Good day, and welcome to the Laurentian Bank special call. Today's conference is being recorded. At this time, I would like to turn the conference over to Susan Cohen, Director, Investor Relations. Please go ahead, ma'am.
Thank you. [Non-english content] . On the call this morning are Rania Llewellyn, President and Chief Executive Officer, and Yvan Deschamps, Chief Financial Officer. This morning, we will provide information on certain charges impacting the fourth quarter 2021 results that were outlined by the bank in a press release earlier today. Following our comments, we will be glad to take your questions. In addition to the press release, we have posted a short slide presentation on our website, which we will discuss during this call. Before we begin, I would like to refer you to slide two, which contains Laurentian Bank's caution regarding forward-looking statements. I would also like to remind everyone that our fourth quarter has ended, and we are currently in our quiet period until the results are released on December tenth.
As a result, we intend to limit the discussion on today's call to the subject of this morning's press release. With that, I will now turn the call over to Rania Llewellyn.
[Non-English content] Merci, Susan. Good morning, everyone. We have now completed a review of the bank's businesses and operations, and in doing so, identified changes needed to be made to reach our full potential. As a result, the bank is expected to record certain charges in its fourth quarter and fiscal 2021 results. While it was not easy, it was necessary and will reposition the bank for profitable growth. This morning's press release announced certain charges estimated to reduce the bank's reported earnings by CAD 209 million pre-tax, or CAD 163 million after tax, and adjusted earnings by CAD 19 million pre-tax or CAD 14 million after tax. This will result in approximately CAD 20 million in ongoing annual cost reductions starting in 2022, and approximately CAD 4 million in cost reductions in the upcoming fourth quarter.
Based on the charges, Q4 2021 reported diluted earnings per share are expected to be impacted by approximately CAD 3.73 or CAD 0.33 on an adjusted basis. If we were to include cost reductions, the impact on reported diluted earnings per share would be reduced by CAD 0.07. The expected charges would also impact the bank's common equity tier one capital ratio by approximately 25 basis points, which is expected to remain above 10%. Even after these charges, the bank maintains a strong capital position and strong liquidity, which will allow us to continue to invest in the bank's future growth. We are more confident than ever about the future, and we are excited to unveil our new strategic plan at our virtual Investor Day on December tenth, 2021. I will now turn the call over to Yvan Deschamps.
Merci, Rania. I will now walk you through the certain charges identified in the press release earlier this morning. Annually, the bank conducts a goodwill impairment test. As a result of this year's test, the bank expects to record an impairment charge on the value of its personal bank segment. This expected impairment reflects the recent decline in asset and deposit volumes, which combined with the bank's limited digital capabilities to support the ongoing changing needs of customers during the pandemic, made it challenging to retain existing customers and acquire net new ones. In addition, the bank has also previously commented on the fact that it currently has two digital platforms, leading to an inconsistent customer experience. In order to simplify the structure of the bank and to improve the customer experience, the bank will consolidate its two digital platforms into one.
As a result, the bank expects to record a pre-tax charge of approximately CAD 93 million. This impairment charge is related to one, goodwill for an amount of CAD 35 million. Two, software and intangible assets for CAD 53 million. And three, premises and equipment for CAD 6 million. The bank has also been working to refine its future works plan and has decided to adopt a hybrid model where working from home will be the first approach for all tasks that can be performed remotely. This is in line with our focus on being a more customer and people-focused bank and will be a key differentiator to attracting new talent.
Given this change, we will be reducing by about 50% of the leased space in corporate office premises in Toronto, Burlington, and Montreal, and expect to record a pre-tax charge of approximately CAD 49 million. These changes will not impact our branch footprint. We are also continuing to pursue a performance-oriented culture while simplifying the organizational structure of the bank. As a result, the bank expects to record a pre-tax severance charge of CAD 9 million related to 64 positions across all levels within different entities and split between roles in Ontario and Quebec at 60% and 40% respectively. In 2016, the bank began a multi-year program to replace its core banking system over two phases.
As part of our strategic plan, and with the addition of our chief information technology officer in July 2021, we reviewed the program and made the decision to cease phase two. Given the rapid evolution and ever-advancing of technology, the bank will look to leverage new capabilities through partnerships to deliver products and services in a faster, more efficient way to market, while also improving the overall customer experience. As a result, we expect to record a pre-tax charge of approximately CAD 38 million. As part of the overall strategic review, we reassessed the investment loan product design and adjusted its credit standards, resulting in an acceleration of remediation of a portion of the investment loans portfolio. As a result, allowances and provisions for credit losses are expected to increase by approximately CAD 19 million in the fourth quarter of 2021.
This anticipated charge will not be designated as an adjusting item to calculate the bank's adjusted results and ratios. As mentioned by Rania, the expected cost reductions will be approximately CAD 4 million on a pre-tax basis for the fourth quarter of 2021, and over CAD 20 million of ongoing pre-tax annual cost reductions starting in 2022. These are mainly as a result of lower amortization charges and lower rent expenses. As Susan mentioned at the beginning of the call, we intend to limit the discussion on today's call to the subject of this morning's press release. That now concludes our prepared remarks, and we would be pleased to take your questions. I will turn the call back to Susan.
Merci. At this point, I'd like to turn the call over to the conference call operator for the question and answer session. Operator?
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. Please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. If you wish to cancel your request, please press star two. As a reminder for participant wishing to ask a question, please remember to mute yourself once you complete the question to negate any background noise while the presenters are responding. If you have a follow-up to the response, please then unmute yourself to respond. Thank you. We will pause for just a moment to assemble the queue. We'll now take our first question from Meny Grauman from Scotiabank. Please go ahead.
Hi, good morning. First question, just on timing. It was my understanding that you originally kind of saved the date for an investor day to talk about the strategic review on January twentieth. Today you're talking about December tenth. I'm just wondering what changed in terms of shifting the date forward. Is there anything notable that accelerated your decision? That'd be helpful. Thank you.
Manny, thanks for your question. What I would say is that, given the announcement today, we thought it would be best to move it up so that there's not much of a gap between us announcing these charges today and the investor day, so that we can unveil our strategic direction a little sooner. That was really the thinking process behind it, Meny, so that we're not waiting too long to unveil our strategic plan.
Just as a follow-up on that, it sounds like this means that the strategic review is fully complete. You know, is there any potential for further charges to be announced on December tenth or at a later date? Or does this encompass all the charges related to the strategic review that you just finished up?
Yeah. What I would say is, you know, obviously we can't comment on in terms of future results. All I can say in terms of write-offs or charges, these charges come on the heels of a complete strategic review that we promised the market for, and so which we're gonna unveil on December the tenth. However, like any good operator, we'll continue to review our operations. Partnerships, as we've said in the past, are a cornerstone of our key strategic plan. We're gonna be very methodical and purposeful in terms of taking appropriate actions. If we need to take an action because of a partnership opportunity that we've identified that aligns with our strategy, improves our revenues, reduces our expenses, and is more impactful and generates return for our shareholders, that will be considered.
At this point, these charges are directly correlated to the strategic plan.
Thanks.
Thank you. Our next question from Paul Holden from CIBC. Please go ahead.
Thank you. Good morning. Sort of a follow-up question, related to the one Manny just asked. Just wondering how you exited the leased office space, and I guess wondering if it's, you know, sublease or you've paid out to exit those leases. Just trying to get a sense if there's any residual cost risk at all in that maneuver.
Yeah. Thank you, Paul, for your question. At this point, we did not exit the offices. We took the decision to eventually exit, so we're gonna start the process for subleasing that space capability. Based on the assumptions that we have right now, it's reflected into a charge that we're outlining this quarter.
Thank you. Next question is related to the credit provisions. Wondering if that's specific to one or two lines of business or if it's broader based. What particularly caught my attention is just sounds like you're tightening up the credit standards and then also changing product design. How should we think about that potentially impacting future growth, particularly in the near term? I mean, my impression is it's saying we're not gonna underwrite all the business we did in the past, but maybe you can elaborate on that for me.
Yeah. No, for sure, Paul. What I would say is just to give you some context. Our investment loan portfolio sits at around CAD 2.3 billion and is around 30,000 accounts that are through our network of advisors and brokers. Those loans are collateralized by mutual funds. As part of our strategic review, we have made the decision in terms of redesigning our product, which included a rationalization of what acceptable mutual fund collateral would look like. By changing that and changing our modeling and credit standards, we are anticipating some additional losses on this portfolio because we're gonna accelerate the remediation process. This product will continue to be one of our key differentiated products in the markets. We're not concerned about it from a growth perspective.
It's just a, you know, redirection and we anticipate that that'll continue to grow.
Understand. Okay. Thank you.
Our next question comes from Mario Mendonca from TD Securities. Please go ahead.
Okay, thanks. Just on this capital hit. In the past you had mentioned a target range of 8.1%-8.5%. Just wondering, is that still the right way to think about excess capital at this point? And sort of, what are your distribution strategies going forward?
Yeah. Thank you for your question, Mario Mendonca. As we discussed, we're gonna unveil much more of the strategic plan coming on December tenth. If you allow me, I would push that question for December tenth. I guess I would keep that the impact of today's charges is about 25 basis points, and we expect that the capital is gonna remain above 10%, but we can provide you more guidance for the future at our December tenth meeting.
Okay, thanks. Another one. Gonna try to sort of ask Meny's question in a bit different way here. In terms of the charge, you know, under the previous management with the strategic plan, there were ongoing restructuring costs sort of throughout the plan, but obviously this was a much larger up-front one. You know, was the thinking behind this one to kind of clean up all the items up front and get it out of the way so if everything goes according to plan, we shouldn't expect any more sorta as the plan is processed? Could there be incremental sort of as we go forward?
Yeah. As discussed, we're trying really to reflect the thoughts behind the strategic plan that we will unveil on December tenth. At this point it really reflects, you know, all the actions that we intend to take and present. As mentioned by Rania a few minutes ago, we will as good operators continue to look at opportunities to improve the bank and should that lead to other things. At this point it does reflect, you know, what we have and will present on December tenth.
Okay. Thank you.
Thank you. Our next question comes from Darko Mihelic from RBC Capital Markets. Please go ahead.
Hi. Thank you. Good morning, everyone. I suspect my questions will also be deferred to the investor day, but I just wanna make sure that I haven't missed anything. The first thing is, with respect to the charges in the personal banking segment, we have a goodwill charge, intangible assets, and premises and equipment. Within that segment, there is basically an admission that you've lost customers and your digital capabilities were not up to par for servicing customers during the pandemic. You take those charges. What's not clear is what changes for the customer tomorrow. What are you doing to prevent further loss and actually grow? Is this a question that really I have to hold on to until December tenth?
Hi, Darko. Yeah. That's the reason why we moved up the investor day from January 20 to December 10, so that you don't have to wait for too long, 'cause I think that's absolutely a fair question, 'cause the impairment is really a reflection in terms of past trends and doesn't really reflect the future plan. Yes, absolutely. We have the confidence that we're gonna return to a growth platform in the personal bank, and we have the right strategy to do so.
Okay. Thank you. Similarly, I suspect this is gonna be the same thing, but maybe you can just remind us, what was phase two of the technology program? Was that the AIRB transition? Now that it's eliminated or, what changes for the bank?
Yeah. No, phase II was really actually migrating the retail other than B2B, the rest of the retail accounts over to the core banking system. That's what phase two is.
Okay.
Yeah, it did. Go ahead, Darko.
The AIRB program just continues and it's expected to be completed at some point next year. Is that correct?
In terms of the AIRB, it will remain a part of our strategic review. We're still a few years away from development. We've leveraged a portion of the AIRB investment already to meet some regulatory projects. For example, the IFRS 9 project. Right now the focus for this year, the next 12-18 months is really to ensure that we meet our Basel III revised framework. At this point, Darko, we don't see AIRB being delivered before 2025.
Okay. Great. Thank you for that. Lastly, in a similar vein, one of the things that you mentioned in the technology is that you will be partnering, going forward, for a lot of your, advancement of technology. What I would appreciate is I understand that you are getting some cost savings out of all these restructurings, but is it possible that, through partnerships, we also have to think about costs being elevated, for the deployment of new technologies? Is that something also that I should think about for December tenth, or is there some sort of guidance you can give us on potentially higher costs that would come about because of going through partnerships?
Yeah. What I would say, I mean, we can comment more about partnership and the strategy on December tenth. Yeah, it's a very different technology strategy is to partner versus build. The way you build your architecture is, you don't worry too much about your core banking system 'cause it's just, it's a back-end processing system that needs to be stable. What we are gonna be focused on is building an integration layer that will allow us to be nimble and agile to partner with whomever we want, and then it becomes a plug and play strategy.
In the meantime, we're gonna be redirecting those investments and resources that we would have invested in core banking phase two to really focus on revenue generating projects or ones that will help us in terms of creating additional efficiencies while improving the customer experience. We will continue to be very cost disciplined and so as we assess partnerships, it's. We're gonna be looking not just at the revenue line, but at the cost structure as well, and how it fits into our overall efficiency ratio.
Okay. Lastly, clearly what is very lacking from this press release is any sort of targets, objectives and so on. Presumably, that's all coming on December tenth as well. I'm guessing that there's really little else you can say except sort of stay tuned. Is that fair?
Yeah, Darko. We're in a quiet period, as you know. Yeah. At this point, can't provide you any guidance and, yeah, stay tuned.
Okay. All right.
You don't have to wait till January anymore.
I do appreciate that. That's much better. It's a much shorter window of limbo. Thank you very much.
Yes.
Much appreciated. Cheers.
Thanks, Darko.
Thank you. Ladies and gentlemen, as a reminder, to ask a question, please signal by pressing star one on your telephone keypad. I will take our next question from Lemar Persaud from Cormark Securities. Please go ahead.
Thanks. My first question is, how long would you say it's gonna take to combine the digital platforms in the personal banking segment? To me, it sounds like it's not something that's gonna be an overnight sort of undertaking. It's gonna actually take quite some time to implement. Maybe I'm wrong, so just any comments on that would be helpful.
Yeah, the way we're gonna do it is we're not gonna actually integrate it. What we're gonna do is we're gonna continue to invest in our primary digital platform that has over 300,000 customers already on it, and stop onboarding new customers onto the platform that we're gonna shut down. We'll be migrating those customers over the next 18 months. It's really unplugging a platform. We'll stop for the next 18 months while we migrate those customers over. We'll continue to invest in the platform that we're keeping to make sure that we fill all the gaps from a digital capability perspective. That'll actually save us in terms of from a resourcing perspective.
Rather than investing in two platforms, you just invest in one and focus all of your efforts in terms of improving the customer experience. Does that answer your question?
Yeah, that's helpful. My second question is related to the investment portfolio associated with the additional PCL. Does the revenue for that flow through fees on investment accounts in other income? You might not be able to answer this right now just given the quiet period, but is it fair to assume some normalization in that revenue line?
Yeah, this is Yvan, Lemar . I'm not sure exactly of your question, but I'll give you the two comments. The investment loans, the fact that they have a collateralization is just a question of security on the loans itself. The revenues from those loans would go through the NII line. The charge that we're discussing today, the CAD 19 million, is gonna go on the PCL line for Q4.
Okay. I'm just looking at your supplementary and just looking at fees on investment accounts, so it's not related to that.
No, it's not related to that. That line is related to our back office services that we have that generates fees for other brokers on our platform.
Got it. Thank you.
Thank you. There are currently no further questions in the queue. As a final reminder to ask a question, please signal by pressing star one. We'll pause for just a second to allow you to signal. With this, I would like to hand the call back over to Rania Llewellyn for any additional or closing remarks.
Thank you for your time this morning. I would like to offer a few closing thoughts. As I said at the beginning of the call, we are more confident than ever about our future. We are a 175-year-old organization with strong roots and a national presence across Canada and the United States. We have a renewed management team and employees that are focused on delivering the best advice, products, and experiences to our customers each and every day. We maintain a strong capital position and strong liquidity, which will allow us to continue to invest in the bank's future growth. We believe these were necessary changes and will help reset and reposition the bank for sustainable long-term profitable growth. As an organization, we have never been more unified and more determined to succeed, and we are excited to unveil our new strategic plan on December tenth.
Stay tuned for more details in the days ahead. We will speak to you then. Thank you.
This concludes today's conference call. Thank you for your participation, ladies and gentlemen, and you may now disconnect.