of what we've, we've historically seen at, at Laurentian, where they're kind of like, you know, six... I think you had CAD 6 million in Q1. So this is, like, the, the primary big one and then smaller charges. Is that, is that a fair, fair way to think about it, if there are more?
I think it's a fair way of saying that, because as I mentioned, most of it should be related to potential small charges we may incur, but, definitely nothing in the quantum that you've seen this quarter.
Okay, great. That's helpful. Thanks. And then my next question, I just want to go to your slide 11 here. There's some weakness outside of the income from financial instruments. So just looking at the list here, card services, fees on investment in accounts, insurance and other. Can you help me think through about what's driving some of these, these other kind of broader base weakness across these other lines? And, you know, 'cause if we see some normalization in the, income from financial instruments, then these ones will start to matter a little bit more, as we look forward. So can you talk to me, like, is there, like, any reason to expect that some of these line items have kind of run rated lower? Maybe that's the best way to ask it.
Yeah, thanks, and happy you asked the question. I can provide a few details. So if I look quarter-over-quarter, definitely income from financial instruments has been the big gainer versus Q1. On the other side, you mentioned the card services. The card services is, in fact, seasonal, because, as you know, Q1 includes Christmas and all of that-
Mm-hmm
... so that's pretty big season. So that's, there's a seasonal impact in those, revenues. And lending fees is lower as well, and that goes with what Éric described a few minutes ago, with the slowdown of the, developers in commercial real estate are waiting, you know, rates to come back, to, to slow down, sorry, to reduce. So technically, lending fees is a question of timing. The cards is a question of seasonality. So technically, I'm not already concerned. The key point going forward is that we-
... you should expect a CAD 20 million yearly reduction, so CAD 5 million per quarter related to the business that we've been selling to Industrial Alliance. So you're gonna see CAD 5 million reduction starting in Q4. We expect that transaction to close in the first days of August.
And where does that reduction go through?
That one would be in the fees and securities brokerage commissions.
Okay, 'cause like the card services revenues, I appreciate the seasonality, but it's still down 11% year-over-year. Then also these fees and investment accounts, specifically down 15% and insurance down 13%. Like, so even if I look at the year-over-year, some of these are still weak. Maybe I'll follow up offline on that one.
Yep, happy to do so.
Okay. And then, you know, final one for me. I think the message is that, you know, when you look at the bank right now, if it's 10.4% CET1 ratio, you're still well positioned from a capital perspective to pursue organic growth. And if we see rate cuts coming, you can capitalize there and still execute on this strategic refresh. Like, this 10.4, I think the message is that that's a sufficiently strong CET1 ratio. So we shouldn't look at the pause on dividends to preserve capital so that you can continue to grow the business. It's more linked to the elevated payout ratio. Is that a fair statement and fair characterization?
Yeah, I think your questions include pretty much all the elements I would have given, so I think it's a fair assessment.
Okay, thanks for the time. I appreciate it.
Thank you, Lemar.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Stephen Boland with Raymond James. Your line is now open.
Thanks. So you went through a number of the business lines on the commercial side, maybe just construction and land. That portfolio continues to decline, so I'm just wondering if it's the environment, your appetite, or competition?
Yeah, thank you, Stephen. It's really the environment as a whole, because the pace we're getting repaid in terms of completing projects versus the new one being launched is unequal. So right now, our tier one developers are awaiting an ease in terms of interest rate level to launch those new projects. And we believe we're very well positioned to capture on that rebound and catch that momentum. So the team is ready for that. So land and construction are definitely core for us to continue and grow into future development. And we're just awaiting a better macroeconomic environment to do so.
Okay, great. More just a question on agenda, just for the Investor Day at 1:00 P.M. Should we expect a press release before that, a new deck, or is that all gonna be provided at 1:00 P.M.? I'm just trying to see if there's gonna be more disclosure ahead of that.
Yeah. Oh, no, no. Sorry for that. So it's Éric. Yeah, you're gonna get a press release and a deck, prior to just 1:00, before we start our Investor Day.
Okay. Thanks very much, guys.
Thank you.
Thank you. That's all the time we have for questions. I would now like to turn the meeting over to Eric.
All right. Thank you for being with us on this call today. We're focused and determined to execute our strategic plan. We're fully aware of our opportunities, and the challenges we face only reinforce the determination of our institution. We will continue to build a robust organization, prioritizing simplicity and delivering enhanced value to all stakeholders. We hope you'll be able to join us on our Investor Day presentation via webcast at 1:00 P.M. today. If you aren't already, you can register on our website under the Investor Relations section.