Thank you for joining us today, and I feel like the best question to start with is on your strategic journey. Obviously, it's been a bit more than a year now, but a lot of moving parts there. Maybe you could just provide some high-level thoughts to start with in terms of progress you've made and things that you're proud of and areas where you maybe feel there's a bit more work to be done.
Yeah. I appreciate having me here, Mike, and definitely thank you for attending. Very proud so far where we are, just above a year in the plan. So I think starting with a quick recap of what we stated last year would be helpful. But we definitely said that we needed to stop being everything to everyone and copying the big banks model. This is not where we're going to succeed. We don't have the scale and the size, actually, to do that, and we were unfocused. We're still too complex as an organization, and this is what me and the executive team have been working on real hard in the last year or so. I'm very proud of the progress we've made.
Starting very early, we divested some business lines that we didn't believe that could contribute to the shareholder value. So we exited the full retail brokerage.
We exited the discount brokerage as well. But I think one of the important moves we made last fall was to integrate our equipment finance group within our Northpoint Commercial Finance division, which is a leader in inventory financing throughout North America, and that integration plays into what we also said we would do is focus on our strength, and the strength of this organization, and as we defined it, is definitely towards being a more commercially focused, specialized organization, and that I'm very proud of the progress we've made.
You talked about things we still need to work upon. 2025 was a big year of investment in terms of the foundational technology, and 2026 will continue to be because we need, as I said, to streamline our distribution and make sure that we have the right digital offering for the various business lines we serve.
Okay. That's super helpful. And then just in terms of specialization, can you talk a bit about that value proposition, just from a practical sense? What does it mean when you say we're specialized? What is it that you do better without giving us too much detail from a competitive standpoint? But what does it ultimately mean in terms of the value that your customers get and why they want to bank with you in those specialized areas that you're focused on?
Yeah, that's a great question, and I truly believe in what we bring to the customer base in terms of value added by having experts in those lines of businesses that are fully dedicated, but also not solely from an origination standpoint. A lot of organizations that tag themselves as being experts in the field have salespeople that are dedicated to an industry, but once you start underwriting or you start in terms of credit adjudication, managing the accounts in terms of the portfolio, it comes in a blended way. On our side, it's truly dedicated teams, and that helps in terms of having a consistent approach in terms of how we go to business through the cycles, understanding the challenges of the entrepreneurs in those industries.
And one big example of that is our commercial real estate practice, where we decided to stop competing on price, where we have those stabilized type assets that everybody wants to go after with lower rates. We focus on the early stages. So land acquisition is a piece of the origination for our construction projects. And this is where expertise comes into play. This is where our operational capabilities come into play. And this is where we're able to sell value. And that's how we're going to drive the right returns for our shareholders. And we're doing it quite efficiently on the commercial front. Other specialties of ours are equipment financing, as I mentioned, year over year, 19% growth. Even with the uncertainties, volatilities we see in the market, that group experienced a nice uptick in terms of assets.
And again, it's because of our approach, and it's because of the dedication of the people we have in there. And that also to mention our inventory finance group, which for us is definitely a great contributor to current, but also future state of this organization.
And so you're sort of set on your specializations in terms of where you are now. Are you maybe looking to expand around the edges, or are you sort of set on this existing portfolio and running with that for the next couple of years?
Yeah, great question again. I think that by expansion, from our standpoint, we feel we're quite diversified in terms of the customer base we serve. Expansion for us means going after maybe other industries to maximize operational capabilities we have out there. Because we believe our Northpoint line of business has that operational capability to upscale and grow even more in different sectors. A tangible example of that is what we said in the last few quarters is that we were trying to find paths of expanding towards other industries.
So right now, we're big in marine. We're big in RV, trailers, powersports . We wanted to go into more diversified, less seasonal type assets, and also commercial-focused. And so we started originating in the construction sector and the ag sector. And just taking ag sector, that dealer base grew 60% last year.
So now we stand at 325 dealers across North America in agriculture. And we have quite good momentum in pursuing that growth potential in various industries.
Okay. Okay. Thanks for that thoughtful response. On inventory finance, just sticking to that, so what will move the needle the most in the next, say, couple of years? Is it the utilization rates because interest rates are dropping? Is it maybe the actual dealer network that you're using? Is it what you just talked about in terms of expanding the actual industries that you cover? And there's partnerships as well you've talked about in the past. There's a lot of moving parts there and a lot of potential catalysts. Which ones are you most excited about among those?
I'm going to state all of the above just for one reason, is that we truly believe in the capabilities of this platform, the returns that are quite good, the low risks we saw throughout the years and through the cycle. The portfolio has been quite resilient. But as you describe, right now, we're servicing 6,500 dealers across North America.
Highly diversified, average financing CAD 800,000 per dealership. So we feel our risk is well positioned there. We believe that that recipe can apply to various industries. And this opens up for great opportunities. And why we believe that the risk level is quite good versus the return is that we always start a vast majority of our approach towards the manufacturers. So it doesn't start with us originating with the dealerships. We go to the manufacturer.
And their testimonial of our growth path is that last year, so year over year, we've experienced a growth of 5.7% of our manufacturer relationship. So now we stand at servicing 718 OEMs here. And once we penetrate those OEMs, this is where we get access to their dealer base, how they distribute products. It allows the team to actually reach out, build up on these opportunities. And this is where we can increase our line of credits. Now, you mentioned the utilization.
Right now, we believe we're running at a low historical level at 41%. We have CAD 10 billion of approved lines of business through our dealers. And the absorption of the post-COVID of the overall products, combined with a potential reduction in the interest rate in the U.S., could actually reposition consumer confidence, but most importantly, allow our dealership to go back closer to historical levels.
We should be running higher 40s in terms of utilization. This is a 20% uptick versus where we are right now on very LT-profitable assets. We're quite happy about this business line. You talked about partnership. We're always open to accelerate the path forward to specialization. We're having various conversations to do so. We're going to land a right agreement for our future state. We can be patient.
And just out of all those catalysts, which one is the most powerful? Is it just the.
Organic growth. How the team is deployed right now can sustain organic growth in various industries, for sure. A reduction in interest rates would be a trigger to rebuilding that inventory level to a faster pace.
Okay. Thanks for that. Maybe switching to personal banking. Obviously, the specialization in commercial is the big focus. But maybe talk about you obviously have other business lines that you're still operating and you care about. So how do you move the needle now on personal banking on that side of the business and some of those monoline relationships on the mortgage side? How do you sort of monetize that and make that a bit more profitable for your shareholders?
Yeah. There's a couple of angles there. We were quite transparent, Mike, at the investor day in terms of highlighting the gaps between how efficient we're running commercial versus how inefficient retail banking is for us. And this is what we need to solve for. And this is what the team is focused on solving for. But I'll start by reducing complexity. But for sure, I think the team out there has done an amazing job. Because if you recall, two years ago, we experienced quite an outage in our retail banking sector. We had to rebuild trust. We had to stabilize our base of customers. And I believe that by refocusing and prioritizing towards our key customers, the team out there was able to do so. Now, we still have some optimization to do.
In terms of square footage of our retail branches, some efforts will continue to be done there. But most importantly, in terms of our distribution channels, we're still too complex. Various channels to originate the same type of products, too many products on the shelf. And this is where we're going to start creating efficiency by focusing on the fundamentals of our technology, exiting the on-prem type technology, moving to more cloud-based application, and making sure that we reduce manual processes and that we improve our way to do business on the retail side, but also making sure that we do it through enhanced customer experience.
Okay. A couple of follow-ups on your comments on the retail banking side. So on the branch optimization, how difficult is it to reduce square footage? Does it come with upfront costs? You have to break leases. Does it get a bit messy, or is it pretty simple?
No, we're doing it in an orderly fashion. And as I mentioned, since 2018, what you need to remember is that what we call a branch is actually an office with an ATM. We don't have cash. We don't have transactional. These are cashless types of offices. So one thing we're doing, and it's sequentially, but as soon as the lease expires, we reevaluate the relevance of the footprint and also the size of that branch/office, making sure that it's more accurate to the needs of our customer needs at the end of the day, meeting a financial advisor via appointment. So that's most of it. Yeah.
And then in terms of just that duplication and different channels, that operational side, that's, I'm guessing, still another little bit to go, maybe another year or so.
Definitely, and that was a core of what we highlighted in terms of complexity and the need to invest. To be able to streamline towards a single point of distribution and reduce complexity, we needed to refocus our foundation in terms of technology, and after that, being able to migrate towards a better state and to accelerate that deployment of new functionalities, this is where we are considering partnerships or other avenues to help us not do it all by ourselves. Because as you know, technology can be quite expensive, so we're trying to get the best mix out of it.
What's your view on technology and the spending required in a digitization of the retail business predominantly? It's mostly retail as opposed to the specialized commercial stuff. How do you sort of look at? I know there's been a lot of good content you've provided on partnerships and that potential. But just high level, does it ultimately get sort of figured out in the next certain period of time? Is it like a 12- to 18-month period? I'm not trying to pin you on a timeline.
No, no. There's no quick fix. So it's quite complex, as always. We need to be mindful of the solutions we're going to pick or the partners we're going to pick. So we're doing it sequentially to make sure that we don't break anything. But we make sure that we have a path forward that makes sense from a return on investment perspective. Because as we said, this can be quite expensive. So what we guided for in 2025 is that we would have high expense levels due to the OPEX. 2026 will be the same in terms of guidance, still pressure on the expense side.
And this is driven a lot by the fact that moving from on-prem to cloud-based technology is actually heavier on the OPEX side. So we have longer-term benefits because you don't have the amortization. You need to take the spending upfront.
But you benefit from the upgrades. You benefit from better functionalities, we believe. So again, I think we have the right team in place. But it's still going to take some time to execute properly.
Okay. So thinking longer term, once you're fully optimized, at what point do you get confident that the efficiency ratio can start to improve? And what's the pathway there? And sorry if it's a tough question to answer. I know there's still a lot of stuff you're doing in the background to get to that optimization level. But once you get there, do you then care a lot more about the efficiency ratio in terms of where it stands?
We do. Midterm, we committed to a 10% plus ROE and a 60% below efficiency ratio. And this is what we're aiming for. Again, midterm for us, at the beginning of the plan, we presented a horizon of three to five years. I think it's going to be to the latter part of this. But again, there's two ways. And the top line for us is a big factor. And we're going to continue and push on those specialized approach. And we think that there's a good opportunity there to see asset growth that will contribute to profitability, maybe faster. But again, we're dependent on the macroeconomic on that front, so.
Okay, and then as the complexity comes down in the business, then is it fair to say that maybe at that point, LB's disadvantage from a scale perspective on the tech side maybe doesn't matter as much?
Yeah. Well, for us, we are a regional bank in terms of retail with a regional footprint. All our branches are in Quebec, 57 of them. And in the plan, we clearly made the point that we are leveraging retail banking for us as a diversified source of funding. So we have close to CAD 2 billion of demand deposits out there that we want to maintain and try to grow. But on our standpoint, we're shifting the mix of asset towards more commercial. And the more we can accelerate that, the better for end state.
And retail right now with our customer base will continue and keep a good portion of our focus to make sure we create efficiencies there. But at the end of the day, to embark new customers into our retail bank, we set it from the get-go. We need the right digital offering.
And we need some type of self-serve tools out there to be deployed. And for the time being, we don't have that.
Okay. Maybe switching over to capital. Obviously, CET1 on a standardized basis, but really good number. Does that change anything in terms of deployment or your view on how that sort of trends going forward? Does it give you more optionality and maybe the ability to invest a bit more, change the pace of investments?
Yeah. We feel good where we are right now, and it's a combination of things. For sure, facing the uncertainties, we said we guided towards a 10% plus buffer in terms of capital.
At 11.3, we're very comfortable where we are. As I said, we still have critical investment levels to maintain through 2026, so good to have that capital, but most importantly is the pipeline we're sitting on ready to deploy towards those specialty groups, both in terms of the unused lines that stand at CAD 10 billion for our inventory finance group, but also, we have an unfunded pipeline on the commercial real estate side that stands at CAD 3.4 billion, so that's an increase year over year of 24% of that pipeline. Last quarter, you saw our commercial real estate asset level grow 5%.
So we think we're very well positioned in terms of those two key sectors to be able to deploy on the right level of profitability for our shareholders. So we're cautiously optimistic. But we believe that this approach allows us to be comfortable with the capital we hold right now.
11.3 currently, obviously, business lending, you'd like it to be a bit more robust. If it was at the level you wanted it to be at, what would that mean for your capital? And is there any possibility that you'd run into constraints on the capital side in terms of being able to deploy into lending?
Right now, I can give you some quick math. In terms of 10 basis points of capital, it's CAD 180 million of RWA. Technically, if we feel the impact in normalizing our utilization rate on the inventory finance business, that would be between 40 and 50 basis points deployment, plus depending on the real estate market. We feel good about where we would be if everything was to be on the optimistic side of growth. That's why we feel good about the 11.3 right now.
Okay. And what about liquidity? That can impact your margin from quarter to quarter outside of the inventory finance seasonality. Any thoughts on liquidity and how you're managing that and how you sort of counterbalance that with?
Again, we're at the high range in terms of LCR. We feel good about our liquidity position. We were able to raise good broker deposits through the quarter and even last year in terms of positioning, and we have other tools. Inventory financing type assets are eligible for securitization type products, so we discussed a lot also about partnership on the forward flow type agreement that would provide that type of optionality on liquidity and also capital relief, so we think that we have the right tools to be able to sustain liquidity needs through this cycle if we are to grow our asset levels on the optimistic side.
Okay. Thanks for that, and then obviously have to ask a question about credit just because I've been asking every bank today. Any high-level thoughts on credit? Obviously, you had a decent-sized reserve release on performing loans, and I think the explanation was largely around the impairments that you have are actually better quality than what they might have been previously.
That's exactly right.
Maybe just touch on that a little bit. It's a bit of a counterbalance, I guess.
You described it right. What came out of gross impaired and true resolution? A lot of it went into repayment, came back to performing, small write-offs. For us, we feel good about how we treat our gross impaired. What came into the gross impaired? As it moved to impaired, we have to go through appraisal, review of the files, and all our collateral securities. We feel better positioned. The cycle is slower to get those deals out. As a reminder, 95% of what we have in terms of loans in the bank is collateralized. We feel that the portfolio is well positioned overall, has been quite resilient through the cycles. On the Commercial Real Estate side, everything that's uninsured stands at a 59% loan-to-value.
And on the residential mortgage side, we are, I think, the highest insured portfolio of the banking industry, standing at 62% of our balance sheet that is insured. And everything that's uninsured on the residential side of things is at a 50% LTV. So we feel good about facing headwinds from a macroeconomic standpoint. And we manage that very actively, so.
Okay. So yeah, that's an interesting dynamic on the insured balance being a lot higher at LB. In terms of the spreads in that business, we often hear the banks, the larger banks, talk about how they'll come in and out of the market depending on spreads. And given that a bigger part of your book is in that business, how do you sort of see the competitive dynamics? Does it fluctuate a lot in terms of that spread? And where is it now? And where do you see it heading in the current rate environment?
Doing insured business always puts pressure on net interest margins. So that's a fact. We've been migrating towards more Alt-A in the last few years. So we had a 6% proportion. Now we're standing at 13% in Alt-A. What's been reducing is conventional for us. We're redoing the mix in terms of that portfolio for sure. And the overall, as we said, will grow towards more commercial type assets. So for us, it's really to make sure that we maximize capital deployment. Insured doesn't require it. So for us, it's maximizing the returns we can generate. We need to be more efficient at it. But on the other side, we strongly believe in our specialization approach, so.
That Alt-A book, I'm not sure if you've disclosed that publicly or not in terms of the size. I don't recall.
Yeah. 13% of the 16 billion. Yeah. It's on the investor deck of Q3.
You're purposefully wanting to grow in Alt-A because you get better margins. What about the actual dynamics of Alt-A? Is there more growth to be had for that part of your customer base? Or is it similar to the overall market?
Yeah. We're pacing it. I think we saw a soft decline in demand there. But overall, we feel good. Our way of originating and underwriting is quite disciplined. So we just thought that increasing that book of business from six to 13 would make us, again, more balanced and more profitable on some aspect of our residential portfolio.
And how complicated is it when you underwrite Alt-A versus the conventional way? The banks have always sort of had an auto-adjudication type of process where credit score comes in, verifiable income. The computer will spit out in two minutes whether or not you're approved. But Alt-A is a bit more complicated. Have you had to build out an infrastructure to move from that 6 to 13? And it sounds like there could be some runway for you to be a bigger player in that market than you want it to be.
Yeah. Mike, I'm going to be very transparent with our investors. But there's nothing auto-adjudication at Laurentian Bank on the.
What I mean is no.
No, no, but I mean, nothing is that simple. So I highlighted that we have a complex operation that we need to create efficiencies. so we're leveraging the same channels to generate our Alt-A as well as our conventional or insured. And it all goes through broker base. Nothing is originated on the Alt-A side from our retail branches. So everything comes into broker base. And internally, it's pretty much all the same team. so it's a pretty rigorous process. But for us, there's a lot of manual steps. Either you're insured or you're conventional or you're Alt-A, so.
And just to clarify, I didn't mean auto-adjudication as in loosening credit standard. I just meant it was a pretty easier process versus an Alt-A, which sometimes.
It's not.
Yeah. Okay. Awesome. So maybe just some final words for investors, some key messages as you look ahead to 2026 if you want to spend the last minute providing that for your investors here.
Thank you, Mike. And again, thank you for listening and being out here. Just want to reinforce the fact that this bank really has some key fundamental strength we believe in. And this is our aim and focus to grow our specialization commercial niches. And we're aiming towards that and trying to find paths to accelerate that growth. And again, the rest of our plan is to truly execute, simplify our model, and make sure that we create efficiencies doing it. And we remain committed to meeting our financial commitments that are, again, 10% plus ROE and 60% below efficiency ratio. So that'd be my message.
So we'll stop there. Thank you very much, Eric, for your insights. Thank you for joining us today.
Thank you for having me. Appreciate it.
You're very welcome.
Thanks so much.
It was great.
Thank you.