Welcome to the Laurentian Bank Q uarterly 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.
[Foreign language] . Good morning, and thank you for joining us to the Laurentian Bank 2024 third quarter results presentation. My name is Raphaël Ambeault, and I'm Head of Investor Relations. Today's opening remarks will be delivered by Éric Provost, President and CEO, and the review of the third quarter financial results will be presented by Yvan Deschamps, Executive Vice President and CFO, after which we'll invite questions from the phone. Also joining us for the question period is Christian De Broux, 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 two of the presentation. I would also like to remind listeners that the bank assesses its performance on a reported and adjusted basis and considered 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.
[Foreign language]. Good morning, and thank you for joining us. Since the introduction of our strategic plan in May, we have remained focused on implementation and execution in order to achieve the results and targets we've set for ourselves. To that effect, I want to extend my thanks to all our team members for their commitment towards the plan. Let me walk you through what we've accomplished so far. In Capital Markets, we successfully completed the divestiture of LBS Retail full-service brokerage to iA Private Wealth that we announced in April. In addition, earlier this month, we announced the sale of LBS Discount Brokerage to CI Investment Services.
We are focusing on where we have expertise, scale, and where we can win, and both of these transactions are directly aligned with these objectives. In Personal Banking, we created a new position, Head of Customer Experience. This role will improve and enhance the customer experience and brings our employees and decision-making closer to the customer. In Commercial Banking, the seasonality impact in Inventory Financing was strong, bringing the utilization ratio to 43%, about 10% below historical levels. The lower utilization rate are proof of our dealers' ability to turn their inventory as well as their prudence in restocking. Furthermore, our sales team kept their momentum in increasing our footprint, reaching 440 new onboarded dealers year- over- year, representing an increase of 7%. As for Commercial Real Estate, we're still observing low levels of new projects being launched.
Our pipeline remains healthy, with insured multi-residential projects, particularly strong. Our teams are well positioned for the rebound, which remains dependent on the pace and level of interest rate reductions in Canada and United States. Concerning the leadership team, following the announcement of Liam Mason's upcoming retirement at the end of the fiscal year, we're thrilled to welcome back Christian De Broux to Laurentian Bank as our new Chief Risk Officer. Christian, which used to be Laurentian Bank Chief Credit Officer, returns to us after having spent over four years at a global specialty finance company. He brings over more than 30 years of experience in a variety of risk oversight, management, and banking roles. We're delighted to have him on board and look forward to leveraging his deep credit knowledge and extensive expertise in risk management.
With respect to earnings, our third quarter results were relatively consistent with the previous quarter on an adjusted basis. As mentioned earlier, we continued to face headwinds in loan volumes, which decreased by CAD 1.2 billion last quarter. With regards to deposits, they are being effectively managed in alignment with our loan and securitization activities. Despite challenging macroeconomic conditions, our portfolio remains robust, robust. Our conservative underwriting standards, as well as the quality and high level of collateral, are contributing to a relatively stable level of loan losses. As such, provision for credit losses was down two basis points quarter- over- quarter, now standing at 18 basis points. Expenses remain elevated at, as we invest in technology and other strategic priorities to support a stronger foundation and our path to improved digital capabilities, as laid out in the Investor Day in May.
Despite this, our adjusted efficiency ratio for the quarter improved to 73.3%, a 50 basis point reduction from the previous quarter. Regarding capital, our Common Equity Tier 1 ratio increased to 10.9% from 10.4% last quarter, reflecting the reduction in loan volumes. We are well positioned to redeploy capital later in 2025 when loan growth resumes, fueled by the expected additional rate reductions. I would 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 seven, which highlights the bank's financial performance for the third quarter. Total revenue was CAD 257 million, down 2% compared to last year and up 2% quarter- over- quarter. On a reported basis, net income and diluted EPS were CAD 34.1 million and CAD 0.67, respectively. We've recorded adjusting items for the quarter, which totaled CAD 8.9 million after tax, or CAD 0.21 per share, and include restructuring and other impairment charges of CAD 6.7 million after tax related to the headcount reduction announced in May, and amortization of acquisition-related intangible assets of CAD 2.2 million after tax. Additional details are available on slide 21 and in the third quarter report to shareholders.
The remainder of my comments will be on an adjusted basis. Diluted EPS of CAD 0.88 decreased by 28% year- over- year, and 2% quarter- over- quarter. Please note that this quarter includes an LRCN interest payment, which had an impact of CAD 0.06 on the EPS. Net income of CAD 43.1 million was down by 25% compared to last year, and up 6% compared to last quarter. The bank's efficiency ratio increased by 480 basis points compared to last year, and decreased by 50 basis points sequentially. The increase year- over- year reflects our ongoing investments in strategic priorities and the impact of lower loan volumes. Our ROE for the quarter stood at 6.2%, up 10 basis points sequentially.
Slide eight shows net interest income down by CAD 11.4 million, or 6% year- over- year, mainly due to lower loan volume. On a sequential basis, net interest income was up by CAD 1.2 million, or 1%, mainly reflecting the positive impact of two additional days in the quarter, partly offset by lower loan volumes. Our net interest margin was down five basis points year-over-year and one basis point sequentially at 1.79%, impacted by lower commercial loan volumes. Slide nine highlights the bank's funding position. We are managing our funding in line with our loan book. On a sequential basis, total funding was down CAD 1 billion. Partnership deposits decreased by CAD 300 million as customers continued to allocate funds back into market activity.
Deposits sourced from advisors and brokers channel were managed down by CAD 500 million, and wholesale funding decreased by CAD 400 million, as we did not replace senior deposit notes on maturity, considering our liquidity position. The bank maintained a healthy liquidity coverage ratio through the quarter, which remains materially above the industry average. Slide 10 presents other income of CAD 75.7 million, which was higher by 10% compared to last year. Higher income from financial instruments, benefiting from constructive financial markets, was partly offset by lower lending fees due to tempered Commercial Real Estate activity. On a sequential basis, other income was higher by 4% for the same reasons.
Slide 11 shows adjusted non-interest expenses of CAD 188.1 million, up 5% compared to last year, mainly due to professional fees and other costs to support our strategic priorities, as well as our regulatory expenses and other costs related to various compliance projects. On sequential basis, non-interest expenses were up by 1%, mainly from higher technology costs. On slide 12, you'll see that our CET1 ratio has increased by 50 basis points to 10.9%, primarily due to a decrease in risk-weighted assets. We experienced strong and healthy seasonality during the summer for Inventory Financing and continued softness in real estate projects. We see these as temporary and are well positioned to redeploy capital later in 2025, as growth will resume based on time and speed of the expected rate reductions.
Slide 13 highlights our commercial loan portfolio, which was down CAD 1.3 billion, or 7% year-over-year, and down CAD 700 million on a sequential basis for the reasons I just mentioned. Slide 14 provides details of our Inventory Financing portfolio. This quarter, utilization rates were 43%, primarily due to dealers taking a more conservative approach to inventory restocking because of the macroeconomic conditions. The volume reductions in Q3 also showed consumer resilience in terms of purchasing power, despite the current macroeconomic uncertainty. Our Commercial Real Estate pipeline remains healthy, but we continue to see developers delaying the start of projects, awaiting further rate reductions. Slide 15 illustrates that most of our portfolio is focused on multi-residential housing, with our exposure to the office segment holding steady at 3% of our commercial loan portfolio.
As noted in previous quarters, the bulk of our portfolio consists of multi-tenant properties with minimal exposure to single-tenant buildings. Slide 16 presents the bank's residential mortgage portfolio. Residential mortgage loans were stable year-over-year and slightly down by 2% on a sequential basis. We adhere to cautious underwriting standards and are confident in the quality of our portfolio. This is reflected in our 58% proportion of insured mortgages and a low loan-to-value ratio of 48% on the uninsured portion. Allowances for credit losses on slide 17 totaled CAD 224 million, up CAD 7.1 million compared to last year, mainly due to higher allowances on impaired commercial loans. Turning to slide 18, provision for credit losses was CAD 16.3 million, an increase of CAD 3 million from a year ago, impacted by a credit migration on commercial loans.
Sequentially, PCLs were down CAD 1.6 million from higher releases and provisions and on performing loans. As a percentage of average loans and acceptances, PCL decreased by two basis points to 18 basis points. Slide 19 provides an overview of impaired loans. On a year-over-year basis, gross impaired loans increased by CAD 175.5 million due to credit migration and commercial loans, and were up CAD 74 million sequentially for the same reasons. Our underwriting discipline, including the quality and the high level of collateralization on our loan book at about 93%, allow us to weather the macroeconomic conditions and the related credit migration without material impacts on our ACL and PCL results. We remain committed to a prudent and disciplined approach to risk management.
As we look ahead to Q4, I would like to note a few key points focused on the next quarter. We expect our loan book to be just slightly down, putting pressure on NII. We expect growth to resume later in 2025 , with the pace and extent of the anticipated rate reductions. Other income will reduce next quarter due to two main factors. First, the closing of the sale of our retail full brokerage activities to iA on August second will negatively impact brokerage fee revenues by about CAD 4 million or CAD 5 million. Second, the income from financial instruments were at a record high in Q3 and may normalize. NIM is expected to remain relatively stable, but it will depend on the overall business mix.
Regarding the efficiency ratio, it is expected to be slightly up from Q3 due to revenue pressure just mentioned and the ongoing investments in our strategic priorities. Considering the macroeconomic environment, PCL are expected to remain in the high teens to low 20s. Capital and liquidity levels are solid and expected to remain strong for Q4. I will 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 touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled 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. Just wanted to ask about the timing of the rebound in loan growth that you see for 2025. Presumably, it takes time for activity to react to rate cuts, and it sounds like you don't believe that rate cuts have fallen enough yet to kind of stimulate the demand that you're forecasting. So just if you could help us narrow the focus in terms of timing in 2025. Is this more of a late 2025 story you're envisioning in terms of seeing loan growth come back here?
Yeah, thank you, Meny. It's Eric, and good morning to you, too. Yeah, this is pretty much what we expect. And again, like depending on both Canada and U.S. rates, the pace and scale of the reduction, it will depend. As you know, two of our key growth engines, so Commercial Real Estate here in Canada, we still have a healthy pipeline, most of it in multi-residential of unfunded.
But, we still see developers being on the sidelines, awaiting for those further rate cuts. So before those projects are launched, expected to impact our growth, probably later in 2025. As for Inventory Financing, as I mentioned in my opening remarks, dealers have actually been strong in sales this summer. And the good story there is that we've been able to increase our dealer base by 7% year-over-year. So sales team is working to expand those opportunity for future growth, but we're awaiting that easing in interest rate as well from the Fed. So that should have an impact, but dealers will remain cautious, we expect, in terms of restocking at this fall season.
What portfolios do you expect to be more sensitive to rates? Meaning, where do you expect to see the reaction first, and then what portfolios might lag?
Here, the demand is still very strong, Meny, in terms of housing across Canada. It's just the developers are waiting to make sure that the economics make sense for their projects in terms of returns, so I believe that if we do feel a pace of steady reduction, those developers are really waiting to launch new projects, so that could have impact. And again, like, consumer confidence in the U.S. has remained strong in terms of purchases throughout the summer, as we see in-line utilizations that are way below historical level at 42% for that period.
So, we believe that if we see an easing, it could be a good story there in terms of rebuilding inventory for the next season, but still to be dependent on the pace of the Fed reduction.
Understood. Thank you.
Welcome.
Your next question comes from Sohrab Movahedi with BMO Capital Markets. Your line is now open.
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 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.
Thank you, Sohrab. So I'll start, and maybe Christian's gonna have to the answer. So the 10.9%, as you mentioned, of CET1 this quarter, 50 basis point increase came from the loan volume reduction, so reduction in the RWA. And as Éric mentioned, we're awaiting the rate cuts, and we expect, you know, pump up demand in Inventory Financing area, including those that will come back and take some of that capital. So we're currently extremely well positioned from a capital perspective to sustain that, and sustain the plan that we're launching as well. From a credit perspective, our guidance has been clearly for the last two quarters, and it's still maintained at the same thing, low 20s to high teens. And we pretty much it's what we see for the next quarter or next two quarters.
So there's no indication at this point that we would see anything material that would divert from this. And maybe, Christian, if you wanna add to this.
Thank you, Yvan, and good morning. So what I would say is you have to understand that the increase in our impaired are coming from well-collateralized new formations in commercial. And there's a minimum bite size required to play in commercial markets, and this creates volatility in GILs. That being said, we have been and we continue to be disciplined in our underwriting, and that's why you're not seeing variations in the ACL or PCL. And like Yvan said, we are still comfortable with our guidance of high teens, low 20s for PCLs going forward. As to the forward view, on GILs, it's hard to predict in the short term, but longer term, with interest rate reductions forecasted, we're expecting our impaired loans to normalize.
Okay, so that's very helpful, Christian. I just wanna 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?
The other thing you have to remember, we're a collateral. You know, we focus strongly on having high collateral behind our loans. 93% of our book is collateralized. So, I think sometimes the surprise come from cash flow loans. That's not where we play, right? We play in collateralized loans, and so, not expecting to be surprised.
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?
It's well diversified, the new formations, right? It's not concentrated in, you know, geographically or by vintage or industry. It's well diversified across the portfolio, so it'll be a mix of all our business lines.
But can you comment on what sort of collateral is behind it, behind the facilities?
It'll be, you know, real estate, it'll be equipment, you know, that's basically what we're gonna have behind our underpinning our loans.
Okay. Thank you very much.
Your next question comes from Gabriel Dechaine with National Bank Financial. Your line is now open.
Hi, good morning. Thanks for all the Q4 guidance and the, you know, the longer-term guidance on loan growth. Just wanna, could you tell me about the income from financial instruments? You were clear there that it was unusually high this quarter. What was the, you know, what is that anyway?
Yeah, thank you, Gabriel. So I would say in line with a few of our peers, Capital Markets have been, or financial markets, I would say, have been constructive over the last few months, last few quarters. So what we see here is that we have good trading activities in our Capital Markets team, good fixed income and pref which is essentially the portfolios that we have to support our customers, have been gaining traction as the interest rates have reduced and the spreads as well. So good performance, strong team that generated great results this quarter.
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, you know, historical experience?
Yeah, with what we have right now, I would say last quarter was a good quarter at 15 this quarter. 19 is a record quarter for the results of this line. So going back to the 15, and if it's a worse quarter, it could be a bit lower than that, is a more normalized number.
Okay. And then, 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, you know, obviously things can happen at, you know, the very last day of the quarter, but, how do you see things shaping up based on what you know today?
What we see, as I mentioned, Gabriel, in my guidance, we see still the high teens to low 20s. So essentially a quarter-
Okay
That will look pretty much like Q2, Q3. We're still in the same ballpark with what we see at this.
Got it. Last one, just a clarification. You talked about the mortgage servicing business that you sold, that closed on August second, and you said CAD 4 million-CAD 5 million of revenue. Is that a quarter or a year?
Yeah. First, the business we sold is, brokers that were doing full brokerage services to our customers. You know, the brokers, when you buy bonds or stock market-
Oh, sorry, yeah. Yeah, yeah.
That's what we sold to iA. On a yearly basis, that business, including discount business that we announced that we're going to sell to CI, that's roughly about CAD 20 million a year, CAD 4 million to CAD 5 million a quarter, and most of that will be on the other income brokerage, fee revenues.
Got it. And what's the bottom line contribution from that business?
Yeah, the bottom line, that business, if we sold it, it's because it's not a space where we could win, so it wasn't making that much money. The impact short term is probably CAD 0.01 or so on the next quarter.
Got it. All right, well, thanks, and enjoy what's left of the summer.
Thank you.
Your next question comes from Nigel D'Souza with Veritas Investment Research. Your line is now open.
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 two commercial loans, so wondering if you could elaborate on, was that primarily migration out of stage two or changes to your model assumptions that led to those lower provisions?
Hi, Christian here. It's mainly migration from the performing to non-performing PCL bucket, but there's also a volume impact, obviously, on performing that's playing there. V olume represents somewhere around CAD 3 million for the quarter, so four basis points. So still keeping us in our guidance range.
T hen I guess the macroeconomic piece of this, you are seeing, you know, you cited weaker macroeconomic conditions currently. It's impacting your loan growth. How is that expected to feed into performing provisions going forward? And I ask that because, you know, if you look at your PCL ratio this quarter, the 20 basis points or so, you know, if you exclude the reversals on performing, it would be closer to 30 basis points. So just wondering how does performing provisions trend from here?
Overall, the PCL rate, you know, we're sticking to the guidance of eight, you know, high teens to low 20s. You'll see, you know, if the economic cycle when it turns, you'll see a little bit of performing PCLs come on board, and they'll be offset by lower PCLs on the non-performing. So, you know, very short term, hard to predict how that will play out, but longer terms, that's how we're seeing it.
Okay. I'll, I'll leave it there. Thank you.
Thank you, Nigel.
Your next question comes from Doug Young with Desjardins Capital Markets. Your line is now open.
Hi, good morning. Just going back to the CET1 ratio, and I kind of understand how it flexes with volume growth, and, you know, 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.
Yeah, thank you for the question. This is Yvan. So the DRIP, if I knock it directly, I would say it's a program that we try not to stop and start too often. So at this point, we just decide to play prudent. As we mentioned, we have pent-up demand that we expect is gonna come back. We need to support the plan that we're launching. So we're playing safe in terms of capital at this point, and that includes the DRIP of not trying to turn it on and off, you know, depending on a quarterly basis, what's happening.
How much would that add to the CET1 ratio per quarter, roughly? I can kind of roughly think. I'm just curious if you've got that handy.
Yeah, it's relatively small, Doug. It's a few basis points on a quarterly basis.
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, you know, the revenue outlook over the next year before we start to see a pivot in loan growth. You know, are expenses expected to remain around where we are today, or, you know, as you kind of peel off some of these businesses, you know, there's obviously some cost reduction there, or is there some other projects that are rolling off that, you know, you should get some efficiencies out of? Just trying to think of how to think of expenses and the expense ratio, you know, in what's otherwise gonna be like a flat loan growth, flat NIM environment.
Yeah. Thank you, Doug. It's Éric. For the line of sight we have in the upcoming quarters, expense levels should remain pretty much where they are right now, and this is due to the investment needed in our foundational technology. And those are the ones that will trigger and drive the most of the efficiency impact, so further down into the execution of the plan. Of course, the team is still working on opportunities, just like you saw in the divesting of the two capital market groups, in terms of brokerage. But for us, it's really to combine the efficiencies created by our projects, as well as opportunistically revisiting our cost structure.
To be expected, still high expenses with the investments we're making over the next few quarters.
So expense ratio is roughly around where we're seeing them today. That's kind of what we should be thinking?
Yeah. And then probably just a little bit more in Q4, just due to the fact of the pressure we just mentioned on top line from a revenue perspective. So, expect to still put pressure on the overall efficiency ratio.
Appreciate the color. Thank you.
Thank you.
Your next question comes from Paul Holden with CIBC. Your line is now open.
Thank you. Good morning. A question with respect to the retail bank. Like, when I look at deposit trends or, you know, the decline in deposits and then also the decline in, the relevant, loan categories, I can't help but wondering 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.
Thank you, Paul. This is Yvan. I'll take that one. You know, the retail and the deposits, so let's start by the deposit. Definitely a reduction in deposit this quarter, which is aligned, as we mentioned, with the loan. We try to manage those in line. But if you look at the retail deposits, which is really the key factor in terms of where our focus is in retail and where we track, you know, the inflows and outflows, we've been pretty much stable this year in terms of retail deposits. We grew those over the last few years, so we've been successful on that side. Down on the loan side, the margins currently or the market, I would say, even in mortgages and some other products, are impacted by the state of the market. So mortgages are more slow these days.
But we're really, really focusing on retail for the deposits, and we had good success in keeping and protecting those over the last many quarters.
Can you remind me, based on what you presented at the Investor Day, sort of when you might expect an inflection in, I 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 could become a 2025 story?
Hi, Paul, it's Éric. I think the 2026 guidance is the best horizon right now we're seeing in front of us. It does require the right level of investments into our foundation before we're able to actually launch and see real impact there. So, more to come on that front. But definitely, as Yvan said, making sure that we protect, that we grow our actual base is aligned also with the plan, and this is why we created a head of customer experience in retail. We're bringing back our employees and leaders closer to our retail customer base, and that, I hope, will feel also into the mix in the coming years.
Okay. Okay, thanks. L ast question, it kind of follows up on Doug's question regarding the DRIP, right? Like, when I look at the current valuation, still trading at, you know, less than half 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, you know, why shouldn't be buying back shares? I get it strategically, you want to grow in commercial loans, but, you know, the implied ROE, implied return of buying back stock today seems pretty compelling. So, you know, I think I've asked you this question before, but I'm going to ask it again. Like, why not go down that route?
Thank you, Paul. This is Yvan. It's going to be difficult for me to give you a different answer to this one, but if I look, for example, just to give you an example, Inventory Financing is at 43% right now. Normally, it should be at 50% for this. So just that volume, well, would represent something like 30-40 basis points, just to sustain. And I'm not talking about the potential seasonal increase during the winter season after they've restocked. Same thing on Commercial Real Estate. We say that we expect that market to resume as rates are going down. So again, we have open lines with the developers that are open, and we need to make sure that we're there.
So maybe you can argue that we're playing safe in the environment, but I don't want to be in a place where I have capital issues, and I would need to issue. Obviously, we're not there at all, but I don't want to play risky on the other side, and we're comfortable with where we are. We believe it's a good place to be to sustain the organic growth that's gonna come back with this business. And we're doing that because we also expect a good return from these investments in Inventory Financing, Commercial Real Estate or the rest of it.
So I guess I, I'll avoid repeating the same I mentioned to Doug for the rest of the answer, but definitely we don't want to turn on and off the DRIP, and the DRIP is relatively small in our capital, so it's not like it was a huge impact on a quarterly basis.
Okay. I'm sorry. I'm just gonna 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, you know, roughly a half book and with a 6.5% ROE, that tells me simply, you know, 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?
Yeah, Paul, it's Éric. I'm gonna take this one. I have to put emphasis on the fact that, like, the specialized niche we're in are delivering very healthy margins and return for our business. So that's the logic and rationale that Yvan just explained. We believe that being positioned, and then we are well positioned in terms of capital right now. We believe that redeploying that capital towards those specialty businesses will bring the return to reward the shareholders. So that's why we keep that position.
Okay. Okay, that's it for me. Thank you.
Thanks, Paul.
Next question comes from Stephen Boland with Raymond James. Your line is now open.
A couple quick questions. Maybe the first, there was something in your non-interest expense line that said your costs are up to because of higher regulatory expenses. Could you clarify what that means?
In fact, the line is, includes more items than that. What we said is-
Yeah
T hat the other non-interest expenses over the last year, because it's down quarter-over-quarter. But over the last year, it came from higher professional fees, which is pretty much half of it, and you can expect that it's related to the strategic projects we have. But our regulatory expenses are compliance projects. You can look in the environment right now, and it's just not us, right? It's the whole industry with B-10, B-13, B-15, B-20, and I can keep going. There's federal budget elements. There's changes in the Quebec language as well. There's a ton of elements that we want to make sure that we're compliant, and we're just staying at a good level in terms of our regulatory obligations. So definitely it does put pressure. We have to stay a good citizen, and that's what we're doing with those investments.
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, I mean, for rate cuts. Is that your anticipation that that is, you know, 25 basis points or 50 basis points? I mean, you're talking to these same developers, I presume, on a regular basis. Like, is it, you know, again, is it 50 basis points, is it a 100 basis points before they start moving on some of the, you know, some of the new projects? I'm just trying to get an idea of how sensitive that, you know, that portfolio is to, you know, minor moves in the rates.
Yeah, Stephen, it's Éric. I'll take this one. It's a great question. Like, I think that's right now what we're feeling and seeing in the market is definitely on the low rise, multi- res. There's definitely a start in momentum, and this is where our pipeline is the most active. Some townhouse projects, Alberta being strong, right now in terms of restart and launch of projects. But for sure, to see new condo projects being launched, like, is gonna take a deeper cut in terms of interest rate. Like, inventory levels are still pretty high in the various GTAs.
So again, depending on the product in that sense, different elasticity. So we feel good about the positioning of the team, but again, we'll have to wait and see how deep the rate cuts impact the return of the developers to the scale it was in the past.
Okay, that's helpful. And I'll sneak one more in. Just on the impairment charges, obviously, you sold off, you know, other businesses. Is it, you know, is this kind of the end of it now? I know you're looking to restart growth, but is there, you know, is there a possibility that other non-core businesses, you know, get, you know, sold off and there's further impairment charges or restructuring charges?
Yeah, thank you for your question. If you look at what we announced this quarter, the CAD 9 million, we gave you a preview at the end of May that we had done head count reductions in May. Most of it relate to that. Out of the CAD 9 million, there's CAD 1 million that relates to the sale that we've done to iA. There's gonna be an additional CAD 1 million you're gonna see in Q4 related to that sale, sorry. So those are an explanation of the numbers. In terms of going forward, we have an elevated efficiency ratio. We need to invest in the business, as we mentioned. We're looking at all parts of the business in terms of where can we improve. We may have to restructure some others.
If we see there is good return and good things for us to do, we may incur additional restructurings. In terms of things at this point and projects, cannot give you much more than that.
Okay. Thanks very much, guys.
Thank you.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Darko Mihelic with RBC Capital Markets. Your line is now open. Darko, your line is now open.
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 two. I'm gonna 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 108. 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 two, despite the migration out of stage two. 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 gonna have a higher, you know, 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.
Thank you, Darko. This is Christian. So, a few things I can say on that, and it's great questions. In our larger commercial files.
Our average ticket is about CAD 15 million, so just a few files can move the needle, either side every quarter. You know, the other thing, too, that I would point out to you is, you know, on our Watch List, it is trending down year to date, so it's confirming the quality of our portfolio, so we've seen some migration out of Watch List to impaired, but Watch List is not backfilling at this stage, so we feel pretty good about the state of the portfolio, and you know, again, we've been running at half the PCL level of other banks, and we're not seeing anything to change that, you know, going forward.
Okay. S o 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.
There are headwinds affecting all of commercial at this point. Like I indicated earlier, you know, the bite size required for us to play in these larger commercial files brings a certain volatility that can affect our impaired loans. That's what we're seeing now. We have to play through the cycle, and we're sticking with our PCL guidance, high teens, low twenties. You know, if there's one thing where I'm not worried, it's the credit book.
Okay. All right. Great. Thank you.
Thank you, Darko.
Thank you. That's all the time we have for questions. I would now like to turn the meeting over to Éric.
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