Laurentian Bank of Canada

Good day, bonjour, and welcome to the First Quarter Results 2021 Laurentian Bank Financial Group Conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Susan Cohen, Director, Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, and thank you for joining us. Today's opening remarks will be delivered by Rania Llewellyn, President and CEO of And the review of our first quarter of 2021 financial results will be presented by Francois Lorrain, Executive Vice President and Chief Financial Officer, after which we will invite questions from the phone. Also joining us for the question period are Liam Mason, Executive Vice President and Chief Risk Officer, Kelsey Gunderson, Executive Vice President, Capital Markets, and for the first time, Eric Povot, Executive Vice President, Commercial Banking. All documents pertaining to the quarter can be found on our website in the Investor Center. Before we begin, let me 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. It is now my pleasure to turn the call over to Rania Llewellyn. Thank you, Susan, and good morning, everyone. Thank you for joining us today. We hope you and your loved ones are keeping safe and well. Our main focus continues to be ensuring the health and safety of our employees while supporting our customers and communities during these challenging times. The first quarter of 2021 marked my first full quarter as CEO of Laurentian Bank, and I am pleased to report that we had a good start to the year, delivering adjusted net income of $47.6 million, which represents an increase of 12% quarter over quarter and 29% year over year, with adjusted earnings per share of $1.03. Our results were driven by a strong performance in capital markets the resumption of growth in commercial banking, lower provision for credit losses, and strong cost discipline. We continue to take a cautious approach towards PCL, considering the high level of uncertainty in the economy. While there is optimism related to vaccines, there is also concern surrounding new variants. To mitigate this uncertainty, the bank continues to maintain healthy liquidity levels and strong capital position with a CET1 ratio of 9.8%. While I am pleased with our overall performance for the quarter, we do not expect this year of transition and strategic refocus to be a straight line to success. There is much work to be done to position Laurentian Bank for sustained growth and profitability. You will recall last quarter we established three strategic pillars that are guiding our efforts and actions. They are, number one, cultivating a customer-first culture. Number two, creating a more agile organization with an innovative mindset. And number three, engaging and empowering our employees to work collaboratively as one team. As we work towards establishing a renewed strategic direction, we set out a number of goals last quarter that I want to update you on. The first goal was the renewal of our senior leadership team in our effort to put the customer at the center of everything we do. I am pleased with our progress on this front as we have recently added three new external hires and an internal promotion. Sebastien Benet, Chief Human Resources Officer will drive the bank's strategy of engaging and empowering employees to work collaboratively as one team. His focus will be on building high-performing teams in a diversified and inclusive workplace. Sebastien joined the bank on February 2nd. Yves Denome, Head of Operations, filled a new role that was established following the retirement of the Chief Operating Officer. We have separated the bank's operations and technology units with Eves overseeing the operations teams. His mandate is to reduce complexity, improve and streamline end-to-end customer processes, and drive cost optimization across the bank. Eves joined us on February 22nd. Adam Swinomar, head of digital, is leading the digital strategy across both personal and commercial banking. He will develop and oversee the strategic digital initiatives to simplify and improve the customer experience. Adam joined the bank on February 2nd. Lastly, Yvonne Deschamps, currently our SVP finance, accounting, and corporate development, will succeed Francois Lorrain as CFO when Francois retires on April 6th. Ivan will use his financial expertise and deep knowledge of the bank's operations to guide the growth and profitability of the bank. Each of these new leaders will play a critical role in helping to achieve our strategic priorities. They will contribute to the thorough review of all the Renton Bank's operations to ensure the organization has the right priorities, resources, and personnel to position the bank for future growth. The second goal was focused on our efforts regarding cost discipline. We have made good progress this quarter on controlling expenses as reflected in our adjusted efficiency ratio of 68.9%. which represents an improvement of 100 basis points over the past quarter and 770 basis points compared to last year. For the remainder of the year, we will continue to focus on expense management while working on identifying structural cost optimization opportunities that align with the future strategic direction of the bank. These efforts will create the type of sustained operational efficiencies that ultimately drive long-term shareholder value. The third goal that we discussed last quarter was to advance our efforts toward the comprehensive strategic review of all the bank's operations and current priorities. This work, spearheaded by our renewed leadership team, is underway and we are on track to deliver our new strategic plan including Laurentian Bank's value proposition and vision for the future by the end of the year. In the near term, one opportunity that has surfaced as a high priority for the organization is our residential mortgage business. While the industry has been experiencing growth over the past 12 months, we have not benefited from it. To reverse this trend, we are embarking on an end-to-end review of our mortgage processes with a focus on reducing the number of touchpoints to improve the customer and broker experience. We will share our assessments and progress over the next few quarters. What is increasingly clear is that the long-term impact of the pandemic will have far-reaching effects. It has changed the way we work and live and the expectations of customers and financial service providers. One area of change and increased investor focus is in the area of ESG. This is an area I am personally committed to because building a legacy for our future customers, shareholders, and employees is vitally important to me. At Laurentian, we are raising the bar at what and how we champion important events. We recognize the annual Bell Let's Talk Day by challenging every employee to a 30-minute mental health activity called Find Time for Me. For Black History Month, we introduced our Courageous Conversation series. And with just a few days until International Women's Day, the heightened need for greater attention to equity, diversity, and inclusion has never been more paramount. I'm proud that women at Laurentian Bank represent more than 65% of our workforce, 46% of our management positions, and we have had equal representation on our board for the past three years. The theme for International Women's Day this year is Choose to Challenge. At Laurentian Bank, we choose to challenge by leading. We're the first bank in Canada to appoint a woman as chair of the board. Jeanine Boivet was in 1997, followed by Isabelle Corville in 2013. And in 2020, we were the first major bank in Canada to appoint a woman as CEO. Laurentian Bank has begun its multi-year ESG journey that I believe will increase our accountability and transparency as we evolve our organization on important issues like equity, diversity, and inclusion, sustainability, and enhanced corporate governance. We will continue to provide updates as we progress through that journey and leverage the experiences of the past year to propel us forward as we create an organization that is more agile, efficient, and above all, customer-centric. Before I turn the floor to Francois for what will be his last earnings call, I would like to sincerely thank him for his outstanding contribution. He has played a vital role in the evolution of the bank over the past five years. His mentorship is enabling a smooth internal succession plan. I want to extend my personal appreciation for your support and guidance during my transition to CEO. We wish you continued health and happiness in the next chapter of your life. Francois?

Thank you, Rania, for your kind words. Good morning, everyone, et bonjour à tous. I would like to begin by turning to slide seven, which highlights the bank's financial performance. Total revenue increased by 4% and adjusted non-interest expenses declined by 7%, driving positive operating leverage from last year. Adjusted net income was $47.6 million in the first quarter of 2021, 29% higher than a year ago and 12% higher than last quarter. Adjusted pre-tax pre-provision income was 38% higher than a year ago and 5% higher than last quarter. Excuse me. A more granular review of the drivers of our performance begins on slide eight. Year-over-year net interest income increased by 3% and net interest margin increased by 3 basis points. The improvement was due to optimized funding as we increased the utilization of secured funding, as well as higher prepayment penalties on residential mortgages. While contributing to net interest income in the short term, prepayment penalties reflect the reduction in the underlying portfolio. This is why reviewing the end-to-end mortgage process, as Rania had mentioned, is a priority which we are proactively addressing. Turning to slide nine, other income was up 6% from a year ago. An increase in capital markets revenues of $7.8 million was partly upset by lower service charges and credit card revenues. The pandemic has led to a buildup of liquidity resulting from government programs and less consumer spending, and it is reflected in reduced credit card usage and faster payment of balances. Slide 10 highlights our disciplined focus on costs. Salaries and benefits were relatively unchanged from a year ago, as higher performance-based compensation related to strong capital markets revenues was offset by a decrease in salaries from a reduction in headcount. premises and technology costs were 3% lower year over year as we continue to streamline costs and decelerated the pace of IT projects given our ongoing strategic review. Other non-interest expenses declined by 30%, stemming from lower regulatory costs and other costs ensuing from efficiency measures, some of which were implemented last year. As well, in the current environment, costs are generally lower, including those related to business development and travel. The adjusted efficiency ratio improved to 68.9%. Slide 11 presents our well-deficit sources of funding. Personal deposits account for 77% of our total deposits and contribute to our healthy liquidity position. We continue to optimize our funding sources and manage third-party deposits to align with loans. Slide 12 highlights our strong capital position. The CT1 capital ratio presented under the standardized approach stood at 9.8% at quarter end and 9.7% excluding Ausfee's transitional arrangements for the provisioning of expected credit losses. Internally generated capital was the main driver of a 20 basis point sequential increase. At the current CET1 level, the bank has about $300 million of excess capital based on the midpoint of our risk appetite range of 8.1 to 8.5%. Slide 13 highlights the commercial loan portfolio, which grew by 3% sequentially. Growth in inventory financing volumes resumed, reflecting seasonality, as well as dealers partially restocking their inventories. While consumer demand for recreational boats and vehicles remains high in the current environment, supply chain challenges are expected to delay a full recovery in inventory financing volumes. Real estate lending also contributed to growth, largely through insured multi-residential mortgages The strength of our underwriting, good diversification, and strong collateral contribute to the high quality of this portfolio. Slide 14 presents the Penn Canadian residential mortgage loan portfolio. The loss ratio increased to 10 basis points and mainly reflects the end of the deferral program and an upward revision of the unemployment rate. The level of insured mortgages at 57% is among the highest in the banking industry, and when combined with a low LTV on the uninsured portfolio, contributes to reducing the overall risk of this portfolio. Turning to slide 15, allowances for credit losses total $193.6 million. The sequential increase of $8.6 million is due to an increase in allowances for impaired commercial loans. It takes into consideration our cautious approach considering the uncertainty related to new variants of the COVID-19 virus and a slower vaccine rollout than previously announced. Scenario weights were unchanged from the prior quarter with higher weights attributed to the base and downside scenarios and a lower weight to the upside. As shown on slide 16, the provision for credit losses was $16.8 million in the first quarter of 2021. Compared to last quarter, PCL decreased by $7.4 million, reflecting lower provisions on performing loans, upset by higher allowances on impaired commercial loans. The PCL loan ratio stood at 20 basis points in the quarter, compared to 29 basis points last quarter and 18 basis points last year. Growth impaired loans on slide 17 were relatively unchanged from the prior quarter and stood at 82 basis points. I would like to offer some thoughts on how we see the second quarter developing. Net interest income will be impacted by the slightly shorter quarter. Net interest margin should be similar to the Q1 level. Capital markets has begun the second quarter with positive momentum. The commercial banking pipeline is strong, and we're cautiously optimistic about our growth prospects. Although we do not expect non-interest expenses to decline in a straight line, we will continue to heighten our heightened focus on cost discipline. Growth impaired loans are expected to peak around mid-year, All things being equal, we believe that we remain adequately provisioned and are cautiously optimistic that provision for credit losses could improve over the remainder of 2021. Considering these factors and the fewer number of days in the second quarter, we expect Q2 pre-tax pre-provision income to be lower than Q1. Before the question and answer session begins, I would like to take a moment to say how privileged I am to have had the opportunity to work with an exceptional team at Laurentian Bank. I'm also fortunate to have been able to build strong relationships over the past five years with investors and analysts. I thank you for your trust and support, and I'll turn the call back to Susan.