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

We'll start our next session with Laurentian Bank, and I'm pleased to have Eric here, the new CEO of Laurentian Bank on the stage. Eric, welcome to the conference.

Thank you, Darko.

Now in this instance, I want to start the conversation a little bit differently because in this situation -- in Laurentian in particular, we just recently had some changes. So Eric, you've been at Laurentian Bank for well over a decade, and you were recently appointed as the President and CEO in October. And obviously, the first time here at my conference. So again, welcome. But maybe you can spend a little bit of time here for investors and shareholders, a little bit on your background just to start us off here because well, I can say you are new.

Yes, yes. And thank you for having me this afternoon. And yes, this is my first RBC conference. Very pleased to be here. As you said, just over 11 years actually, for Laurentian Bank, last 3 years as Head of Commercial Banking. And within that group and that time spend, we've been very successful for the whole organization like delivering strong growth, 16% CAGR, grew those assets from $12.7 billion to $18 billion in that time spend and also generate great NPS. So great customer surveys, feedback from excellent to world class actually in some of our specialty groups. And looking forward, I believe that we can take those learnings and best practices and actually extend those to the whole organization. As for me, I'm a pretty passionate guy, very result-driven. I'm a team player. I love our people, and I love this bank.

Okay. And so diving into it, I mean, thinking of a way to ask this question. I mean, essentially, you came into the role in, let's call it, a nonstandard fashion right after a mainframe outage, caused some disruption. So maybe you could spend a little bit of time touching on that incident? And if there's any sort of lingering issues that have arisen from that outage? And how should we think about it going forward?

Yes. Unusual is the right word for stepping into the role. So definitely, just to recap in terms of what happened. So on September 23rd, team was working on the mainframe upgrade, was unsuccessful, led to a multi-day outage, where our retail customers in Quebec as well as some small business customers were impacted not being able to use our electronic services and our online banking platform. Although they were able though, to transact within point-of-sale, so with debit and credit cards and also had access to ATM to withdraw money. When I was appointed, I said this was definitely unacceptable situation for our organization, for our customers. And the first priority was to get this event behind us, stabilize the situation, make sure that the outage was dealt with, which it is, and it is behind us. And to make sure that we increase our communication level with our customer. Make sure that they understand what was happening, how we were mitigating the impacts for them and what solution we were putting forward. So I believe we learned a lot through this exercise that we're in a stronger position now than we were at that time. And I firmly believe that we made investments in the past, and we need to continue to invest in our foundational technology going forward.

So one of the things that we noticed is -- okay, so in your results, there was some fees that you had waived and it does look like the deposit base was stable. But we've gone through Christmas now and people are out using their cards and spending and so on. So can you give us an update like what is -- is -- what are the customer reaction today? Is there anything new to speak to that? And is there any other kind of fee waiving that we should think about or other actions to not only appease the customer base, but to start growing deposits? So maybe you can talk to a little bit of the more immediate aftermath.

Yes. For our customers, first of all, I'd just like to take this opportunity being here to thank them for their resiliency and their patience through this event. The actions that were needed to be taken were taken. So we waived September and October fees, and that was disclosed in our Q4 results. And really, like in terms of how we think forward about deposits. Deposits are key. They're core to the bank. We believe in a strong deposit base, and we need to aim and continue at trying to grow that deposit. But as we highlighted in terms of the strategic alignment between our loans growth as well as our deposit and securitization growth, like we need to make sure that both goes in sync. And throughout this summer and the fall period, like we've been managing liquidity very, very prudently. Maintaining a very high level of LCR. And right now, we feel pretty strong about our liquidity position, which could position us in the upcoming quarters in terms of considering maybe reducing a little bit our deposit base, again, remaining prudent in the overall, but to enhance profitability, this is something we might be considering.

Okay. And then sort of switching gears, I think one of the things that I've noticed from covering the bank for a long, long time is there's always sort of been a pressure, a view towards moving your efficiency ratio sort of lower. And I thought that -- as an analyst from the outside, I thought the problem was maybe partially taken care of when the union was sort of dissolved. But the bank has sort of continued to struggle to improve efficiency. So maybe -- and I recognize that you haven't detailed your plan yet to anyone, but what -- why the struggle towards a better efficiency ratio? And can you share something with us today that would help us better understand how you might be tackling the efficiency problem?

Yes. And we started already. So last quarter -- not last quarter, actually, in December, we already announced a reduction of about 2% of our workforce. So that will impact our charges that are coming to Q1. But why we weren't as successful as we should have been. I think it's a mix. It's a mix of things in terms of -- we had to make significant investments in the past few years to bridge some gaps we add in terms of our technology footprint and tools. So we did that. And by the time this brings back some revenue and has real impact on the organization, takes some time. But I think that overall, in terms of the macroeconomic situation. I think we worked fast enough reacting to how it had impacted our revenue streams and we didn't reduce costs fast enough. Like this bank has been talking about simplification and reducing our efficiency ratio, and we didn't quite do it. So the team and I have the mandate right now to really work on a revamping plan coming back in the spring, making sure that we simplify this bank and we stop being everything to everyone. We need to focus, and we've been very successful in areas where we put our focus into adding value to our customer base. And I strongly believe if we do so all across, we can be successful.

Okay. I look forward to the more detailed plan soon enough, I guess.

Spring.

Spring. Okay. So now maybe coming back to sort of the macro question that I've been asking every [indiscernible] bankers is there's been a pretty big change in forward view on interest rates. The implied curve telling us central banks in Canada, U.S. is going to cut pretty important category for Laurentian Bank is the net interest margin and net interest income. Give us a thought on how you think this can evolve in 2024?

Yes. For us, I think size and speed is a big element in there in terms of movements like what we saw in the past years in terms of very high and rapid increase in interest rates didn't allow us to actually reprice at the same pace of our cost of funds. I think that moving forward, what we see in the upcoming year is a more moderate reduction in terms of interest rates sequentially. And for us, in terms of our funding structure, what it really means is that we may have opportunity to delay some of the repricing on our loan books. But from a margin perspective, what we guided for is a pretty stable margin versus what we disclosed in Q4.

But if rates do come down faster and dramatically -- you think like what's...

It could have a small benefit to the margin if it comes on a faster pace and on bigger scale. Yes.

Okay. Great. And the other side of the coin is loan growth. So if rates do come down aggressively. What will be your outlook for -- and we can talk on couple of different places, right, we can talk about commercial, and inventory financing, where I think on the inventory financing side, we may have some expectations that it gets a lot slower. But over to you, how do you view the loan growth situation with a falling rate environment potentially fast falling rates.

Yes. And there's different buckets, as you highlighted, Darko. So on the mortgage side, we see unit growth there, pretty stable versus last year. We would expect on a personal loan side, there's still some softening just because the high interest rate versus our main products, which is leveraged loans are less attractive at the time being. So some softening there. In terms of the commercial book, as you know, we have big specialties. So two of them are commercial real estate where we focus on construction projects, mainly residential, so multi-res as well as condo. And throughout 2023, we felt a slowdown in that area. Even though demand is still out there just because of the shorting in the -- shortage in housing, we feel that it's going to be still muted in terms of growth in 2024. So before an interest rate decrease has a real impact into launching new projects, we're going to have a portion of the year already done. So that by the time we approve those projects and they start building, some delays there. In terms of inventory financing, what we saw and we communicated in Q4 is that our dealer base have taken a more conservative approach into restocking their inventory for the upcoming 2024 season. So the products we finance, consumer goods. Our dealers have been more prudent, not being sure what to expect in '24. So line utilization for that business would usually range around mid-50s. And in the last quarters, the line utilization were at 48%. But it's a good approach, like we appreciate the market to be disciplined like we don't want dealers to be ending up having too much inventory that they cannot move during the up season. So for now, that business as well, like we see muted to small maybe ramp up but not as a normal year would provide.

And how much is that predicated on growing the number of dealers? Like is there a push to attract new dealers to the platform or are you content with sort of where you are?

No, actually, we see great opportunities in that business model because we can leverage the operational capabilities of inventory financing. And as we indicated in the past, we can grow this into other industries. Like right now, we have a big focus in marine, RV, manufactured housing and trailers. But for sure, the team has been growing those dealer base between 10% and 15% organically per year. Now we started expanding into ag, into construction, into IT. And it's pretty much the same recipe all across, like you start with the OEM. You go out there, you sign a repurchase program with them. They get out of -- they get to their dealership distribution list. After that, you do calls to onboard those dealers. You take securities on dealers, PGs from the owners. And after that, you have curtailment whenever these assets go out of the repurchase cycle. So we feel good about the opportunity. It's definitely a business that we like, and we've been very successful growing in the past.

And is it nationwide? Or should we think about certain contiguous states? Or how should we think about where you're going with that?

Actually, the strength of -- sorry for that, that's my English -- but of the offering is that we can cover the full North American scale, which gives us a competitive advantage and not a lot of players can actually provide for that in the inventory sector. So all across Canada and the U.S., like we cover right now 5,800 dealers and there's still good opportunity to grow there not only within the industries, but again, diversifying across other industries.

And just a final question on this and I promise to move on, but this is an interesting different thing from Laurentian. So we always want to sort of dive into a little more detail on what some banks are doing differently. So if you are, in fact, moving into other industries, are you growing your sales force? Or can you give us sort of any indications and you mentioned 15% growth. Is 15% growth reasonable? Is 20%, 30%, in number of dealers not necessarily in balance as we...

Yes. So it's a number of dealers. And yes, when you go into another industry, it's all about hiring the right people and going after the right OEMs at the level. So -- but you don't need to deploy a very big workforce or sales force to do that. And once you onboard those OEMs, you can after that leverage the inside salespeople that you have already into the operational structure and maximize that structure. So after that, you add heads towards the capacity and the type of assets you think you can bring in. But in terms of potential growth, it's definitely a path forward for us.