CA - Laurentian Bank of Canada (LRCDF) Q3 2022 Earnings Call Transcript
Laurentian Bank of Canada (LRCDF)
Q3 2022 Earnings Conference Call
August 31, 2022, 09:00 AM ET
Company Participants
Andrew Chornenky - VP and Head of IR
Rania Llewellyn - President, CEO
Yvan Deschamps - EVP and CFO
Eric Provost - Head of Commercial Banking
Liam Mason - Chief Risk Officer
Kelsey Gunderson - Head of Capital Markets
Karine Abgrall-Teslyk - Head of Personal Banking
Conference Call Participants
Meny Grauman - Scotiabank
Gabriel Dechaine - National Bank Financial
Paul Holden - CIBC
Sohrab Movahedi - BMO Capital Markets
Doug Young - Desjardins Capital Markets
Nigel D'Souza - Veritas
Marcel McLean - TD Securities
Jooyoung Kim - Credit Suisse
Presentation
Operator
Good day and welcome to the Third Quarter Results 2022 Laurentian Bank Financial Group Conference Call. Today's conference is being recorded.
At this time, I'd like to hand the conference over to Andrew Chornenky, Vice President and Head of Investor Relations. Please go ahead.
Andrew Chornenky
[Foreign Language] Good morning and thank you for joining us. My name is Andrew Chornenky and I'm the Head of Investor Relations at Laurentian Bank. Today's opening remarks will be delivered by Rania Llewellyn, President and CEO, and the review of the third quarter financial results will be presented by Yvan Deschamps, Executive Vice President and Chief Financial Officer. After which, we will invite questions from the phone. Also joining us for the question period are several members of the Bank's executive leadership team. Liam Mason, Chief Risk Officer; Eric Provost, Head of Commercial Banking; Karine Abgrall-Teslyk, Head of Personal Banking; and Kelsey Gunderson, Head of Capital Markets.
All documents pertaining to the quarter can be found on our website in the Investor Centre. I would like to 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 2 of the presentation.
I would also like to remind listeners that the Bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Rania and Yvan will be referring to adjusted results in their remarks and as otherwise noted as reported.
I'll now turn the call over to Rania.
Rania Llewellyn
[Foreign Language] Good morning and thank you for joining us. I hope everyone had a nice summer and a chance to recharge.
We are pleased with our performance this quarter and remain confident that we will exceed our financial targets for the year. On behalf of the entire management team, we would like to thank our one winning team for their efforts over the last quarter. They have continuously shown their resilience and commitment to putting our customers first.
The macroeconomic environment continues to be uncertain and volatile, and is being weighed down by high inflation, very rapid interest rate increases and geopolitical tensions. Notwithstanding, our results speak to the strength of our underlying businesses, our prudent approach to credit, disciplined cost management and the progress we are making on executing against our plan.
This quarter, total revenue grew by 2% and pre-tax pre-provision income was up 6% year-over-year. Net income for the third quarter with CAD58.2 million or 2% lower than a year earlier. As a result of higher provisions on performing loans, PCL increased by ADC11.2 million or 11 basis points year-over-year to $16.6 million or 18 basis points. Earnings per share were CAD1.24 compared to CAD1.25 last year and ROE was 8.7%, down 20 basis points from a year ago.
Following our record strong second quarter since 2018, revenue was relatively flat quarter-over-quarter, impacted by lower financial market related non-interest revenues. PCL increased by CAD3.6 million or three basis points quarter-over-quarter. Pre-tax pre-provision income and net income were both down by 5% and 6% respectively, while ROE was down 160 basis points, including the impact of the CAD3.3 million interest payment on limited recourse capital notes.
Commercial banking had another strong quarter. Our commercial loan portfolio grew by CAD3.9 billion or 29% year-over-year and over CAD600 million or 4% quarter-over-quarter. Personal deposits saw a significant growth of 17% year-over-year and 8% quarter-over-quarter, supporting our solid loan growth.
Last quarter, we said that expenses would be higher in the second half of the year as we continue to deliver on key strategic initiatives including digital onboarding and our reimagined Visa experience. At 67.1%, our efficiency ratio improved by 130 basis points year-over-year and at 66.4% year-to-date, we will exceed our fiscal 2022 target of less than 68%.
The Bank CET capital ratio of 9.1% is down from 9.3% last quarter, as we continue to redeploy capital in line with our strategic plan to support profitable, sustainable organic growth. Our CET1 ratio remains above our pre-COVID level of 9% and higher than our operating target of 8.5%.
As outlined at our December 2021 Investor Day, our business lines play a key role in the success of our strategy. Commercial banking, our growth engine, continue to execute on its proven business model with a focus on its key specializations. Real estate financing was up by more than CAD300 million or 3% from last quarter to CAD9.7 billion. Results were mostly driven by the conversion of our strong unfunded pipeline in the construction portfolio to support the multi-residential segment, as developers continue to catch up to the structural supply shortage in certain markets.
Inventory financing was up CAD225 million or 7% from last quarter to CAD3.6 billion driven by a more normalized pre-pandemic credit utilization rate of 51%. Equipment financing was up CAD50 million or 3% from last quarter to CAD1.5 billion, driven mainly by the Transportation and Construction segment.
As part of our strategy and commitment to diversify our geographic footprint, we now have 21% of our commercial loan portfolio in the U.S., exceeding our medium term target of 18%. In capital markets, we saw significant volatility this quarter as markets digested various geopolitical risks and aggressive monetary tightening by central banks. In response, we continued to deliver on our focused and aligned strategy.
First, in line with our objective to expand coverage to our top-tier commercial clients, we offered a full suite of advice to our core clients as they navigated current macroeconomic conditions. This led to a strong quarter in FX.
Second, we participated in six Bank issued preferred or a limited recourse capital notes issuances as part of our priority to grow our Syndicate positions with core corporate issuers. And third, we participated in four ESG themed bonds, including two new-to-market issuances by OPG and the Municipal Financing Authority BC as part of our objective to participate in sustainable bond issuance.
In personal banking, we are leading with a digital-first approach to reposition the business for growth. To that end, we are pleased to announce the launch of our digital account opening solution. In partnership with thirdstream, we were able to deploy digital account opening in just six months, which aligns with our strategy to partner versus build to get to market faster.
Our digital onboarding rollout will focus first on our employees to ensure a seamless customer experience. As the solution is rolled out more broadly, it will allow us to continue acquiring new customers within to that, beyond our physical footprint and as our launching pad to expanding our retail presence across the rest of Canada. Our initial focus will be on checking and deposit products.
To enable the launch of digital account opening, we were able to utilize our recently announced cloud-based API solution in partnership with Kyndryl. With this milestone, we now have a strong and proven foundations to deliver faster, more seamless and innovative digital capabilities for our customers.
Along with this key milestone, other digital achievements this quarter include the introduction of self-service password resets, which will help divert more than 5,000 calls per month from our contact centers and the launch of our Refresh public website as well as our newly modernized online customer platform LBC direct. The new modernized LBC direct ensures that our digital banking experience is consistent across all devices and improves the overall banking experience for our customers.
We said that retention was also a key priority this year, and our recently launched loyalty team continues to make progress. For instance, our loyalty change proactive outreach to GIC customers led to a 12% year-over-year increase in retention. In our year of execution, we have now successfully closed the top five digital pain points identified by our customers through the launch of contactless TAP debit cards, mobile app, self-service password reset, refreshed web and digital onboarding.
Our strategy is also underpinned by a strong culture and a commitment to ESG. With culture as our driving force, we launched a new career path program for our personal bank advisors. Participated in private events across the country and partnered with Brian at work Canada to build up and foster a culture where everyone belongs.
In making the better choice, I am proud to announce that Laurentian Bank had the best year-over-year improvement among the big Canadian banks in the Sustainalytics ESG Risk Rating survey and we moved into the low risk category. This reflects the collective enterprise wide effort to incorporate ESG best practices across all the Bank activities including implementing a new EDNA policy for the Board and employee.
In wrapping up my remarks, I want to share a progress update with you on the year-to-date basis, we are exceeding each of our 2022 financial targets. Our EPS growth is up 11%, exceeding our target of greater than 5%, ROE is 9.4%, exceeding our target of greater than 8.5%. Our efficiency ratio is 66.4% or 160 basis points better than our target of less than 68%. And our operating leverage is positive at 3.9%.
Our team continues to demonstrate their resilience through this volatile economic environment, we are confident and committed to executing on our strategy to deliver long-term sustainable and profitable growth as well as exceeding our financial targets this year.
I would now like to turn the call over to Yvan.
Yvan Deschamps
[Foreign Language] I would like to begin by turning to Slide 13, which highlights the Bank's financial performance for the third quarter of 2022.
Reported EPS was CAD1.19 and net income was CAD55.9 million. Adjusting items this quarter amounted to CAD3.19 before taxes or CAD0.06 per share and are related to the amortization of acquisition-related intangible assets. Details of adjusting items are shown on Slide 27, the remainder of my comments will focus on adjusted results.
EPS and ROE were CAD1.24 and 8.7%, a decrease of CAD0.01 and 20 basis points respectively compared to a year ago. Pre-tax pre-provision income or PTPP was CAD85.5 million, a 6% increase from last year. Compared to the second quarter of 2022, EPS and ROE decreased by 11% and 160 basis points respectively, while PTPP decreased by 5%.
The key elements of variation this quarter related to the CAD3.3 million interest payments on LRCN. Lower financial market related non-interest revenues due to volatile market conditions. An increase in PCL as a result of higher provisions on performing loans due to the less favorable macroeconomic outlook and strategic investments to close key foundational gaps and support growth.
Slide 14 so the increase of net interest income by 8% year-over-year on a sequential basis increased by 5% mainly due to the positive impact of three additional days in the quarter and higher interest income from permanent from commercial loans, partly offset by higher funding costs and liquidity levels.
At 1.83% NIM was down four basis points quarter-over-quarter, we made the decision this quarter to prudently carry a higher level of liquidity based on our strong asset growth this year and to reduce funding risk in the period of economic volatility. This along with the timing lag of assets repricing results within the quarter over quarter decrease.
Other income as presented on Slide 15, decreased by 11% compared with the year ago and 10% sequentially. This quarter. The decrease was mainly as a result of the volatile financial markets unfavorably impacting fees and securities brokerage commissions, commissions on sales of mutual funds and income from financial instruments. Non-interest expenses, as shown on Slide 16, were flat compared to a year ago. Despite our strategic investments to close key foundational gaps improve the customer experience and accelerate business development activities to support growth.
These were offset by lower amortization charges and rent expense. Sequentially, noninterest expenses increased by 3%, mainly due to the aforementioned strategic investments, as well as higher professional and advertising fees also to support growth. Partially offset by lower performance-based compensation. The increase this quarter was in line with our purchase guidance.
As a result the efficiency ratio, this quarter was higher by 190 basis points sequentially to 67.1%. However, as Rania mentioned in her remarks, we are seeing sustained improvement year-over-year as we were able to grow revenues and maintain our focus on cost.
Slide 17 presents our diversified sources of funding. Sequentially, deposits increased by 6% or CAD1.4 billion while loans grew by 2% compared to last year deposits grew by 15%, while loans grew by 11%. This tracks positively with our objective of growing deposits and loans in line slide 18, highlights our capital position. CET1 capital ratio, which is presented under the standardized approach. So that 9.1% compared to 9.3% last quarter.
This quarter's variation was once again linked to the redeployment of capital accumulated during the pandemic to sustainable profitable commercial loan growth in line with our strategic plan. Our CET1 ratio remains above our pre-COVID level of 9% and higher than our minimal operating level of 8.5%. In line with our disciplined approach to managing capital, the Bank is reintroducing at 2% discount as part of the DRIP program.
Slide 19 highlights the commercial loan portfolio, which delivered strong growth loans increased by over CAD600 million or 4% quarter-over-quarter driven by growth in real estate financing of over CAD300 million or 3% and inventory financing of over CAD225 million or 7%. Our results in real estate were driven by the realization of our strong pipeline, particularly in the construction portfolio for the multi-residential segment. Inventory financing continue to make market share gain and experience normalization in utilization rate.
Slide 20 presents the Pan Canadian residential mortgage loan portfolio residential mortgage loans increased by 1% both year-over-year and sequentially. In line with our objective of portfolio stabilization the bank's residential mortgage portfolio remains relatively weighted towards insured mortgages at 56% and combined with a low LTV of 44% on the uninsured portfolio contributes to reducing the overall risk of this business.
Turning to Slide 21, allowances for credit losses total have been CAD93.2 million, a sequential decrease of CAD9.6 million, mainly due to write-offs of previously provisioned accounts in the commercial loan portfolio.
As shown on Slide 22, the provision for credit losses was CAD16.6 million in the third quarter of 2022, increasing by CAD11.2 million from a year ago. This was mainly due to higher provisions on performing loans as a result of volume growth in the commercial loan book and less favorable macroeconomic outlook. Last year also saw a release of provisions on performing loan. Sequentially, the provision for credit losses increased by CAD3.6 million mainly for their same reason. PCL ratio stood at 18 basis point.
Slide 23, highlights the improving trend in gross impaired loans, which decreased by CAD29.1 million quarter-over-quarter, mainly due to favorable repayments and write-offs of previously provisioned accounts in the commercial loan portfolio, we continue to manage our risk with a prudent and disciplined approach and remain adequately provisioned.
I would now like to offer some thoughts on how we see the remainder of the year in development. We anticipate a relatively stable capital level for Q4 as a result of tempering loan growth supported by internal capital generation we expect modest revenue growth in Q4 on the back of the recent commercial loan growth and of early indicators showing a partial rebound in capital markets activity. We are forecasting our NIM to be in the mid-180s for Q4, an increase of a few basis points versus Q3.
For the full year, we expect to be at or slightly above our target of 1.85%. Overall expenses are expected to remain elevated in Q4, slightly above Q3. For the, sorry -- for the year, we will remain below our 2022 efficiency ratio target of less than 68%, leading to a positive operating leverage.
The provision for credit losses remains difficult to predict on a quarterly basis given the uncertain macroeconomic environment. Overall, we expect PTPP to increase slightly in Q4 and we remain confident that we will exceed our 2022 financial targets.
I will now turn that to Andrew.
Andrew Chornenky
At this point, I would like to turn the call over to the conference operator for the question-and-answer session. Alexandra we are ready for our first question.
Question-and-Answer Session
Operator
Of course, thank you. [Operator Instructions] And we'll go ahead and take our first question from Meny Grauman with Scotiabank. Please go ahead.
Meny Grauman
Hi, good morning. I'd like to talk about capital. Yvan you gave us some guidance for the rest of the year. And we've talked about this before. You highlighted moderating loan growth for Q4, keeping the capital ratio relatively stable. If I got that correct. And just on that guidance in terms of moderating loan growth, is this something that you're actively doing or is it just a broader comment on the market as a whole slowing down and if that's the case, do you see evidence of that sort of early days in Q4 already?
Yvan Deschamps
Yes, thank you for the question Meny. I think it's an important one. And I'm really pleased to just add a few comments on that, but if you allow me, I'll just start by doing a step back and we're currently at 9.1% CET1, which is above the 8.5% minimal range. So we still have a good buffer there, but very important to look at the past, so pre-pandemic, we were at 9%. So we're pretty much back to the level that we had pre-pandemic because the pandemic definitely impacted a few portfolio and we have accumulated capital during that period.
And our first priority has always been to redeploy vast capital and we're really pleased with the exceptional growth that we have in commercial growth over the last 12 months pretty much. So at this point, it's not the question of wanting to slow it down, it's a question of normalization, because we did redeploy that capital and the specialty inventory financing is normalizing in terms of market growth at this point. So the utilization rate, as mentioned by Rania, now 51%, which is closer to historical level. So that is slowing down, and that's just a reflection of the growth that we had over the last year.
So we are still managing prudently the capital and are pleased with the level and expect that at this point that the capital generation in currently is going to sustain a more normalized growth going forward.
Rania Llewellyn
And Meny just to add to what Yvon was saying, we are constantly proactively managing prudently our capital and so we did pause the share buyback in Q2, we're reintroducing the 2% DRIP and given the current macroeconomic conditions, making sure that our growth is profitable and we're looking at a risk-adjusted returns. So it's not growth for the sake of growth. But just being more diligent and proactively managing that growth going forward.
Meny Grauman
Thanks Ren,. I guess where I'm coming from is, commercial loan growth just seems remarkably strong and if I look across the peer group. It doesn't seem like it's slowing in the near future term certainly it's come in higher than expected I think even higher than you had guided to and expected. So the question is, in Q4, if it doesn't slow as you expect what are the implications of that? So that's what I'm trying to understand it, is it something that you can actively slow or do you have other levers that you can use in order to offset that tremendous RWA growth that you're seeing?
Yvan Deschamps
Yes, so definitely I would say an institution, including us, we do have what we call that capital to get right. So depending on the what's happening in the market we will adjust. Can we slow down some growth? Definitely we could slow down some growth if we see higher growth in other portfolios. So we're not uncomfortable many at this point with the level of capital that we have and we feel that we have a few tweaks but as mentioned by Rania we're thinking proactive actions like we stop the share buyback last quarter.
We read through the DRIP, this quarter, which is a reflection of the economy, but is also reflection honestly of the growth that we have. So we are taking proactive move, but we definitely have contingency plans in case we would need to address them but at this point, what we see in our crystal ball which is hard, it's not as pure science is that we should be roughly in line with internal capital generation this quarter.
Meny Grauman
Thanks.
Operator
And we'll go ahead and take our next question from Gabriel Dechaine with National Bank Financial. Please go ahead.
Gabriel Dechaine
Good morning. I just want to talk about the margin. A few things here coming to mind. One I get the idea that you want to make the balance sheet more liquid during volatile time but from Q2 to Q3 is not like the world is really gotten dramatically worse was volatile in Q2 volatile in Q3. Just wondering what changed the perspective there. And also, to what extent did you maybe get caught off guard by some rapidly increasing cost in the broker channel where the deposit growth was the highest of the bank. I mean, I get that -- you got to be nimble and all that but not like the we'll get dramatically worse this quarter it's about the same as bad as it was in Q2?
Yvan Deschamps
Yes. So thank you for your question, Gabriel, I'll take that one. So the level of liquidity is a reflection of two items. So definitely the uncertain times led us to be prudent in the compact and gather more liquidity and what's great is the liquidity. If you look at it, it came from the deposit, side. Right. So we didn't pull it from the wholesale or something like that. So we're really pleased with the deposit gathering that we had, over the last quarter.
The second thing is that if you look at the growth, definitely, the growth of commercial was excessively at performance over the last 12 months. So, that leaves us to or that led us to be more conservative and prudent last quarter because again we just wanted to make sure from a liquidity perspective, we would be careful and manage accordingly. So it impact the NIM by about two basis points. So half of the difference between last quarter and this quarter relates to the level of liquidity.
So we've seen a tempering of that which was exceptional in Q2, was still pretty good in Q3, but lower then, than it was in Q2. So the exceptional deposit gathering business an excess of liquidity. But I much prefer being in that position then the reverse. And with that will allow us to gradually redeploy those liquidity into loans that will have better margins, which will contribute to this. And I would call that impact transitory because it's going to come back over the next quarters.
Gabriel Dechaine
So, loan growth came in faster than anticipated. I guess, so you decided to step on the gas a bit in deposit channel but for Q4, you might do less of that because you've got the excess liquidity already on balance sheet, and can you, can you talk about...
Yvan Deschamps
I think it's right, Gabriel. So if I work for only one month. Sorry, did you want to add something?
Gabriel Dechaine
Like, what do you have any comment on the increase in funding cost of the broker channel or that not a factor to all?
Yvan Deschamps
Yes, we have the two things. So I'll comment on your first portion, and I'll answer that one after so we're one month in. So I would say with level of liquidity that we had at the end of the quarter, we slowed down right in terms of this deposit gathering at this point. So that's going to help gradually in Q4 and going forward, but the deposits came in very strong in the demand deposits as well as the broker GIC term deposits.
And we've been very successful there, only playing with rates in that market, as you can expect, but also building relationships and deepening the relationship that we have and which also brought more deposits than we expected.
So we're really, really pleased with the performance that we had, not only last quarter, but if you look at the full year since last year we grew by 15% at a deposit base which for me has been a real key change or at the Bank versus what we have in the previous years.
Gabriel Dechaine
Okay, thanks and enjoy the last few days of summer.
Yvan Deschamps
Thank you.
Operator
And we'll go ahead and move on to our next question from Paul Holden with CIBC. Please go ahead.
Paul Holden
Thank you. Good morning. We want to continue the discussion on NIM and maybe put aside sort of the explanations you just provided to Gabe's question. Because you provided some guidance last quarter, which said that you get more of a NIM benefit from Bank of Canada rates in 2023 versus 2022 so again kind of putting aside the liquidity explanation, why just remind us on why that is, is that just assets take longer to reprice than deposits?
Yvan Deschamps
It's a very good question. And so a few elements there. So the first one that I did not mentioned yet is we need to change in the mortgage retention, which I think is the short-term pain, but very nice long-term gain. And Kevin and our team have been very successful at increasing the retention of the mortgages, due to the loyalty activities that we have there probably partly because of the increase in rate as well.
But we're really happy with the retention that we had, so that created less our prepayment penalty this quarter, that means that we're going to keep the customers on long-term basis, but that did create probably one basis, one point of NIM that we did not anticipate. But we're really pleased with the results.
The second one is the liquidity we probably pulled a bit more than we expected in the context of the assets, but I'll discuss that one, then I think it's really transitory and going to change over time. The last one is really the repricing of the assets and I know I'm not the only one that mentioned that. So the funding cost always go up in terms of anticipation, the repricing in the question of contracts and it's also a question of discipline in the market.
So we're portion of the lagging in terms of repricing is due to contracts, meaning that you know the increases need to happen, so that we can implement it the other contracts that we have with the customers versus the funding will have increased a few months before.
The second element to that is, I would call it market discipline. If you look in some products, definitely the funding costs went we faster than what you with the in the pricing, but it's not only a question of Laurentian it's a question of market discipline, but again I'm optimistic and I see that also as transitory and the market discipline should come back over the next quarters.
Paul Holden
Okay, so then a couple of follow-ups to that answer, first on the contracts. I'm assuming these are new annually. So maybe you can confirm or correct me on that assumption. And then two, does your view on benefit from Bank of Canada rate increases in 2023, does that still stand?
Yvan Deschamps
Yes. And thanks for digging. I think it's good that I had a few comments. So it's not a yearly thing in terms of contract by I'll give you neat little example. The funding rates will increase, but as you know, the loans that are based on Prime will only increase when Bank of Canada officially increase.
So there is a lag between that funding and the prime increase for the customer. And in some other contracts that we have with the customers as well, the variable rate is based on the prior month. So you may get a few weeks of delay and in the context where we've seen pretty big increases over last quarter and frequent increases that creates a lag. But that's when it's really transitional then it come backs relatively quickly.
The only thing I'd be careful is that we still anticipate increases of interest rates over the next two quarters or so. So I would expect that that lag will lag will last a little bit longer, but again as they interest rates increases you know stabilize or stop, we will catch up back to that element. So I will reserve my comments on '23, but I would say that we're still positioned to take advantage because of all the elements I discussed as we will reduce the liquidity as we will reprice the variable rate contract that I just mentioned. And as well as we will continue to evolve the portfolio mix. We see that there is still upside on NIM side.
Paul Holden
Okay, that's very helpful. And one more question from me, if I can? Just you pointed out, you're exceeding all of your 2022 financial targets. So that's great and I guess my question is does that enable you to accelerate any of the strategic investments you need to make in that business whether that comes in Q4 or in the following year?
Yvan Deschamps
The first thing is definitely it allowed us to sustain the investments that we're doing. We also mentioned last quarter that we would keep an elevated level of expenses for the remainder of 2022. So it definitely did allow us to push and invest a bit more, not only in the strategic investments, but also to support the growth because we had the fantastic growth over the last 12 months, and we need to make sure that we sustain the level of service to the customers and for us it's something that we look at it, the customer first is our principal.
So, definitely we have to invest there. We continue to invest there. But on the, on the strategic initiatives, in fact or a less Rania have comments on it, but she already reflected in her remarks, a lot of the adjustments we have just sorry accomplishments we have for.
Rania Llewellyn
Yes. So, Paul. So thanks for the question. So obviously, it's a dynamic process in terms of us managing our expenses, looking at our projects, majority of which are strategic but we do also have some other non-strategic projects. So it's really important to make sure we have the right balance between investing in the future and having the right cost discipline particularly in a volatile uncertain macroeconomic environment. So we've been consistent in terms of what our target is this year, will be coming back to the Street in Q4 as we finalize kind of our budget and what our strategic plans are for delivery and execution is for next year.
We've got lots of levers that we can play around but making sure that we manage our expenses in line with the growth is also very important so making sure we have that cost discipline is key, we've always said, at Laurentian Bank, we have two opportunities here it's topline revenue growth and efficiency. So there is a number of other efficiencies that we're looking at and we will continue to invest in that, so. So we're comfortable with the level of investments at this point.
Paul Holden
Great. Look forward to the 2023 outlook next quarter. Thank you.
Rania Llewellyn
Thanks, Paul.
Operator
We'll go ahead move on to our next question from Sohrab Movahedi with BMO Capital Markets. Please go ahead.
Sohrab Movahedi
Alright thank you. I just wanted to make sure I heard a few things correctly. I think part of the reason why you mentioned commercial loan growth came in a little bit hotter than you had expected was I guess faster normalization in utilization rates. Is that the right way of thinking about it?
Yvan Deschamps
Yes, it is correct Sohrab.
Sohrab Movahedi
So just as a matter of curiosity, how much of it would you say was kind of existing clients drawing down more versus just building the portfolio with new clients.
Eric Provost
Yes Sohrab, it's Eric. Just commenting on that and thank you for the question. Actually, it's really a mix. The way the team has deployed we've been able to keep winning market share. So we are up 20% year-over-year in terms of our dealer base. So that is a contributor, but for sure with the macroeconomic environment, we saw demand for those products normalizing. So that is the big factor in terms of credit line utilization of our existing dealer based in the portfolio, so we did a mix of both like, we're successful on boarding new business, but definitely consumers right now are more tempered in their demand for these types of products.
Yvan Deschamps
And maybe to add bit of color on that. So normalizing as a word that is very important. And when we see normalizing it's not negative. Since going back to the normal environment, we have pre-COVID where the dealers will go back to their normal utilization level their deadline, within the context where the consumer demand is back to what it was.
So if you go back in the COVID environment, the demand was too -- was extremely high from the consumers, and that's why the portfolio reduced, but we're going back to normal level. And we're going to go back to normal level of growth in that portfolio.
Sohrab Movahedi
Okay. But I suppose been normalization was a bit of a surprise to you, is that the right way to think about it. You didn't expect it to normalize as quickly as it has been?
Yvan Deschamps
Yes. Not as quick Sohrab for sure because like pre-season ordering for the dealers occur usually in the fall season, early winter. So that was prior to the war, prior to interest rate hikes. So like those ordering occurred very strongly again for the 2022 season in anticipation of another strong year. And then the dealers are just coming out of two exceptional year, so I just think that they forecasted higher demand and with the macro-economic environment like it just, it's just slowed down, consumer to more normal pace like utilization right now at 51. If you go pre-COVID in 2019 during that summer, utilization was up at 55%.
So we're not even catched up but definitely it was quicker than expected.
Sohrab Movahedi
I mean Eric, every indication is that maybe the economic outlook is going to further slow-down, do you worry that the normalization may mean a lower low this cycle on these utilization rate?
Eric Provost
Well, right now we're very comfortable where we are with the portfolio and we haven't changed our way to underwrite so. So we feel confident about where we are and normalization doesn't mean stop into these sectors. So this summer we saw a good liquidation of products, we're tracking KPI's on aging inventory and liquidation. So we're monitoring that portfolio very closely. But no, for now we're comfortable where we are and we'll see what's ahead. But no concerns so far.
Rania Llewellyn
So, maybe if I could just add a little bit of color, because it is inventory financing. It's Rania. So when consumer demand actually slows down and the dealers have ordered the unit, it actually improves the utilization for us. So they start drawing down on our facilities, which actually earns us revenue. And so one of the things we're watching out for and I know our dealers are as well is the aging of the inventory, making sure that they are slowing down on their orders. So again, just a reminder, in terms of when demand slows down and they're sitting on inventory, they're actually drawing down on our facilities, which generates revenue for us.
And so that's why the pre-pandemic levels of 55%. So I think the surprises, is the supply chain came back very quickly faster than we anticipated. The products are still being sold and there's really no aging in the inventory. So from a PCL perspective, we're very, very comfortable and we know and we know that our dealers are being prudent in terms of their ordering season going into the session.
Sohrab Movahedi
Okay. I just have two maybe -- I just have two quick questions, one follow-up to that, I mean, Liam, if your borrowers end up having to sit on inventory, because of lack of demand, what ripple effect does that have on your -- what implications as it have on your reserve building requirement?
Liam Mason
First of all, Sohrab thank you for the question. We do have a disciplined reserving process against those inventories. I would know we've got some five layers of protection on that portfolio, we have the collateral itself, which is at wholesale prices you've got the backing of dealership, many of the dealers have personal guarantees on the dealer. Your OEM's, your manufacturers and re-purchased arrangement and then we have a curtailment process where if you're not -- if you're not seeing the turnover.
But right now the liquidation rates are normalizing as Eric said, we're not seeing a lot from an aged inventory standpoint, this is a very operational business, we're on the ground doing inspections, looking at the inventory, but we really don't see any cause for concern. Given the layers of protection and given our reserving comfortable with that portfolio at this juncture. It's more of a return to normal, then a slowdown or a recessionary impact.
Sohrab Movahedi
Okay. So we just more crystal clarity you will earn higher spreads dealers are using the facility because of a slowdown in demand without any implications for reserve, is that you're telling me?
Yvan Deschamps
No. Just to be clear, as we earn those spreads our discipline is to maintain appropriate ACL's against that growth and indeed if I might jump in here, sort of one of the big drivers of our increase in ACLs was our prudent measured approach and we increased reserves commensurate with that volume, that's our discipline. That's how we maintain ensuring that we have the credit protections that we need. In addition, two layers of protection I mention.
Sohrab Movahedi
Okay. And the volumes, I mean I think to an earlier question you suggested that the circumstances, let's just say meant being a bit more prudent on reserves -- sorry liquidity, higher liquidity levels was a prudent. Why don't you think you will have to retain a higher liquidity, let's say for the next couple of quarters because the macro uncertainty, certainly not lessening is intensive back?
Yvan Deschamps
Yes, it's a good questions Sohrab, and I didn't say that we would let it all go in Q4, to be clear, we're going to look at what that mean in the environment. We're going to look at the growth that we're having as well. We will redeploy some of it in the growth because currently we did gather a lots in last quarter. So we believe that that we're at the point we can use some of it, but definitely, I think we can be accused of being prudent and it will probably continue to be prudent for a few quarters. So we may hold a little bit of liquidity for the next few quarters, but I would expect gradually be that right.
Sohrab Movahedi
Thank you for taking my question.
Yvan Deschamps
Thank you.
Operator
And we'll move on to our next question from Doug Young with Desjardins Capital Markets. Please go ahead.
Doug Young
Hi, good morning. Just on the performing loan build just trying to get a sense, believe it was more associated with the commercial side. Is this related to the inventory finance book? Is this across the board? And I do think there is a bit of an uptick in commercial write-offs this quarter, correct me if I'm wrong, again with this more related to the inventory being longer-dated or it is across the board. Just hoping to get a sense of those two teams and what segments they relate to?
Yvan Deschamps
So why don't I have my colleague Eric speak to the growth in the portfolio. Then I'll take the remaining of the question. Eric?
Eric Provost
Yes. Thank you, Doug. The growth was really from all across, but mainly driven by commercial real estate, as well as the inventory financing and then to pinpoint inventory financing actually we are at record low aging like -- like coming out from these two years definitely the dealers and the portfolio there is very healthy. And like Liam just explained like we are well reserved and protected into this segment, and we feel comfortable there. So Liam, maybe more details on the write-offs?
Liam Mason
Sure. Thanks, Eric. And you got to be really pleased with that growth. The write-offs are normal ebbs and flows in our commercial file management. The files were fully provisioned. And if you look at our GILs, I'm actually really pleased, our gross impaired loans are coming down, down CAD 29 million. And we're seeing with that GIL drop, either things returning to performing or getting written off. But these were long-standing files. We have a very client-centric approach to managing workouts and they were fully provisioned. So not indication of any trend or any concentration, and certainly not related to inventory finance.
Yvan Deschamps
This is Yvan, if I can be extremely crystal clear, the performing loan increase in commercial was due to the macroeconomic factor. It was not related to any particular portfolio. So it's really driven by the environment. And as Liam mentioned, the write off is much more clean up than something you write, because they were fully provisioned for.
Liam Mason
Yes, just the other -- just to drive that point home, if you think back to last quarter, we were one of the banks that looking at the economic environment, stock, sort of the volatility and the weaker economic environment coming, and we updated our economic assumptions and the weightings of our outlook, and that's served us very well. And this quarter, given the change in the macroeconomic outlook that's been highlighted by many of the Banks and in line with our prudent approach to reserving, we made further adjustments to the assumptions and the weight. And that's really, to Yvan's point, what's driving it. We continue to be prudent and measured and that's part of our DNA and how we operate.
Doug Young
Okay. Just so what we're seeing in the write-offs and the performing loan builds around the commercial side, this isn't anything to do specifically with the particular portfolio like inventory finance? This is more, as you say, clean up across the book and across the different segments?
Liam Mason
Yes.
Doug Young
Okay. And then just on the CET1 ratio and the sequential decline, and this might be a simple answer, but I mean RWA was up 4% quarter-over-quarter. I think the loan book was up 2% quarter-over-quarter. And so there is a bit of a difference there. Can you maybe detail a bit of what the driver was? Are you seeing migration impacting the RWA? I guess it wouldn't be migration, but is this just the portfolio mix? Just trying to get a sense of that.
Yvan Deschamps
It's really portfolio mix. We're not seeing any adverse migration. You can see that in our Stage 1 and Stage 2 elements across the commercial portfolio. So it's really portfolio mix.
Doug Young
Okay. That's all from me. Thank you.
Operator
We'll go ahead and move on to our next question from Nigel D'Souza with Veritas. Please go ahead.
Nigel D'Souza
Thank you. Good morning. I had a question for you on your interest income sensitivity disclosure. I noticed that the increase in NII over the 12 months -- last quarter, that was CAD 12 million from a 1% increase, and this quarter it's about CAD 1 million. So just wondering what led to the decrease in NII benefit? Is that mainly on your expectation of higher deposit betas? Any color there would be appreciated.
Yvan Deschamps
Yes. Thank you for your question, Nigel. So the first thing is we definitively dynamically manage the balance sheet and that trespass is really the position that you have at one single point in time, which is exactly at the end of the quarter. So if you look at the last few quarters, I think if I run the numbers, we have CAD 1 million this quarter, we had CAD 12 million last quarter. If you look at the one before, we have CAD 3 million, and the one before we had CAD 15 million.
So I wouldn't see too much in that at this point. We remain positioned to take advantage of increases in interest rates. And as I mentioned, we're going to see or we expect to see 2 basis points increase next quarter. And I mentioned already a few drivers of increase in terms of margins and NII coming from reducing gradually the level of liquidity. The portfolio mix is going to be an impact as well. And I mentioned the repricing. So I wouldn't read too much in the stress test. It's really a single point in time, and that does fluctuate on a daily basis.
Nigel D'Souza
Okay. And then maybe tying that together with your NIM outlook on Slide 29 for then to exceed 1.9% over the medium term. Can you remind me again, that expectation, is that driven by your expectation for margin expansion in the existing portfolio or the change in the loan portfolio mix?
Yvan Deschamps
Yes, I would simply just in fact repeat what I just mentioned, Nigel, because it's a contribution of various factors. Definitely, the portfolio mix has an impact. So we've seen growth in commercial and that does contribute a reduction that we would expect a little bit on the liquidity side with the impact as well. And at one point the repricing of the assets will have an impact. So it's really all of those points. And that's all understanding that the discipline has to be in the market in terms of repricing of the assets also.
Nigel D'Souza
Okay. That's combination of factors. So if I could just switch gears and maybe a broader question. Looking at SOI, it doesn't look like a recession is your base case scenario at the moment. But if that does change and the base case scenario is one of the recession, does that impact your strategic roadmap or strategic plan going forward? How does that view you think does change?
Liam Mason
Well, why don't I talk about the scenario, and then I'll pass it to Rania on the strategic side. We have updated our scenarios, as we do every quarter, a regular process, and look forward. Our pessimistic scenario does include moving to a lower economic growth pattern, call it recession and how long and for long that is, depends on how the macroeconomic conditions evolve. I mean you heard from Jackson Hole, the Fed chair, you've heard the Bank of Canada indicate they are going to be moving to reduce inflation and that's going to have a direct impact on economy. We factor that in. As I mentioned earlier, we've also adjusted the weightings on our outlook across our economic scenarios both last quarter and this quarter to port more weight on the year on the weaker scenarios, and our reserving will remain prudent and we'll adjust accordingly.
In terms of the strategic implications for that and how the economic profile, matter of fact our strategy, Rania?
Rania Llewellyn
Yes. So thanks for that question. What I would say, as I had mentioned, we delivered on a lot of things this year, right? So we said, you know, it's a digital-first approach. We said we were going to grow the commercial book of business, we are going to diversify. So we feel pretty confident that we've built a lot of foundational pieces that should we decide to slow down some other strategic projects, we have enough of the foundation that we can use it as a launching pad for growth, acquisition, retention, cross selling while being very selective as to where else do we want to invest. And so I think we have the appropriate levers. We feel we're very well positioned at this point, both from a provisioning perspective as well as from an expense management perspective, but it's definitely something that we will come back to you in Q4 to kind of outline what are some of the strategic deliverables we were going to deliver on. But we're very committed to our three year strategic plan. We've been executing according to the plan and so we'll continue to, like I said, dynamically manage where we need to depending on how the conditions change.
Did that answer your question?
Nigel D'Souza
Yes, it did. That was helpful. Thank you.
Operator
And we'll move on to our next question from Marcel McLean with TD Securities. Please go ahead.
Marcel McLean
Thank you. Two real quick ones for me. Just going back to the capital. You said you have a tool kit there that you can deploy if loan growth continues to exceed expectations. Just wondering if an ATM is part of that? I know one of your peers has been using it for a number of quarters. And maybe if there is a certain level where that does get implemented when you dip below this 9% that was your pre-pandemic level, are you comfortable letting it drop to 8.5%? Just kind of wondering what your thoughts are on that.
Yvan Deschamps
Yes. Thank you for your question. That's a good one. I don't want to go too much in the details of my tool kit, as you can imagine. But what I can say definitely is ATM is not at the top of that, it's right. So at this point, we're pretty comfortable with the level where we stand. And I mentioned pre-pandemic, we were at 9%. So it's not like we're very low. We're just getting back to where we were, which is a normal level for the Bank. Our minimum is 8.5%. So we still have a cushion. So again, I'm going to repeat a bit myself. We stopped the share buyback. We reintroduced the DRIP. There is a few things like that, we can easily do, but the ATM is not on the forecast for now.
Marcel McLean
Okay. And then secondly on the NIM. If I'm hearing you correctly, it's actually going to be, we'll have to wait till we see a period, a quarter where we see stability in the Bank of Canada rate before we really start to see an improvement in your NIM and that's when the improvement might come through more, am I hearing that correct or is there more to it?
Yvan Deschamps
Yes, I'll answer with a yes and no word to that. So the first thing is we mentioned that we're going to see an expansion of the NIM. We expect to see one in Q4 and we'll provide more guidance on '23, and again I don't want to be too much myself but liquidity level, asset mix and the lag of repricing.
Well, I'm going to answer, you may be right in a certain way is the repricing of the loans because the fact that for the part of the loan that I have that has a repricing lag of a month or a few days or something like that, definitely as the interest rates stop increasing, we're going to catch up fully. So that will have an impact. And the other pricing lag that I discussed is relative to the market, and that one is a bigger question and an industry-wide question.
Marcel McLean
Okay. Thank you. That's it from me.
Operator
And we'll go ahead and take our last question from Jooyoung Kim with Credit Suisse. Please go ahead.
Jooyoung Kim
Hi. Good morning and thanks for taking my questions. So sort a couple of quick ones here. Just on tax rate, it was lower than prior period. So just wondering if there is anything unusual or one-time in nature? I'm just trying to get a sense on whether that 15%, any effective tax rate is appropriate going forward?
Yvan Deschamps
Yes, it's a very good question, Joo. And a big portion of that is technical. So this quarter about 16%, last quarter 20%. About close to half of it is coming from the repayment of the LRCN, because the way it's done as the interest payment is done below the net income, while the tax is impacting the net income. So every time we have the interest payment, it does reduce the tax rate. So you would see that every six months because we pay that that every six month. The rest is a mixed bag, depending on the level of profitability of the various elements. So next quarter, just pick something in the middle of that, then you should get closer to what we would expect for Q4.
Jooyoung Kim
Thanks for that. And last one from me, just on your non-interest revenue. When I look at the sort of more traditional retail banking revenue we saw decreased in lending fees service then sort of card year-over-year basis. Just wondering what drove that year-over-year decline this quarter?
Rania Llewellyn
Sorry, if you can just speak up a little louder? It was really hard to hear.
Jooyoung Kim
All right. So can you hear me better now?
Rania Llewellyn
It's still little staticky, so.
Jooyoung Kim
Sorry, I'll try it again. I just had a question on the non-interest revenue. When I look at the sort of the traditional retail banking revenue, like the cards fees and service fees. Just they were down year-over-year. Just wondering what drove that decline this quarter?
Yvan Deschamps
Yes. The key element this quarter relative to that would be card services. So it's lower this quarter because we had, you know, have promotion program to increase the velocity and use of credit cards. So that impact Q3 in fact by a little bit more than CAD 1 million. So this one is really a one-time. So you would see that being corrected in Q4 in terms of level of revenue. The rest, I would say is relatively in line versus what you would have seen over the last few quarters. So again, just to be very clear, we would expect the visa revenue to increase back to pretty much where it was.
Jooyoung Kim
Thank you. That's it from me.
Operator
And with that, that does conclude our question-and-answer session for today. I would now like to hand the call back over to our CEO, Rania Llewellyn for any additional or closing remarks.
End of Q&A
Rania Llewellyn
In closing, following a solid Q3, we will continue to execute against our strategy as we head into Q4. Our credit quality is sound and we are confident in our strong underwriting practices and highly collateralized portfolio. We will continue to apply strong cost discipline across the organization and identify additional cost optimization opportunities. Our one-winning team is engaged and continues to show resilience through this period of volatility. We remain confident in our ability to exceed our 2022 financial targets.
Thank you for joining the call today.
Operator
And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.
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Laurentian Bank of Canada (LRCDF) Q3 2022 Earnings Call Transcript