Laurentian Bank of Canada (LB) Earnings Call Transcript & Summary

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. [Foreign Language] 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 fourth quarter 2021 results that were outlined with 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 2, 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 10. 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.

[Foreign Language], Susan. Good morning, everyone. We have now completed a review of the bank's businesses and operations and in doing so, identify 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 $209 million pretax or $163 million after tax and adjusted earnings by $19 million pretax or $14 million after tax. This will result in approximately $20 million in ongoing annual cost reductions starting in 2022 and approximately $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 $3.73 or $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 $0.07. The expected charges would also impact the bank's common equity Tier 1 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 10, 2021. I will now turn the call over to Yvan.

[Foreign Language], 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 2 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 2 digital platforms into 1. As a result, the bank expects to record a pretax charge of approximately $93 million. This impairment charge is related to: one, goodwill for an amount of $35 million; two, software and intangible assets were $53 million; and three, premises and equipment for $6 million. The bank has also been working to refine its future works plan and have 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 lease space in corporate office premises in Toronto, Burlington and Montreal and expect to record a pretax charge of approximately $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 pretax severance charge of $9 million related to 64 positions across all levels within different entities and split between the roles in Ontario and Québec at 60% and 40%, respectively. In 2016, the bank began a multiyear program to replace its core banking system over 2 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 seize Phase 2. Given the rapid evolution and advancement 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 pretax charge of approximately $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, a remediation of a portion of the investment loans portfolio. As a result, allowances and provisions for credit losses are expected to increase by approximately $19 million in the fourth quarter of 2021. This anticipated charge will not be designated as an adjusting item to calculate the banks adjust to the results and ratios. As mentioned by Rania, the expected cost reductions will be approximately $4 million on a pretax basis for the fourth quarter of 2021 and over $20 million of ongoing pretax annual cost reduction 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.

[Foreign Language] At this point, I'd like to turn the call over to the conference call operator for the question-and-answer session. Operator?

[Operator Instructions] We'll now take our question from Meny Grauman from Scotiabank.

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 view on January 20. Today, you're talking about December 10. So I'm just wondering what changed in terms of shifting the date forward? Is there anything notable that accelerated your decision? That would be helpful.

Yes. So Meny, 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's -- 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.

And then just as a follow-up on that, it sounds like -- this means that the strategic review is fully complete. So is there any potential for further charges to be announced on December 10 at a later date? Or does this encompass all the charges related to the strategic review that you just finished up?

Yes. So what I would say is, obviously, we can't comment on in terms of future results. But all I can say in terms of write-offs or charges, these charges come on the heels of a complete strategic review that we have promised the market for, and so which we're going to unveil on December 10. However, like any good operator, we'll continue to review our operations, partnerships, as we said in the past, are a cornerstone of our key strategic plan. And so we're going to be very methodical and purposeful in terms of taking appropriate actions. And so 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. But at this point, these charges are directly correlated to the strategic plan.

We are going now move to our next question from Paul Holden from CIBC.

So sort of a follow-up question related to the one Meny just asked. Just wondering how you exited the leased office space. And I guess, wondering if it's subleased or you've paid out to exit those leases, just trying to get out if there's any residual cost risk at all in that maneuver?

Yes. 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 going to start the process for subleasing that space capability. And based on the assumptions that we had right now, it's reflected into a charge that we're outlining this quarter.

Next question is related to the credit provisions. Wondering if that's specific to 1 or 2 lines of business over its broader based? And then what particularly caught my attention is just it 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 saying we're not going to underwrite all the business we did in the past, but maybe you can elaborate on that for me?

Yes. No, for sure, Paul. So what I would say is just to give you some context. So our investment loan portfolio sits at around $2.3 billion and is around 30,000 accounts that are through our network of advisers and brokers. And those loans are collateralized by mutual funds. And so 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. And so by changing that and changing our modeling and credit standards, we are anticipating some additional losses on this portfolio because we're going to accelerate the remediation process. This product will continue to be one of our key differentiated products in the market. And so we're not concerned about it from a growth perspective. It's just a redirection, and we anticipate that, that will continue to grow.

Our next question comes from Marcel McLean from TD Securities.

Okay. Just on the capital here. In the past, you had mentioned a target range of 8.1% to 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?

Yes. Thank you for your question, Marcel. So as we discussed, we're going to unveil much more of the strategic plan coming on December 10. So if you allow me, I would push that question for December 10. But I guess I would keep that the impact of today's charges is about 25 bps. And we expect that the capital is going to remain above 10%, but we can provide you more guidance for the future at our December 10 meeting.

Okay. And another one, could I try to sort of ask Meny's question in a different way here. But in terms of the charge, 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 upfront one. Was the thinking behind this one to kind of clean up all the items upfront and get it out of the way. So if everything goes according to plan, we shouldn't expect any more sort of as the plan is processed or could there be incremental sort of as we go forward?

Yes. So as discussed, we're trying really to reflect the thoughts behind the strategic plan that we will unveil on December 10. So at this point, it really reflects all the actions that we intend to take and present. But 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. But at this point, it does reflect what we have and we'll present on December 10.

Our next question comes from Darko Mihelic from RBC Capital Markets.

I suspect my questions will also be deferred to the Investor Day, but I just want to make sure that I haven't missed anything. So 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. And 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. So 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 10?

Darko, yes, so that's the reason why we're -- we moved out the Investor Day from January 20 to December 10, so that you don't have to wait for too, too long because I think that's absolutely a fair question because the impairments is really a reflection in terms of past trends and doesn't really reflect future -- the future plan. So yes, absolutely. We have the confidence that we're going to return to a growth platform in the personal bank, and we have the right strategy to do so.

Okay. And then similarly, I suspect this is going to be the same thing, but maybe you can just remind us what was part -- what was Phase 2 of the technology program? Was that the AIRB transition? And now that it's eliminated, what changes for the bank?

Yes. So no, Phase 2 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 2 is.

Okay, and...

And so, it -- go ahead, Darko.

So the AIRB program just continues and is expected to be completed at some point next year. Is that correct?

So in terms of the AIRB, it will remain a part of our strategic review. We're still a few years away of development. we've leveraged a portion of the AIRB investments already to meet some regulatory projects. So for example, the IFRS 9 project. And then right now, the focus for this year, the next 12 to 18 months, is really to ensure that we meet our Basel III revised framework. So at this point, Darko, we don't see AIRB being delivered before 2025.

Okay. Great. And 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. And so 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 10? Or is there some sort of guidance you can give us on potentially higher costs that would come about because of going through partnerships?

Yes. So what I would say, I mean, we can comment more about partnership and the strategy on December 10. But yes, it's a very different technology strategy is to partner versus build. And so then the way you build your architecture is, you don't worry too much about your core banking system because it's just -- it's a back-end processing system that needs to be stable. What we are going to 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. But in the meantime, we're going to be redirecting those investments and resources that we would've invested in core banking Phase 2 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 going to 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. And lastly, clearly, what is -- what is very lacking from this press release is any sort of targets, objectives and so on. Presumably, that's all coming on December 10 as well. And I'm guessing that there's really little else you can say, except to sort of stay tuned. Is that fair?

Yes, Darko, we're in a quiet period, as you know. So yes, so at this point, I can't provide you any guidance. And yes, stay tuned. So you don't have to wait to January anymore.

There is -- I do appreciate that. That's much better. It's a much shorter window of limbo.

[Operator Instructions] And then I will take our next question from Lemar Persaud from Cormark Securities.

My first question is, how long would you say it's going to take to combine the digital platforms in the personal banking segment? To me, it sounds like it's not something that's going to be an overnight sort of undertaking is going to actually take some -- quite some time to implement. Maybe I'm wrong. So just any comments on that would be helpful.

Yes. So the way we're going to do it is we're not going to actually integrate it. What we're going to do is we're going to 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 going to shut down, and we'll be migrating those customers over the next 18 months. And so it's really unplugging a platform. So we'll stop for the next 18 months while we migrate those customers over, but 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 will actually save us in terms of from a resourcing perspective rather than investing in 2 platforms, you just invest in 1 and focus all of your efforts in terms of improving the customer experience. Does that answer your question?

Yes, that's helpful. And then my second question is the -- related to the investment portfolio associated with the additional PCL. Does the revenue for that flow through fees on investment accounts in other income? And you might not be able to answer this right now just given the -- your quiet period, but is it fair to assume some normalization in that revenue line?

This is Yvan, Lemar. So I'm not sure exactly your question, but I'll give you the 2 comments. So the investment loans, the fact that they have a collateralization is just a question of security on the loans itself. So the revenues from those loans would go through the NII line. And the charge that we're discussing today, the $19 million is going to 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. But that line is related to our back office services that we have that generates fees for other brokers on our platform.

And there are currently no further questions. [Operator Instructions] 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. [Foreign Language] 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. And 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 10. 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.