Key question for first-timers. Just, I was hoping you could start by talking about your background, and how that positions you well to lead Laurentian Bank at this key juncture, given its position in the market now. And obviously, we'll go into the strategic plan that you unveiled, but maybe you give us a little bit of a background.
Yeah, for sure. So, hi, everyone. Thank you for being here. I've been in the industry for 25 years now. Prior to joining Laurentian Bank, I spent 12 years doing specialty finance and been at the bank for the last 12 years. 11 of those running commercial banking. Very proud of what we set up in terms of the group there, the teams, and almost a year now as CEO. And as you said, last May, we unveiled our new strategic plan, and looking forward to give you more details around that.
We'll get into some of the challenges Laurentian is facing and how you hope to solve those challenges. But maybe if you could just talk about some of the key strengths of the bank as you see it now. Maybe keep that front and center before we talk about some of the more challenging aspects of the business.
Yeah. Well, we have the great opportunity to lead a 178-year institution. Like, Quebec-based, we have a 57 branch network out there, very strong core retail customer that has shown great stability, even though last year, as we know, was a challenging year for us. The other big strength I did mention is that in the last 10 years, we really built an amazing commercial banking in really niche, specialized industries. And I think that the third one I'd say is our team members. Like, the people that surround me at the leadership team, as well as in the various specialized teams we have out there, do an amazing job and have the right talent to actually help us execute on this plan.
And so, you know, maybe we should dive right into the strategic plan, the refreshed strategic plan that you unveiled a few months ago in the spring, early summer. Maybe first, to kind of get us thinking in terms of where we've come from, you know, your plan comes after some false starts, if we call it that. And so where did the old plan fall short in your view? And sort of what were you solving for from that perspective, coming in and having to refresh on a strategic plan that was in the midst of being executed on?
Yeah, and then not solely the previous one. I think that the last two plans didn't quite deliver the expected results. And I think, if I have to point out one element, it's the fact that both of those plans tried to make Laurentian Bank copy the D-SIB models. Really tried to be everything to everyone out there, which, for a bank of our size, our regional footprint in Quebec, didn't quite well deliver on expectations there. I think we were spread too thin in too many areas, and this is what this plan is addressing.
Okay, so maybe you know, let's go into it in... On a high level, it's really two components here in terms of the commercial side of the business and the personal side of the business. So maybe you can provide us with sort of high-level key points in terms of the, the strategic plan on both sides of those businesses.
Yeah, and what we said is that we would double down and push, invest our resources into our strength, and commercial banking has been our strength. Like, we've been able to go from CAD 6 billion of assets up to CAD 18 billion in 2023, in very specialized niches. Like, commercial real estate, one of them, that we operate across Canada. Very specialized team that, again, deliver value because we focus a big portion of what we do into the construction aspect of commercial real estate, mostly in residential. After that, we have a great franchise in inventory financing. People maybe don't know, but Laurentian Bank, through its subsidiary, so Northpoint Commercial Finance, a business we've acquired in 2017, operates and serve over 6,000 dealers across North America.
We also have a specialized group that does equipment financing, which is a business we actually acquired from CIT Canada in 2016, but we doubled in the last seven years. These definitely are areas we believe not only we can keep on growing within their current state, but, like, we can expand in those ecosystems because our teams know the business. We don't compete on price. We're comfortable of how we underwrite those deals, definitely a lot of potential there. I'll be happy to touch on the headwinds we've been facing in those two sectors mostly later on. For sure, in terms of commercial, it is an area of focus for us to deliver real profitable growth in the future.
In terms of the retail, I did open up with that in terms of saying that we need to stop being everything to everyone. I think that we started delivering on that in terms of simplifying our bank and making sure that our resources are allocated in the right areas. As we announced, like, we successfully divested from our full retail brokerage division, part of our capital market. We also announced early August that we concluded a deal with CI Financial to divest our discount brokerage. The goal in the plan is to really narrow down our product shelf into our retail business, but to keep that footprint and to leverage the opportunity we have to gather retail deposit and to be an important component of our overall funding mix.
Again, with the goal to fund our commercial business lines.
Just thinking about the plan in total, I mean, it definitely strikes me that, you know, the more challenging aspect of this plan really is on the retail side. And you know, from that perspective, well, I'm wondering if you would push back on that at all. It seems pretty self-evident, but I'm just curious if you agree with that.
Yeah, I think the biggest challenge of the plan is execution, and then for most of the businesses, this is what needs to be taught and sequenced to make sure that we deliver on what we said we would, but coming back to our retail personal banking, one thing to note is that our core deposits in retail has remained stable through a challenging year, so we stand at CAD 7.5 billion right now, but in the last five years, that core deposit grew from CAD 7 billion to CAD 7.5 billion, so the actual state of our personal retail with our footprint we have in Quebec is providing for opportunities to maximize the current customer base we have. The challenging part, and where we need to focus on investment, is related to our digital path.
We still don't have the right tools, the simple tools that would offer a self-serve digital solution to acquire new customers, and again, not to go outside of our core region right now, where we benefit from a name that is known, and I think we can maximize, so this is a big portion of the execution, is to work on the foundation of technology, to position this bank not for the next few quarters, but really years ahead in terms of providing the right product shelf for middle-class customers that would benefit from competition versus what the D-SIBs are actually offering out there, in terms of day-to-day banking services.
One question on the retail trends that you're seeing, and you highlighted the stability of the deposit base through, you know, a challenging period. And I think when you talk about that, it definitely strikes me as being not understood from the get-go. Meaning, I think it's kind of remarkable to have that stability through a very challenging period like you experienced. So the question becomes, to what do you ascribe that to? How do you explain that stability? Doesn't seem so obvious why that would have remained so stable through this period.
If you go back to the challenges, one of them was an outage we experienced, and that outage lasted about four days. Really, in terms of some applications of our retail banking, weren't available to our customers for that extended period, which of course is unacceptable, and we came out very strongly to say that. It comes back to the people aspect that I mentioned at the beginning, that our frontline folks have such deep relations with the core primary customers we have in our retail banking, that customer understood that this was an IT situation. I think I was very transparent out there, saying that it was human error that we learned from the outage.
But we took the right steps to stabilize and to make sure that this was understood, and that at the end of the day, we're in the people business, and I think our advisors and our frontline did an amazing job, and they are a big, big factor in that stabilized portfolio of ours in retail.
You talked about getting out of the full-service broker channel, discount broker channel. Can you explain why you decided to divest from both?
Yeah, for sure. It's again aligned with the plan, simplifying the bank, but making sure that we focus where we can win and where we have scale. Coming back on the two transactions, in terms of the full brokerage service, we had CAD 2 billion of assets under management for 27 advisors. Definitely not the scale you want there to generate earnings. Don't forget, like, those require investment in technology to stay up to date, compliance requirements, back office. For us, we didn't see in the timeframe of our plan, which is three to five years, how we would scale that business to a level that would make it accretive to the bank. Same thing for discount.
Like, discount brokerage, like, just over 2,000 customers for CAD 250 million of assets, that is what I would call distraction for us, and what we intend to do is to focus our people and our resources where it's gonna generate some real impactful earnings for our organization, and those two didn't quite fit those criteria.
Are there other businesses that would fit that criteria, that there are also potentially up for divestiture, or is this it? Like, how should we think about it?
I have to say, if we come back to our expense level right now at 73.3 efficiency, there's more work to be done. And then when I took the role, I really committed to the fact that we would review all our product shelf, all our processes, as well as all the projects in the bank, to make sure that the ones we work on will achieve goals in terms of delivering the right level of return. But also in terms of simplifying, eliminating some manual processes out there that we have, and really address the fact that we've been structured, like I said, as copies of D-SIB, which is not for us the optimal state.
The team is assessing still opportunities for us to make plays where we cannot scale or cannot create those efficiencies.
And so you've been very clear in terms of the need to invest in the plan, and I think we saw that come through in Q3, and the guidance going forward suggested, you know, higher efficiency ratio, and that makes sense. But can you just talk more about sort of the key investment priorities, especially in the short term? How would you rank the investment priorities as you see them?
Yeah. Short term will be to address, like, those simplification needs, as well as reducing manual processes. We still have too many distribution channels for the various product shelves that we have. So, we have two broker channels for mortgages, three channels for deposits. So on the short term, what the team is assessing is how we can simplify our technology stack, decommission some of those systems, so that we start creating those efficiencies. But again, I think that on the midterm period, it is the foundation we need to address.
We need to complete that digital path that will make us a relevant competitor in offering simple banking products for the middle class, and this is what we're assessing at the moment in terms of optionalities to position us with the right partner to do so.
When you talk about having too many distribution channels, I mean, sitting here, it sounds simple to just fix that problem, but I imagine it's more complex. Maybe you can give us a little bit of insight in terms of what's really behind in terms of the plumbing or sort of what is making this more challenging than it would seem on the surface?
Yeah, I think it relates again to technology and how you address your technology stack as a whole. Like, sometimes those distribution channels were built upon different systems, different teams, in different groups. So it's the addressing actually how we do things, and we need to rethink our ways of doing business. And we have to do it in a way that will make us relevant to the customers and bring value to the table. Because if we just compete on commodity, like, D-SIBs are, in my mind, always gonna win. So our people make a difference. We need to be simple and efficient, providing the products to the customers.
You talked about the systems outage. How does that influence how you think about tech investments, maybe broader? You know, what lessons do you draw from that experience?
The outage we talked about, I think that it's not from the outage. I think that the learnings are in terms of technology, you need to invest for the long and sustainable future. I think that we closed gaps in the last plan that were needed, like, we needed to address those, but not enough was done on the foundational to allow us to leap forward. I think that this is where the game changer for us is gonna come in terms of providing a true digital path to address our needs in terms of personal banking and also keep our edge in terms of our commercial specialties. Like it's a mix of investments, so it's not solely focused on the personal banking side.
Like, there are some needs to make sure that we keep our edge in our specialty groups.
And then maybe kind of question to capital. You ended Q3 with a CET1 of 10.9%, up 50 basis points quarter over quarter, but that was really helped by 4% sequential reduction in RWAs. So, you know, it's a benefit but of RWA contraction, but that's not sort of steady state that you want in a bank. So the question really becomes, as you look forward in terms of your growth plans, significant investments needed, do you have the ability to generate the organic capital that you need in order to fund all of your plans? Right now, the capital position looks very, very strong, but how does that evolve over time, and do you have what you need?
Yeah, I think we're in a strong position in terms of capital. As you know, commercial banking as a whole has more RWA associated with, so we need to make sure that we're prudent and have the right stack of capital to do so. But right now, how we see it is definitely we are well-equipped to face 2025 and the start of this plan with the capital levels we have. And also what I did mention in terms of potential growth or maximizing our commercial niche or operations. There's a lot of this we intend to fund ourselves, but some areas and some additional paths we could take could actually be very appealing to partners.
What I mean by that, if I focus on just inventory financing, in that North American play, there are partners out there that might be interested in a different risk profile of customers. That for us, in terms of maintaining that disciplined approach, in terms of credit underwriting, maybe doesn't fit our appetite, but could be actually managed by us to other partners. Others can go deeper in terms of their pricing grids, and we don't play on price. We wanna keep that risk-reward equation, so we think we have into the mix of funding ourselves, as well as maximizing the capabilities that we have in that particular business, a lot of opportunities in front of us during that plan, so.
One question that's capital-related that came up on the call, and I, I think it's important to, to address it again, is just the, the fact that you have a discounted DRIP in place. And so how do you reconcile that with the strong capital position that we just talked about? And give you an opportunity to-
Yeah.
... to talk about that.
It's a great question, and again, for us, it's been minimal, so last time we closed the DRIP, what we realized, since our stock is heavily retail traded, is that DRIP participation, when we reinitiated the DRIP, didn't get as much traction, so right now we're tracking about 12% participation, and it equates to about a basis point or just over a basis point per quarter, so for us, it's just a decision of not closing it, reopening it, and don't forget, like, right now we're running at low historical utilization of our line of credit in our inventory finance group.
Expecting this to pick up again means that we will be able to redeploy that capital later on in 2025, we expect. So we believe that just for the one basis point per quarter, we thought better to just leave it this way for the time being.
Wanted to talk about credit. A topic on the Q3 call. Beat expectations, but impaired provisions continued to move higher. Obviously, the offset was on the performing side. The real question is: What gives you confidence in the guidance that you provided in terms of, you know, a PCL ratio staying within the historic range? Maybe the key point here is, you know, within the context of we're still seeing rising impairments, so what gives you confidence that despite the rising impairments, that you're still gonna be within the historic range on a PCL, total PCL ratio?
Yeah, it's a great question. And for us, the gross unparalleled volatility is really linked to a few files, chunkier files, or so bigger size, that actually moved to the Stage 3. But for us, not a concern in terms of driving more PCLs. Like, we've guided high- teens, low 20s PCLs, for the upcoming quarter, very comfortable about that guidance. You have to look at both buckets in perspective. Running at 18 basis points PCL right now, if you compare to the D-SIB average, they're running about 41. So on our side, we've always taken a very prudent approach in underwriting. 93% of what we do at the bank, in terms of the lending side, is collateralized.
We are very comfortable about those accounts that move to impaired, that we have the right level of collateral to back us up. They are within special loans, within resolutions, so that's why we maintain that PCL guidance out there.
I wanted to talk about your U.S. business and just take a deeper dive into that business. I mean, one of the pushbacks here over the years has been that it's a riskier business and you know, when the economy turns will lead to bigger losses. You know, I don't think that's really proven itself out, but. But maybe you could just address, sort of, just talk in broad terms about what you're doing in the U.S. and how you view the risk profile in your U.S. business.
Yeah, again, 95% of what we do in the U.S. is inventory financing. And in our investor deck, we have more detail about that. But definitely, the way we approach that market contains many layers of securities. Like, we start originating at the OEM level, which means that we go to the OEM, we're gonna set up a repurchase agreement with those OEM. And after that, once that program is in place, we get access to their dealer network, the distribution network, and this is where we have warm calls and be able to embark those dealership into our profile.
But once we do so, we do finance the product, so whatever marine, so boats, RVs, trailers, manufactured house, and we finance those at the wholesale price, meaning that we already have a discount, like, versus market price in terms of our financing if we are to take the asset back and liquidate. But the way the ecosystem works is that once you got the OEM repurchase for some amount of the assets that you finance through the dealer, well, the level of collaboration when a dealer comes into the stress is way higher. And this is what we've saw. So it's a business that generate very healthy accretive margins with very low write-off profile.
And then we've experienced it lately with the spike in interest rate, putting pressure, of course, on the dealers in terms of supporting that floor with the higher interest rates. And even though we saw some dealers having some more trouble in some areas, OEM were always eager to step in to make sure that there are LT resolution. And on top of having the asset, having some repurchase agreement in place with the OEMs, we have security on the dealership, we have personal guarantees of the dealer. So the way we structure our approach there makes us very comfortable in terms of the risk we're taking. And don't forget, like I said, like, we service over 6,000 dealers, so we're highly diversified geographically.
Average ticket size is 800K, so it's a very good business, and we really like that specialty business.
U.S. is about 21% of your commercial loans. Is there a scope for it to go much higher? I mean, you're talking about a business that you like. You like the risk profile, successful. Is there room to push higher? Are there related businesses in the U.S. that would fit well with that profile?
Yeah, so two things there. Like, the 21% is also a consequence that we saw a decline in terms of our commercial real estate portfolio within the year. So those are solely Canadian assets. So don't have a real mixed target in terms of U.S. versus Canada. I think it aligns more with how specialized we are and the opportunity we see to grow. To answer your second question, like, 5% of what we have in the U.S. is equipment finance-related. And one thing that complements the inventory financing on the commercial side is the leasing aspect of it. So you can go, again, on the commercial front, address the OEM needs, service their dealer distribution, and after that, with our leasing arm, we could actually capture the business on the end users in terms of the commercial.
So this is an area where I could see a better alignment, stronger fit, and to push the strategy even further in terms of opportunities for us in the future.
Wanted to talk about... We talked about the credit profile of this business, but in terms of volumes and what you're seeing in terms of utilization in particular, if you could just give us a sense of, you know, it's gone through, y ou know, we've gone through a pandemic period, post-pandemic period, lots of change impacting volumes in this business. Give us a flavor for sort of what we've seen and where we are now in that evolution.
For sure. So, pandemic, a big outflow of those assets because strong demand, so we had low utilization, historical low at the time. Supply chain came back, pandemic ended, and then we saw normalization. So, again, I think that there's a capacity of absorption in the market in general of those types of goods. So, right now where we are is that in the interest rate hikes that we've experienced, for sure, in terms of some types of assets there, dealers didn't feel quite as aggressive in terms of restocking the last fall season. And this summer period, actually, consumers were present, dealers were actually able to turn more inventory than they guided us, which is healthy.
Like, it's good for the overall portfolio. It's good for the dealer base and their financial health. So right now we're running at the end of Q3 at around 43% utilization, when in normal historical years we'd be running high 40s, low 50s in terms of utilization. So there's definitely some room there to catch up in terms of asset levels. But again, like, still uncertainty in the market in terms of how fast the Fed's gonna reduce the rates in the U.S., the election that is upcoming. So we expect the dealers to stay cautious in their restocking season towards 2025. But again, it's gonna be very dependent again on the speed of actions that the Fed could implement out there. So more to see. I think we're gonna still see some conservatism.
Conservativism.
That's it. Sorry for the English, but-
Yeah.
... through the beginning of 2025.
Got it. And then maybe just to conclude, a nice way to wrap up, just in terms of key takeaways here for investors, and we'll end with that.
Yeah. Well, thank you for the opportunity. The goal is to build a simpler bank, to make sure that we're more focused, that we maximize our strength. We have great business lines, we have great people. I just think that it's a question of of stopping trying to be everything to everyone and really aim at our specialized focus and come back to our roots in terms of our personal banking sector. So, we've built momentum, we started execution. We're very early in the plan. We unleashed the plan end of May, so more to come there, but very optimistic I have the right team to help us execute on this plan.
Thank you so much, Eric. I'll say thank you to you-
Thank you.
... and then I'll call up my colleague, Phil, for the last session of the afternoon.
Merci.
Merci.
Thank you.