Laurentian Bank of Canada F4Q07 (Qtr End 10/31/07) Earnings Call Transcript

Dec. 4.07 | About: Laurentian Bank (LRCDF)

Laurentian Bank of Canada (LB.TO) F4Q07 (Qtr End 10/31/07) EarningsCall December 4, 2007 2:00 PM ET

Executives

Gladys Caron - VP of PublicAffairs, Communications and IR

Réjean Robitaille - President andCEO

Robert Cardinal - CFO

Louis Marquis - Head of Credit

Michel Trudeau - Head ofLaurentian Bank Securities

Luc Bernard - Head of RetailFinancial Services and Small and Medium Enterprises

Bernard Piché - Head of Treasury,Capital Markets and Brokerage

Analysts

Rob Sedran - National BankFinancial

Michael Goldberg - DesjardinsSecurities

John Aiken - Dundee Securities

Ian de Verteuil - BMO CapitalMarkets

Sumit Malhotra - Merrill Lynch

Operator

Welcome to the Laurentian BankConference Call. Please be advised that this call is being recorded.

I would now like to turn yourmeeting over to Ms. Gladys Caron. Please go ahead.

Gladys Caron

Good afternoon, everyone. Ourpress release was issued today on Canada Newswire and is posted on our website.This afternoon, the review of our fourth quarter in the year 2007 will beprovided by our President and CEO, Réjean Robitaille, followed by apresentation by our CFO, Robert Cardinal who will highlight Laurentian Bank'sfinancial performance. Finally, Réjean will conclude.

The following members of oursenior management team are also present at this call to answer any of yourquestions. Bernard Piché, Head of Treasury, Capital Markets and Brokerage; LucBernard, Head of Retail Financial Services and Small and Medium Enterprises; FrançoisDesjardins, Head of B2B Trust; Lorraine Pilon, Head of Corporate Affairs;Michel Trudeau, Head of Laurentian Bank Securities; Louis Marquis, Head ofCredit; Marc Paradis, Controller; Pierre Minville, Head of Integrated RiskManagement; Andre Lopresti, Chief Accountant, and myself, Head of PublicAffairs, Communications and Investor Relations.

Before we start, I would like tomention that a PowerPoint presentation accompanying this conference call isavailable on our website and will be referred to by Réjean Robitaille andRobert Cardinal throughout their speeches.

During the conference call,forward-looking statements may be made, and it is possible that actual resultscould differ materially from those projected in such statements. For thecomplete portion that we note regarding forward-looking statements, pleaserefer to our press release or to the PowerPoint presentation.

I would like to add that ourcompany 2007 audited and consolidated financial statements including notes areavailable on sedar.com and on our website. I will now turn the floor over to RéjeanRobitaille.

Réjean Robitaille

Thank you, Gladys, and goodafternoon, everyone. I am very satisfied with our 2007 results. This yearshowed considerable improvement and profitability and operational efficiency. Thediluted earnings per share were $3.48, up 40% from 2006. Our return on equityalso grew considerably, reaching 10.9% versus 8.2% a year ago. Increasedrevenues in all of our business lines linked primarily to strong loans anddeposit growth, contributed to the Bank's performance.

As shown on slide 4, all our 2007objectives have been reached. Moreover, some of our results exceeded our annualobjectives, such as the return in equity, the net diluted earnings per share,total revenue and the efficiency ratio.

As presented in slide 5, ourefficiency ratio improved substantially in 2007, reaching 73.2% versus 76.1% in2006. Our efforts to increase revenue combined with diligent cost controlsuccessfully contributed to the fact that the ratio has been the best in thelast four years.

Now let me point out the trend ingrowth, shown on slide 6 as our total loans and BAs increased by 9% and totaldeposits by 6% over last year. Excluding all securitization activities for2007, total loans would have increased by 12%.

In retail financial services,total loans rose by 7%, while commercial financial services book increased by15% over the last 12 months. Real estate financing group, the largest subset ofcommercial banking, continues to perform very well with 22% growth comparedwith last year.

B2B Trust for loan portfolios,have shown strong growth over last year. Investment loan portfolio is up by 55%or $791 million while maintaining our credit quality. Moreover, total depositswere up by 9% over the fourth quarter of last year.

Laurentian Bank Securitiescontinues its development as assets under administrations are up 4% from lastyear. This internal growth is a direct consequence of our well-targetedstrategies and actions, including investments in our distribution networks andsystems, increased business development personnel, initiative to develop aperformance-focused culture, as well as targeted and efficient marketingcampaigns.

Now turning to slide 7, as wehave already announced, our exposure to the securities issued by the conduitscovered by the Montreal Agreement is limited. We have reduced the value of ourinvestments by $2.9 million or $2 million after-taxes corresponding toapproximately 15% of the value of these securities. We are following this matterclosely and continue to support the Montreal Agreement.

We have also announced anincrease in our quarterly dividend of 10%, or $0.3 per common share. Thequarterly dividend is therefore increased from $0.29 to $0.32 per share. Thisreflects our confidence as well as that of the Board of Directors in the futuredevelopments of the Bank.

Finally, our unionized employees havevoted in favor of an agreement in principle between the Bank and the union forthe renewal of the collective agreement. This is excellent news for ourorganization and clear proof of the marked improvement in our working relations.The new agreement will be for a term of four years and will be in effect untilDecember 31, 2011.

I will now ask Robert to provideyou with more details on our financial performance. Robert?

Robert Cardinal

Thank you, Réjean. My commentswill focus mainly on the comparison of our results for the quarter with thesame quarter last year for the whole year with those of 2006. I will alsobriefly comment on the financial performance of the lines of business and say afew words about our 2008 objectives.

Slide 8 shows that on a GAAPbasis, diluted earnings per share for the fourth quarter of 2007 were $1.14 andthe return on equity was 13.8%. In 2006, we had posted diluted earnings pershare of $0.84 and an ROE of 10.8%. Both quarters included $0.19 of earningsper share from discontinued operations, representing the recognition of $5.2million or $4.4 million after income taxes, and ourdiffered gain on the sale of BLC [Montreal]Rousseau as mutual fund sales significantly exceeded the minimum requirementsboth in 2006 and 2007.

Net income from continuingoperations in the fourth quarter reached $0.95 per common share compared to$0.65 per common share in 2006.

Important items, net income inboth quarters included certain important items of a non-recurring nature asdescribed in our press release, which specifically impacted our earnings pershare.

The most important items are asfollows. For the fourth quarter of 2007, first, a $4 million gain, resultingfrom the worldwide restructuring of VISA are $3.3 million after taxes and $0.14per common share, a favorable tax adjustment of $2.2 million, resulting fromthe resolution of certain tax exposure representing $0.09 per common share. Andfinally, a charge of $2.9 million related to the $20 million portfolio ofsecurities issued by conduits covered by the "Montreal Agreement"representing $2 million after taxes or $0.09 per common share.

Results for the fourth quarter of2006 included only a favorable tax adjustment of $2.1 million or $0.09 percommon share as explained in our press release. Excluding these items, earningsper share would have been $0.80 in the current quarter compared to $0.56 lastyear, a growth of 43% in our core earnings per share.

Again, excluding these items forearnings per share for the fourth quarter of $0.80 is lower than the earningsper share of $0.85 we reported in the third quarter, which included noimportant significant items.

As explained in our press releaseon pages 6 and 7, results of the current quarter were also affected by certainother items related to the liquidity and credit prices. The most important netimpact was the affect of the narrowing of the Prime-BA spread that nettedapproximately $2.7 million before income taxes for the quarter. This interestrate spread which negatively impacted our results for the quarter, hassubstantially reverted to its historical levels since the beginning ofNovember.

Now, let's turn to slide 9 forthe highlights of the year compared to last year. As to results from continuingoperations, and excluding important items explained at the bottom of the slide,net income reached $83 million or $2.99 per common share, and the return on equitywas 9.4%. This represents a significant progress in our core earnings per sharewhich shows a growth estimated at 40% for the year compared to 2006.

Slide 10 summarizes the maindriver behind these results [namely], first an improvement of the net interestincome, due mainly through loan and deposit growth, tighter asset and liabilitymanagement, as well as liquidity management. Net interest income grew by $33million or 9% to $390 million.

Net interest margin increased to2.31% in 2007 compared to Person 2.14% in 2006. Growth in our personal loansreached $790 million or 19% and $770 million or 11% in residential mortgageloans including securitized loans.

Other income was $193.7 millionin 2007 compared to a $182.6 million in 2006. The $11.1 million increase ismainly attributable to growth in core activities, including higher fees ondeposits and card services, on mutual funds sales, brokerage activities andfrom treasury and financial market activities. Other income also includes the$4 million gain on the VISA worldwide restructuring.

The provision for credit lossesremained stable at $40 million for both years. Non-interest expenses increasedby $16.6 million or 4%, compared to the growth of 8% in our total revenues. Thebank benefited from a strong positive operating leverage of 4% over 2006.

The $16.6 million increase ismainly related to higher salaries and employee benefits, as a combined effectof salary increases, new hirings and performance-based compensations, as wellas tight control over investment technology, rents and other expenses.

Finally, the bank benefited froma lower tax rate. The effective tax rate for 2007 was 22.7%, excluding theimpact of several important items of a non-recurring nature explained on pagefive of our press release. The effective tax rate for 2007 would have been27.9% compared to 29% in 2006. This lower tax rate in 2007 results from theincrease in investments in Canadian securities that generate tax exempt income,such as dividends, and also from a corporate reorganization, that reduced thetax rate on foreign credit insurance income.

[Note 18] to the annualconsolidated financial statements provide further information on the income taxexpense. We'll talk about the 2008 objectives. As I mentioned, we met orexceeded our objectives for 2007, revenue grew significantly as a result ofhigher loans and deposit volumes and overall improvements in all businesssegments while cost control measures limited increases in expenses.

Results for the year also benefitedfrom certain items as described earlier. Excluding these items, return oncommon shareholder liquidity would have been 10%, including discontinuedoperations and diluted net income per share would have been $3.18, as explainedon pages two and three of our press release.

Objectives set for 2008 describedon the table on page two, mainly ROE of between 9.5% and 10.5% taking intoaccount that the bank will not necessarily benefit from significant items nextyear, as it did in 2007.

Furthermore, the objectives takeinto account certain [plan] costs associated with initiatives aimed ataccelerating the bank's growth, as well as the uncertainty related to theprevailing liquidity and credit [drivers].

The earnings per share target up$3.30 to $3.60 for 2008 represents a growth of between 4% and 13% over the coreearnings per share of $3.18 for 2007, including the $5.2 million fromindustrial for both years.

As shown on slide 12, our netimpaired loans went from plus $5 million in the fourth quarter of 2006, tominus $11 million at the end of this quarter, reflecting primarily a reductionin gross non-performing loans. Our credit quality situation remains good.

Risk management continues to be avery important element at Laurentian Bank. We continue to maintain strongcapital ratios and closely monitor our loan portfolio and the creditenvironment. We also continue to remain very cautious and to monitor veryclosely the market environment which is moderately affected by the asset-backedcommercial paper prices and conduits.

I will now talk about thecontribution of lines of business. All business lines contributed to totalrevenue and income growth when compared to last year.

On slide 13, total revenue ofRetail Financial Services increased by $23 million or 6.5% over last year toreach $377.1 million. The sector contribution to net income increased by $10.3million to $44.9 million or 30% over last year, reflecting the significantbusiness development activity. Growth in average loans and average deposits of$506 million and $365 million, respectively, higher income from mutual funds,from fees on deposits, the visa gains and the lower income tax rate associatedwith lower taxes on credit insurance revenue were also key factors in theseresults.

As shown on slide 14, net incomecontribution of commercial and financial services increased slightly to $24million. Total revenue was relatively stable at $82.8 million. The increase innet interest income resulting from the higher loan and deposit volumes mainly inreal estate financing and in the small and medium-commercial in Quebec, was offset by lower loan fees, mainly in Ontario.

The next slide shows that netincome contribution of B2B Trust line of business grew by 25% to $30.5 million.The main drivers of this increase were, impressive growth in personal loans anddeposits, mainly $791 million in investment loans and $289 million in averagedeposits. Lower loan losses on personal line of credit portfolio and relativelystable non-interest expenses, which led to a strong improvement in theoperational efficiency ratio.

As can be seen from slide 15, netincome contribution of Laurentian Bank Securities was $7.1 million for theyear. Laurentian Bank Securities has been expanding its activities over thepast years through the opening of new offices and the introduction of theInstitutional Equity Division.

Excluding the impact of the gainon the sale of the Montrealstock exchange and the asset-backed commercial paper provision, this expansionhas led to a 25% or $1 million increase in net income for the year, compared tolast year resulting from good performance of the Institutional Division.

On slide 17, other sectorsreported improvement, improved revenues and contribution for the year. Theimprovements are attributable to the resolution of various tax exposures, asexplained earlier and also largely to the higher interest and non-interestincome has progressed continues to be made in treasury and financial marketoperations, particularly in liquidity and asset and liability and risk ratemanagement, despite the lower securitization revenues.

This concludes my comments. Nowback to Réjean.

Réjean Robitaille

Well, thank you, Robert. Nowturning to some of our initiatives, the bank has taken other steps in itsdevelopment, as can be seen from slide 18.

During the fourth quarter, wehave carried on with our initiatives to improve our efficiency, such asoptimizing important processes in our business lines and corporate sectors.This optimization will of course continue in 2008.

In our retail financial servicessector, we began replacing all our ABMs and the deployment should be completedby the end of December 2007. We continue to improve our customer informationmanagement tools while removing sales and administrative barriers.

We are already known for ourproximity to customers, and we believe that with a more comprehensive andpowerful knowledge based on our clients, our branch based employees will beable to serve them even better.

Regarding commercial financialservices, in early November, we moved the commercial banking center to Thornhillin Ontario.This is a better location for our customers and provides us with bettervisibility. We continue to set the foundations of a long-term development ofthis sector.

B2B Trust, which does businesswith over 16,000 independent financial professional across Canada, will continue itsdevelopment as planned through channel and product expansion, focusing solelyon five core distribution channels, mutual fund industry, insurance industry,investment industry, mortgage brokerage and deposit brokerage.

Laurentian Bank Securities iscontinuing its development by applying rigorous execution to its growthactivities and daily management. This sector added employees and strategypositions in its retail division and institutional equity and institutionalfixed income sectors in order to consolidate its position to further continueits development.

In summary, as shown on slide 19,the year 2007 was a very good year, with increased total income coming fromorganic growth and high quality sources of revenues. Significant improvementsof our operational efficiency at several levels of the bank, improved creditquality and strong net income improvement from continuing operations.

In conclusion for 2008, we willcontinue to maintain our efforts to ensure the banks’ development with along-term vision by focusing on the same three priorities, which are increaseour profitability, improve operational efficiency and to further develop ourhuman capital.

We are very proud of our 2007accomplishments, however, we are aware that we must continue to improve ourprofitability in 2008. We are committed to do so and we are counting on ourdedicated employees to do this, after all, they are the banks best assets and Iwant to thank them for their performance in 2007.

This wraps up my comments and Iwill now turn the floor back to Gladys.

Gladys Caron

At this point, I would like toturn the call over to the conference operator for the question-and-answersession. Please feel free to ask your question in French or in English.

Question-and-Answer Session

Operator

Thank you, Gladys. (OperatorInstructions). Your first question is from Rob Sedran from National BankFinancial. Please go ahead.

Rob Sedran - National Bank Financial

Hi. Good afternoon. Réjean, I amgoing to start with an easy one. If I annualize the new dividend and use thebottom end of the EPS target range, I land below the 40% payout. Now, I knowthe dividend is reviewed every quarter, but just philosophically, what is theview on the dividend. I mean some of your larger peers or all of your largerpeers, I guess, have settled into an every other quarter pattern. Is that asort of policy you would like to see at Laurentian Bank?

Réjean Robitaille

Rob, first of all, well, thankyou, Rob, I think it's a good and easy question. Well, with a 10% increase, Ithink that's significant. As you have mentioned, we review that on a quarterlybasis.

That said, we did have a stronggrowth in 2007 and we think to do the same thing in 2008. So, it's importantfor us to also continue to grow our capital, and as you can see in terms of ourcapital objectives for next year, it's over 9.5%. So, we will look at thesituation on a quarterly basis. But I think it's important that you notice thatwe will also continue to grow the capital base on the strong growth that wehave in the past and would be planning to have.

Rob Sedran - National Bank Financial

Okay. My second questionsurrounds the issue of credit quality. Specific provisions have been unchangedfor the last eight quarters at $10 million which says to me there is an elementof conservatism in that figure, at least from the way I look at it. It lookslike formations were down, which sort of bucks the trend that we have seen sofar this quarter from some of the larger banks. Can you talk a little bit aboutcredit quality? I noticed that you took out the PCL ratio objective this year.Any color you can give us would be appreciated especially in the context ofsome of the strong loan growth you have been recording?

Réjean Robitaille

I will ask Louis Marquis responsiblefor credit to answer that question.

Louis Marquis

Well, as you have seen, ourimpaired loan level has decreased materially in the year, and we had a stableenvironment. The fourth quarter was a good quarter for us, and I see no signsat this point of any deterioration. We are not seeing any sign in our books ofdeterioration. But of course, it's a market that we have to be very carefulabout right now.

Réjean Robitaille

As for the objective that youmentioned, this year we did a benchmark and we also did the same thing lastyear, to the benchmark comparing objective versus, let's say, our peers decidedto not show, let's say, the credit quality in terms of -- it's already, infact, including all the other objective in terms of EPS and return on equity.But as Louis mentioned, we will certainly follow very closely the situation.

Rob Sedran - National Bank Financial

Okay. And then the last questionas just a point of clarification because I am not sure if I caught thiscorrectly, but the $3.30 to $3.60 objective that you mentioned from an EPSperspective, does that include the roughly $0.18 or $0.19 from discontinuedoperations or is that $3.30 to $3.60 from continuing operations?

Réjean Robitaille

No, that's including the $0.19,let's say, the 5.2 million on the balance of sales of Edmond de Rothschild.

Rob Sedran - National Bank Financial

Okay. Thank you.

Operator

Thank you. The next question isfrom Michael Goldberg from Desjardins Securities. Please go ahead.

Michael Goldberg - Desjardins Securities

Thanks. I also had a fewquestions. First of all, would I be correct in estimating that the impact of anarrower prime-BA spread in the quarter was about $0.08 a share?

Robert Cardinal

Yes. It is approx 2.7 million ifyou take a tax rate of roughly 30%. It comes to about $0.08 to $0.10 per share.

Michael Goldberg - Desjardins Securities

Okay. And also both the $3.30 to$3.60 earnings objective for 2008, does that take into account passage of theFederal budget in the $4 million to $5 million tax charge that would result?

Robert Cardinal

I have to say that, yes, wedescribed the impact to approximately $4 million to $5 million, which arrivedafter we prepared our objectives. But unfortunately, it does take into accountthat impact.

Michael Goldberg - Desjardins Securities

Okay. So, it's reduced by thatamount.

Robert Cardinal

Yes.

Michael Goldberg - Desjardins Securities

Okay. And also after the passageof the budget, what would be the appropriate effective tax rate to assume for2008?

Réjean Robitaille

Let Robert answer that question.

Robert Cardinal

We provided the table on pagefive of the press release where we -- if you think there is a subtotal, where,excluding these items, the effective tax rate would have been 27.9% in 2007.So, roughly 28% would be a good number for 2008 as well.

Michael Goldberg - Desjardins Securities

Even taking into account reductionsin the tax rate?

Robert Cardinal

No. Without that, the impact ofthe Federal mini-budget would probably increase that effective tax rate. That28% is without the impact of $4 million to $5 million from the mini-budget.

Michael Goldberg - Desjardins Securities

Okay. Also, I just have a coupleof number questions. How much were commissions in Laurentian Bank Securities inthe fourth quarter? And how much was stock-based comp in the fourth quarter?

Réjean Robitaille

Commissions, maybe, Michel?

Michel Trudeau

All right, when you talked aboutyour commission, you were referring to the retail division?

Michael Goldberg - Desjardins Securities

I had a number of about $4million.

Réjean Robitaille

Yeah, I see what you mainly use,because we changed the presentation in 2007, so you would like, in fact, Ithink we will probably, I have to call you back with that answer. As to yoursecond question, which is the impact of stock based concentration in the fourthquarter, we provide on our additional information where we breakdown the salaryand fringed benefits increased which should be somewhere here. And on that, so,I think we call it supplementary information, there is a table on thenon-interest expenses and the fourth quarter everything included on performancebased compensation the amount was $6.8 million all included.

Michael Goldberg - Desjardins Securities

Okay. And I have one finalquestion, how much are the cumulative mutual fund sales now since the sale ofBLCER?

Luc Bernard

As you know, this is confidentialinformation so we can't say that, just to mention that in the last three yearswe were above the threshold and each year we had a better year than theprevious one.

Michael Goldberg - Desjardins Securities

Okay, that's great. Thank youvery much.

Operator

Thank you. The next question isfrom John Aiken from Dundee Securities. Please go ahead.

John Aiken - Dundee Securities

Good afternoon. Réjean, with yourinitiatives for growth that you detailed in your presentation, how much flexibilityis built into that, because what we are seeing with your range of EPS is fairlywide, and what I'm getting at is, if the environment deteriorates and you arenot able to generate higher revenue growth as you may want, is there anopportunity to scale back on the level of spending and reduce expenses on ago-forward basis?

Réjean Robitaille

The answer is, yes. As you know,we are still very prudent in terms of cost control. I think that we did that in2007. That said, it's important also for us to continue to invest in ourbusiness development. There is such, there is some initiatives for 2008 thatwill probably continue throughout in terms of increasing the profitabilityoverall.

As you know, in terms of thetarget that we had in prior these ones, is to increase profitability and wementioned through a lot of people that we want to get the double digit returnsas soon as we can. That's done, that said I think we have also to showsustainable double digit returns in the future.

So that's why we will continue toinvest in our business development. But we will solve the situation veryclosely in terms of different market environments and it will be possible tolet's say reduce some of those initiatives in the future.

John Aiken - Dundee Securities

Great, thanks. And in terms ofthe new contract that you have in place with the Union, I was wondering, Iguess the first question is for Robert, is there a material impact on thebenefits, you gave some very good disclosures as to what we are expecting forsalaries. And I guess secondly for Réjean is, does the new contract do anythingto improve the flexibility which you have with the Union in case there are moreopportunities in the market place and allow you to redeploy employees oranything on those nature?

Robert Cardinal

About the costs associated withsalaries and everything the agreement remains in is all inclusive – it’s allincluded in our EPS targets and ROE targets for next year and is taken into account.

Réjean Robitaille

Any impacts on our [debts],that's important. In terms of the second part of your question, we are very,very proud with the relationship that we have now with our Union and thesignature of the agreement in principle, concerning that showed that wecertainly have a very good relationship with our Union.And also based on the fact that we will have a four-year contract I think showthat. In terms of flexibility, there is always a possibility. I think that'stwo key words when you have a unionized force, is respect and communication andthat's what we showed to them in the last 32.5 years and based on that we wereable to do a lot of things this year. So I think that in terms of flexibilitythat's not a concern for us.

John Aiken - Dundee Securities

Great, thank you very much.

Operator

Thank you. The following questionis from Ian de Verteuil from BMO Capital Markets. Please go ahead.

Ian de Verteuil - BMO Capital Markets

The question I have relates tosecuritization and it looked as if you had a -- from the notes on page seven,when you talked about various things in the quarter. One of those are thePrime-BA land spread compression, but the second related to -- quite areasonable sized gain on your securitization and then you all said it wasmark-to-markets on the swaps. I guess, I would have thought there would be agood gain just because I know the CMB program went very well, but why was it,this particular quarter that there would be this decrease in the fair value ofthe seller-swaps.

I know spreads have blown out, butwould that like on a normal basis, would I just assume those to offset on anormal basis?

Réjean Robitaille

I'll letBernard ask that question.

Bernard Piché

Ian, no.

Réjean Robitaille

Answer that question? Sorry.

Bernard Piché

The profit on securitization iswhat it comes when we do, and it's an add up thing depending on the type of mortgages that we securitize and allthat. The swap adjustment was related, as you've just mentioned through thespread that has developed over BAs where the funding of the bank sponsored conduitson which that we have been using for securitization. So that widening of spread,that was meant that we have to mark-to-market build swaps negatively, it so happens that the two componentsof a magnitudes are rather similar magnitude.

Ian de Verteuil - BMO Capital Markets

So, given where we are today, ifyou securitize $300 million or $400 million of residential mortgages again,what will be the net of those two?

Bernard Piché

Well, the adjustment to the swapis done. We had assumed a certain pattern of wider spreads in the future andthat has been done by our risk management group, and we've established a newmark-to-market. Assuming that the conditions do not change and we go ahead withtheir securitization, we may end up having to register a profit, though I can'tpredict the size depending on the blocks that we securitize and it would notnecessarily be offset by a change in the swap value, unless the spread thatwe've seen widening since mid-August, widened it further.

Ian de Verteuil - BMO Capital Markets

Alright.

Robert Cardinal

So, I hope we will not happen.

Ian de Verteuil - BMO Capital Markets

Let’s all hope that doesn'thappen. So, you are effectively, these four ops you put back in to hedge theinterest rate on these conduits. You had continued to put those back in, butthere is no reason assuming spreads remain where they are, that's the onlydifference would be, it wouldn't have $2.8 million fair value loss on theswaps.

Robert Cardinal

Yes. That's right.

Ian de Verteuil - BMO Capital Markets

Thank you.

Operator

Thank you. The next question isfrom Sumit Malhotra from Merrill Lynch, please go ahead.

Sumit Malhotra - Merrill Lynch

Target, maybe more philosophicalthan anything else. 9.5% plus, I compare that to some of your larger peers whoI think at the low end are seeing 8% plus. When I think about Laurentian Bank,right now your loan portfolio almost 85% retail, tier-play on Canada, not muchon the capital market side, not really looking at acquisitions. Can you give usmaybe a little bit of idea behind your thought process on keeping the capitalratio target at such a high level, especially compared to some of your peers inCanada?

Réjean Robitaille

Well, I think that, as Imentioned for us it’s important to continue to show important capital ratio andyou may ask some of our peers, which seems low for me, but that's their pointof view. And well, there are specific items concerning that, we will have thebenefit of Basel Accord, we are doing the standard method, as you know we arenot in the advanced method. And we feel comfortable at the level of 9.5% ormore that even if we have a retail portfolio or retail loan portfolio, we thinkthat's an adequate level. Same thing also and that's the thing that we work on.We certainly want to see an improvement in terms of our rating and then yourfuture, I think that we show a strong growth and strong profitability and it'simportant also for the rating agencies to continue to show a good level ofcapital ratio.

Sumit Malhotra - Merrill Lynch

And those kind of, you help on acouple of things that I was trying to lead into as well. Number one, I meanthis is the very strong third year, I think you have used the word stable a fewtimes increasing stability in the results. Where are you in the process withthe rating agencies in terms of an upgrade, because you have mentioned that ina few occasions?

And number two, well, I thinkabout the fact your business-to-business trust loan portfolio. I think it's up25% year-over-year this quarter. What can you tell us about the Basel II Accordand how that might impact some of the risk ratings you have on different piecesof your loan portfolio?

Réjean Robitaille

For the first part of yourquestion, as you know, I think rating agencies, they do on an annual basis,usually during the spring, so we have positive outlook with DBRS and they areaware of our results. We will follow the situation very closely. As appose to BaselAccord, maybe I could ask our Chief Risk Officer, Pierre Minville, to answeryour question.

Pierre Minville

For the impact of Basel for Standard Bank isusually favorable for a retail bank. So as our portfolio are mainly in retailand also taking into consideration the capital for operational risk, the net ofboth is several little to a retail bank. So you should see some impact on ourratios.

Sumit Malhotra - Merrill Lynch

Okay, thanks. Thanks for that.Quickly turning over to net interest margin, obviously, a key part of yoursuccess over the last three years and we saw some weakness that you referencedthis quarter. When I look at the four operating segments, if you will, netinterest margin, at least for commercial, retail and business-to-business, Irealize or I recall that one was down. So, a good part of the success you hadin increasing NIM has come from reducing your liquidities, balance sheetmanagement those type of factors.

Where do you think we are interms of net interest margin heading into 2008? Because your loan growth stilllooks very good. How about the other half of the net interest income puzzle? Doyou think you're in for a period where there's large increase on margins hasabout to flatten out now, we are about to see more of a balanced environment interms of where your NIM goes from here?

Réjean Robitaille

I'll let Bernard answer thatquestion.

Bernard Piché

It's always difficult to answer aquestion like that. What I can say is, that we have, as you know, sustained avery sharp improvement in the margin. We've been saying for a few quarters thatwe thought that this should taper off. And finally it happened this quarter.

We have been, as you knowimpacted by the prime-BA spread by the cost of -- holding, say, withliquidities with the BA moving up. I think that impact is factored in thenumber that we've seen in Q4.

As we move forward, I don'texpect a significant deterioration nor improvement in that margin. I think wehave reached a good plateau. However, I should be prudent in saying that whatwe have seen lately has been an adjustment on the side of the cost of funding,which was one side of the balance sheet. But as you know, we have seen more andmore of an adjustment in the pricing of products in the industry.

As an example, I was looking thismorning at the swap rate in Canadafive years, for example, and we have seen the swap rate go down about 80 basispoints since late July. While the mortgage rates have stayed quite stable at725, 730. So there is a capacity for the industry to adjust pricing on bothside of the balance sheet, to make sure that the margins are going to besustainable, which I believe is what we're having next [year].

Sumit Malhotra - Merrill Lynch

Okay. Thanks for that. Last oneis a quick numbers question. The ABCP charge that went through the otherincome, could you just confirm what line item that went through, was ittreasury financial markets, brokerage or was it other, just looking to cleanthat up.

Réjean Robitaille

Yeah. There are two portions fortotal of 2.9 million. The 2.1 million of the securities…

Robert Cardinal

Laurentian Bank securities.

Réjean Robitaille

The Laurentian Bank securitieswent through the brokerage [condition] line and the order the $0.8 million wentinto treasury and financial market.

Sumit Malhotra - Merrill Lynch

Okay. Thanks very much.

Operator

Thank you. (OperatorInstructions). The next question will be from Michael Goldberg from DesjardinsSecurities. Please go ahead.

Michael Goldberg - Desjardins Securities

Thank you. National Bank havesaid that somewhere under a 100 of its commercial clients have been leftholding asset-backed commercial paper and presumably they are not too happyabout this. Has this created business opportunities for Laurentian Bank, and isthere anything that you've been able to do to take advantage of thoseopportunities?

Réjean Robitaille

The answer is yes. In any, let'ssay, in crisis there is always opportunity and we are there to look at thoseopportunities, definitely.

Operator

Thank you. There are no furtherquestions registered at this time. I would now like to turn the meeting backover to you, Ms. Caron.

Gladys Caron

Thank you all for joining ustoday. If you have any further questions, the phone numbers are listed on thepress release. Thank you.

Operator

Thank you. The conference has nowended. Please disconnect your line at this time. We thank you for yourparticipation and have a great day.

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