Executives
Gladys Caron - VP of Public Affairs, Communications and IR
Réjean Robitaille - President and CEO
Robert Cardinal - CFO
Louis Marquis - Head of Credit
Michel Trudeau - Head of Laurentian Bank Securities
Luc Bernard - Head of Retail Financial Services and Small and Medium Enterprises
Bernard Piché - Head of Treasury, Capital Markets and Brokerage
Analysts
Rob Sedran - National Bank Financial
Michael Goldberg - Desjardins Securities
John Aiken - Dundee Securities
Ian de Verteuil - BMO Capital Markets
Sumit Malhotra - Merrill Lynch
Laurentian Bank of Canada (LB.TO) F4Q07 (Qtr End 10/31/07) Earnings Call December 4, 2007 2:00 PM ET
Operator
Welcome to the Laurentian Bank Conference Call. Please be advised that this call is being recorded.
I would now like to turn your meeting over to Ms. Gladys Caron. Please go ahead.
Gladys Caron
Good afternoon, everyone. Our press 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 be provided by our President and CEO, Réjean Robitaille, followed by a presentation by our CFO, Robert Cardinal who will highlight Laurentian Bank's financial performance. Finally, Réjean will conclude.
The following members of our senior management team are also present at this call to answer any of your questions. Bernard Piché, Head of Treasury, Capital Markets and Brokerage; Luc Bernard, Head of Retail Financial Services and Small and Medium Enterprises; François Desjardins, Head of B2B Trust; Lorraine Pilon, Head of Corporate Affairs; Michel Trudeau, Head of Laurentian Bank Securities; Louis Marquis, Head of Credit; Marc Paradis, Controller; Pierre Minville, Head of Integrated Risk Management; Andre Lopresti, Chief Accountant, and myself, Head of Public Affairs, Communications and Investor Relations.
Before we start, I would like to mention that a PowerPoint presentation accompanying this conference call is available on our website and will be referred to by Réjean Robitaille and Robert Cardinal throughout their speeches.
During the conference call, forward-looking statements may be made, and it is possible that actual results could differ materially from those projected in such statements. For the complete portion that we note regarding forward-looking statements, please refer to our press release or to the PowerPoint presentation.
I would like to add that our company 2007 audited and consolidated financial statements including notes are available on sedar.com and on our website. I will now turn the floor over to Réjean Robitaille.
Réjean Robitaille
Thank you, Gladys, and good afternoon, everyone. I am very satisfied with our 2007 results. This year showed considerable improvement and profitability and operational efficiency. The diluted earnings per share were $3.48, up 40% from 2006. Our return on equity also grew considerably, reaching 10.9% versus 8.2% a year ago. Increased revenues in all of our business lines linked primarily to strong loans and deposit growth, contributed to the Bank's performance.
As shown on slide 4, all our 2007 objectives have been reached. Moreover, some of our results exceeded our annual objectives, such as the return in equity, the net diluted earnings per share, total revenue and the efficiency ratio.
As presented in slide 5, our efficiency ratio improved substantially in 2007, reaching 73.2% versus 76.1% in 2006. Our efforts to increase revenue combined with diligent cost control successfully contributed to the fact that the ratio has been the best in the last four years.
Now let me point out the trend in growth, shown on slide 6 as our total loans and BAs increased by 9% and total deposits by 6% over last year. Excluding all securitization activities for 2007, total loans would have increased by 12%.
In retail financial services, total loans rose by 7%, while commercial financial services book increased by 15% over the last 12 months. Real estate financing group, the largest subset of commercial banking, continues to perform very well with 22% growth compared with 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 deposits were up by 9% over the fourth quarter of last year.
Laurentian Bank Securities continues its development as assets under administrations are up 4% from last year. This internal growth is a direct consequence of our well-targeted strategies and actions, including investments in our distribution networks and systems, increased business development personnel, initiative to develop a performance-focused culture, as well as targeted and efficient marketing campaigns.
Now turning to slide 7, as we have already announced, our exposure to the securities issued by the conduits covered by the Montreal Agreement is limited. We have reduced the value of our investments by $2.9 million or $2 million after-taxes corresponding to approximately 15% of the value of these securities. We are following this matter closely and continue to support the Montreal Agreement.
We have also announced an increase in our quarterly dividend of 10%, or $0.3 per common share. The quarterly dividend is therefore increased from $0.29 to $0.32 per share. This reflects our confidence as well as that of the Board of Directors in the future developments of the Bank.
Finally, our unionized employees have voted in favor of an agreement in principle between the Bank and the union for the renewal of the collective agreement. This is excellent news for our organization 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 until December 31, 2011.
I will now ask Robert to provide you with more details on our financial performance. Robert?
Robert Cardinal
Thank you, Réjean. My comments will focus mainly on the comparison of our results for the quarter with the same quarter last year for the whole year with those of 2006. I will also briefly comment on the financial performance of the lines of business and say a few words about our 2008 objectives.
Slide 8 shows that on a GAAP basis, diluted earnings per share for the fourth quarter of 2007 were $1.14 and the return on equity was 13.8%. In 2006, we had posted diluted earnings per share of $0.84 and an ROE of 10.8%. Both quarters included $0.19 of earnings per share from discontinued operations, representing the recognition of $5.2 million or $4.4 million after income taxes, and our differed gain on the sale of BLC [Montreal] Rousseau as mutual fund sales significantly exceeded the minimum requirements both in 2006 and 2007.
Net income from continuing operations in the fourth quarter reached $0.95 per common share compared to $0.65 per common share in 2006.
Important items, net income in both quarters included certain important items of a non-recurring nature as described in our press release, which specifically impacted our earnings per share.
The most important items are as follows. For the fourth quarter of 2007, first, a $4 million gain, resulting from the worldwide restructuring of VISA are $3.3 million after taxes and $0.14 per common share, a favorable tax adjustment of $2.2 million, resulting from the resolution of certain tax exposure representing $0.09 per common share. And finally, a charge of $2.9 million related to the $20 million portfolio of securities issued by conduits covered by the "Montreal Agreement" representing $2 million after taxes or $0.09 per common share.
Results for the fourth quarter of 2006 included only a favorable tax adjustment of $2.1 million or $0.09 per common share as explained in our press release. Excluding these items, earnings per share would have been $0.80 in the current quarter compared to $0.56 last year, a growth of 43% in our core earnings per share.
Again, excluding these items for earnings per share for the fourth quarter of $0.80 is lower than the earnings per share of $0.85 we reported in the third quarter, which included no important significant items.
As explained in our press release on pages 6 and 7, results of the current quarter were also affected by certain other items related to the liquidity and credit prices. The most important net impact was the affect of the narrowing of the Prime-BA spread that netted approximately $2.7 million before income taxes for the quarter. This interest rate spread which negatively impacted our results for the quarter, has substantially reverted to its historical levels since the beginning of November.
Now, let's turn to slide 9 for the highlights of the year compared to last year. As to results from continuing operations, 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 equity was 9.4%. This represents a significant progress in our core earnings per share which shows a growth estimated at 40% for the year compared to 2006.
Slide 10 summarizes the main driver behind these results [namely], first an improvement of the net interest income, due mainly through loan and deposit growth, tighter asset and liability management, as well as liquidity management. Net interest income grew by $33 million or 9% to $390 million.
Net interest margin increased to 2.31% in 2007 compared to Person 2.14% in 2006. Growth in our personal loans reached $790 million or 19% and $770 million or 11% in residential mortgage loans including securitized loans.
Other income was $193.7 million in 2007 compared to a $182.6 million in 2006. The $11.1 million increase is mainly attributable to growth in core activities, including higher fees on deposits and card services, on mutual funds sales, brokerage activities and from treasury and financial market activities. Other income also includes the $4 million gain on the VISA worldwide restructuring.
The provision for credit losses remained stable at $40 million for both years. Non-interest expenses increased by $16.6 million or 4%, compared to the growth of 8% in our total revenues. The bank benefited from a strong positive operating leverage of 4% over 2006.
The $16.6 million increase is mainly related to higher salaries and employee benefits, as a combined effect of salary increases, new hirings and performance-based compensations, as well as tight control over investment technology, rents and other expenses.
Finally, the bank benefited from a lower tax rate. The effective tax rate for 2007 was 22.7%, excluding the impact of several important items of a non-recurring nature explained on page five of our press release. The effective tax rate for 2007 would have been 27.9% compared to 29% in 2006. This lower tax rate in 2007 results from the increase in investments in Canadian securities that generate tax exempt income, such as dividends, and also from a corporate reorganization, that reduced the tax rate on foreign credit insurance income.
[Note 18] to the annual consolidated financial statements provide further information on the income tax expense. We'll talk about the 2008 objectives. As I mentioned, we met or exceeded our objectives for 2007, revenue grew significantly as a result of higher loans and deposit volumes and overall improvements in all business segments while cost control measures limited increases in expenses.
Results for the year also benefited from certain items as described earlier. Excluding these items, return on common shareholder liquidity would have been 10%, including discontinued operations and diluted net income per share would have been $3.18, as explained on pages two and three of our press release.
Objectives set for 2008 described on the table on page two, mainly ROE of between 9.5% and 10.5% taking into account that the bank will not necessarily benefit from significant items next year, as it did in 2007.
Furthermore, the objectives take into account certain [plan] costs associated with initiatives aimed at accelerating the bank's growth, as well as the uncertainty related to the prevailing 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 core earnings per share of $3.18 for 2007, including the $5.2 million from industrial for both years.
As shown on slide 12, our net impaired loans went from plus $5 million in the fourth quarter of 2006, to minus $11 million at the end of this quarter, reflecting primarily a reduction in gross non-performing loans. Our credit quality situation remains good.
Risk management continues to be a very important element at Laurentian Bank. We continue to maintain strong capital ratios and closely monitor our loan portfolio and the credit environment. We also continue to remain very cautious and to monitor very closely the market environment which is moderately affected by the asset-backed commercial paper prices and conduits.
I will now talk about the contribution of lines of business. All business lines contributed to total revenue and income growth when compared to last year.
On slide 13, total revenue of Retail Financial Services increased by $23 million or 6.5% over last year to reach $377.1 million. The sector contribution to net income increased by $10.3 million to $44.9 million or 30% over last year, reflecting the significant business 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 associated with lower taxes on credit insurance revenue were also key factors in these results.
As shown on slide 14, net income contribution of commercial and financial services increased slightly to $24 million. Total revenue was relatively stable at $82.8 million. The increase in net interest income resulting from the higher loan and deposit volumes mainly in real 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 net income 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 and deposits, mainly $791 million in investment loans and $289 million in average deposits. Lower loan losses on personal line of credit portfolio and relatively stable non-interest expenses, which led to a strong improvement in the operational efficiency ratio.
As can be seen from slide 15, net income contribution of Laurentian Bank Securities was $7.1 million for the year. Laurentian Bank Securities has been expanding its activities over the past years through the opening of new offices and the introduction of the Institutional Equity Division.
Excluding the impact of the gain on the sale of the Montreal stock exchange and the asset-backed commercial paper provision, this expansion has led to a 25% or $1 million increase in net income for the year, compared to last year resulting from good performance of the Institutional Division.
On slide 17, other sectors reported improvement, improved revenues and contribution for the year. The improvements are attributable to the resolution of various tax exposures, as explained earlier and also largely to the higher interest and non-interest income has progressed continues to be made in treasury and financial market operations, particularly in liquidity and asset and liability and risk rate management, despite the lower securitization revenues.
This concludes my comments. Now back to Réjean.
Réjean Robitaille
Well, thank you, Robert. Now turning to some of our initiatives, the bank has taken other steps in its development, as can be seen from slide 18.
During the fourth quarter, we have carried on with our initiatives to improve our efficiency, such as optimizing important processes in our business lines and corporate sectors. This optimization will of course continue in 2008.
In our retail financial services sector, we began replacing all our ABMs and the deployment should be completed by the end of December 2007. We continue to improve our customer information management tools while removing sales and administrative barriers.
We are already known for our proximity to customers, and we believe that with a more comprehensive and powerful knowledge based on our clients, our branch based employees will be able to serve them even better.
Regarding commercial financial services, in early November, we moved the commercial banking center to Thornhill in Ontario. This is a better location for our customers and provides us with better visibility. We continue to set the foundations of a long-term development of this sector.
B2B Trust, which does business with over 16,000 independent financial professional across Canada, will continue its development as planned through channel and product expansion, focusing solely on five core distribution channels, mutual fund industry, insurance industry, investment industry, mortgage brokerage and deposit brokerage.
Laurentian Bank Securities is continuing its development by applying rigorous execution to its growth activities and daily management. This sector added employees and strategy positions in its retail division and institutional equity and institutional fixed income sectors in order to consolidate its position to further continue its development.
In summary, as shown on slide 19, the year 2007 was a very good year, with increased total income coming from organic growth and high quality sources of revenues. Significant improvements of our operational efficiency at several levels of the bank, improved credit quality and strong net income improvement from continuing operations.
In conclusion for 2008, we will continue to maintain our efforts to ensure the banks’ development with a long-term vision by focusing on the same three priorities, which are increase our profitability, improve operational efficiency and to further develop our human capital.
We are very proud of our 2007 accomplishments, however, we are aware that we must continue to improve our profitability in 2008. We are committed to do so and we are counting on our dedicated employees to do this, after all, they are the banks best assets and I want to thank them for their performance in 2007.
This wraps up my comments and I will now turn the floor back to Gladys.
Gladys Caron
At this point, I would like to turn the call over to the conference operator for the question-and-answer session. Please feel free to ask your question in French or in English.
Question-and-Answer Session
Operator
Thank you, Gladys. (Operator Instructions). Your first question is from Rob Sedran from National Bank Financial. Please go ahead.
Rob Sedran - National Bank Financial
Hi. Good afternoon. Réjean, I am going to start with an easy one. If I annualize the new dividend and use the bottom end of the EPS target range, I land below the 40% payout. Now, I know the dividend is reviewed every quarter, but just philosophically, what is the view on the dividend. I mean some of your larger peers or all of your larger peers, I guess, have settled into an every other quarter pattern. Is that a sort of policy you would like to see at Laurentian Bank?
Réjean Robitaille
Rob, first of all, well, thank you, Rob, I think it's a good and easy question. Well, with a 10% increase, I think that's significant. As you have mentioned, we review that on a quarterly basis.
That said, we did have a strong growth in 2007 and we think to do the same thing in 2008. So, it's important for us to also continue to grow our capital, and as you can see in terms of our capital objectives for next year, it's over 9.5%. So, we will look at the situation on a quarterly basis. But I think it's important that you notice that we will also continue to grow the capital base on the strong growth that we have in the past and would be planning to have.
Rob Sedran - National Bank Financial
Okay. My second question surrounds the issue of credit quality. Specific provisions have been unchanged for the last eight quarters at $10 million which says to me there is an element of conservatism in that figure, at least from the way I look at it. It looks like formations were down, which sort of bucks the trend that we have seen so far this quarter from some of the larger banks. Can you talk a little bit about credit 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 of some of the strong loan growth you have been recording?
Réjean Robitaille
I will ask Louis Marquis responsible for credit to answer that question.
Louis Marquis
Well, as you have seen, our impaired loan level has decreased materially in the year, and we had a stable environment. The fourth quarter was a good quarter for us, and I see no signs at this point of any deterioration. We are not seeing any sign in our books of deterioration. But of course, it's a market that we have to be very careful about right now.
Réjean Robitaille
As for the objective that you mentioned, this year we did a benchmark and we also did the same thing last year, to the benchmark comparing objective versus, let's say, our peers decided to not show, let's say, the credit quality in terms of -- it's already, in fact, 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 question as just a point of clarification because I am not sure if I caught this correctly, but the $3.30 to $3.60 objective that you mentioned from an EPS perspective, does that include the roughly $0.18 or $0.19 from discontinued operations 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 is from Michael Goldberg from Desjardins Securities. Please go ahead.
Michael Goldberg - Desjardins Securities
Thanks. I also had a few questions. First of all, would I be correct in estimating that the impact of a narrower prime-BA spread in the quarter was about $0.08 a share?
Robert Cardinal
Yes. It is approx 2.7 million if you 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 the Federal budget in the $4 million to $5 million tax charge that would result?
Robert Cardinal
I have to say that, yes, we described the impact to approximately $4 million to $5 million, which arrived after we prepared our objectives. But unfortunately, it does take into account that impact.
Michael Goldberg - Desjardins Securities
Okay. So, it's reduced by that amount.
Robert Cardinal
Yes.
Michael Goldberg - Desjardins Securities
Okay. And also after the passage of the budget, what would be the appropriate effective tax rate to assume for 2008?
Réjean Robitaille
Let Robert answer that question.
Robert Cardinal
We provided the table on page five 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 reductions in the tax rate?
Robert Cardinal
No. Without that, the impact of the Federal mini-budget would probably increase that effective tax rate. That 28% is without the impact of $4 million to $5 million from the mini-budget.
Michael Goldberg - Desjardins Securities
Okay. Also, I just have a couple of number questions. How much were commissions in Laurentian Bank Securities in the 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 about your commission, you were referring to the retail division?
Michael Goldberg - Desjardins Securities
I had a number of about $4 million.
Réjean Robitaille
Yeah, I see what you mainly use, because we changed the presentation in 2007, so you would like, in fact, I think we will probably, I have to call you back with that answer. As to your second question, which is the impact of stock based concentration in the fourth quarter, we provide on our additional information where we breakdown the salary and fringed benefits increased which should be somewhere here. And on that, so, I think we call it supplementary information, there is a table on the non-interest expenses and the fourth quarter everything included on performance based compensation the amount was $6.8 million all included.
Michael Goldberg - Desjardins Securities
Okay. And I have one final question, how much are the cumulative mutual fund sales now since the sale of BLCER?
Luc Bernard
As you know, this is confidential information so we can't say that, just to mention that in the last three years we were above the threshold and each year we had a better year than the previous one.
Michael Goldberg - Desjardins Securities
Okay, that's great. Thank you very much.
Operator
Thank you. The next question is from John Aiken from Dundee Securities. Please go ahead.
John Aiken - Dundee Securities
Good afternoon. Réjean, with your initiatives for growth that you detailed in your presentation, how much flexibility is built into that, because what we are seeing with your range of EPS is fairly wide, and what I'm getting at is, if the environment deteriorates and you are not able to generate higher revenue growth as you may want, is there an opportunity to scale back on the level of spending and reduce expenses on a go-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 in 2007. That said, it's important also for us to continue to invest in our business development. There is such, there is some initiatives for 2008 that will probably continue throughout in terms of increasing the profitability overall.
As you know, in terms of the target that we had in prior these ones, is to increase profitability and we mentioned through a lot of people that we want to get the double digit returns as soon as we can. That's done, that said I think we have also to show sustainable double digit returns in the future.
So that's why we will continue to invest in our business development. But we will solve the situation very closely in terms of different market environments and it will be possible to let's say reduce some of those initiatives in the future.
John Aiken - Dundee Securities
Great, thanks. And in terms of the new contract that you have in place with the Union, I was wondering, I guess the first question is for Robert, is there a material impact on the benefits, you gave some very good disclosures as to what we are expecting for salaries. And I guess secondly for Réjean is, does the new contract do anything to improve the flexibility which you have with the Union in case there are more opportunities in the market place and allow you to redeploy employees or anything on those nature?
Robert Cardinal
About the costs associated with salaries and everything the agreement remains in is all inclusive – it’s all included 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 the signature of the agreement in principle, concerning that showed that we certainly have a very good relationship with our Union. And also based on the fact that we will have a four-year contract I think show that. In terms of flexibility, there is always a possibility. I think that's two key words when you have a unionized force, is respect and communication and that's what we showed to them in the last 32.5 years and based on that we were able to do a lot of things this year. So I think that in terms of flexibility that's not a concern for us.
John Aiken - Dundee Securities
Great, thank you very much.
Operator
Thank you. The following question is from Ian de Verteuil from BMO Capital Markets. Please go ahead.
Ian de Verteuil - BMO Capital Markets
The question I have relates to securitization 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 the Prime-BA land spread compression, but the second related to -- quite a reasonable sized gain on your securitization and then you all said it was mark-to-markets on the swaps. I guess, I would have thought there would be a good 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 of the seller-swaps.
I know spreads have blown out, but would that like on a normal basis, would I just assume those to offset on a normal basis?
Réjean Robitaille
I'll let Bernard ask that question.
Bernard Piché
Ian, no.
Réjean Robitaille
Answer that question? Sorry.
Bernard Piché
The profit on securitization is what it comes when we do, and it's an add up thing depending on the type of mortgages that we securitize and all that. The swap adjustment was related, as you've just mentioned through the spread that has developed over BAs where the funding of the bank sponsored conduits on 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 components of a magnitudes are rather similar magnitude.
Ian de Verteuil - BMO Capital Markets
So, given where we are today, if you 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 swap is done. We had assumed a certain pattern of wider spreads in the future and that has been done by our risk management group, and we've established a new mark-to-market. Assuming that the conditions do not change and we go ahead with their securitization, we may end up having to register a profit, though I can't predict the size depending on the blocks that we securitize and it would not necessarily be offset by a change in the swap value, unless the spread that we'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't happen. So, you are effectively, these four ops you put back in to hedge the interest rate on these conduits. You had continued to put those back in, but there is no reason assuming spreads remain where they are, that's the only difference would be, it wouldn't have $2.8 million fair value loss on the swaps.
Robert Cardinal
Yes. That's right.
Ian de Verteuil - BMO Capital Markets
Thank you.
Operator
Thank you. The next question is from Sumit Malhotra from Merrill Lynch, please go ahead.
Sumit Malhotra - Merrill Lynch
Target, maybe more philosophical than anything else. 9.5% plus, I compare that to some of your larger peers who I 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 much on the capital market side, not really looking at acquisitions. Can you give us maybe a little bit of idea behind your thought process on keeping the capital ratio target at such a high level, especially compared to some of your peers in Canada?
Réjean Robitaille
Well, I think that, as I mentioned for us it’s important to continue to show important capital ratio and you may ask some of our peers, which seems low for me, but that's their point of view. And well, there are specific items concerning that, we will have the benefit of Basel Accord, we are doing the standard method, as you know we are not in the advanced method. And we feel comfortable at the level of 9.5% or more that even if we have a retail portfolio or retail loan portfolio, we think that'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 your future, I think that we show a strong growth and strong profitability and it's important also for the rating agencies to continue to show a good level of capital ratio.
Sumit Malhotra - Merrill Lynch
And those kind of, you help on a couple of things that I was trying to lead into as well. Number one, I mean this is the very strong third year, I think you have used the word stable a few times increasing stability in the results. Where are you in the process with the rating agencies in terms of an upgrade, because you have mentioned that in a few occasions?
And number two, well, I think about the fact your business-to-business trust loan portfolio. I think it's up 25% year-over-year this quarter. What can you tell us about the Basel II Accord and how that might impact some of the risk ratings you have on different pieces of your loan portfolio?
Réjean Robitaille
For the first part of your question, 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 are aware of our results. We will follow the situation very closely. As appose to Basel Accord, maybe I could ask our Chief Risk Officer, Pierre Minville, to answer your question.
Pierre Minville
For the impact of Basel for Standard Bank is usually favorable for a retail bank. So as our portfolio are mainly in retail and also taking into consideration the capital for operational risk, the net of both is several little to a retail bank. So you should see some impact on our ratios.
Sumit Malhotra - Merrill Lynch
Okay, thanks. Thanks for that. Quickly turning over to net interest margin, obviously, a key part of your success over the last three years and we saw some weakness that you referenced this quarter. When I look at the four operating segments, if you will, net interest margin, at least for commercial, retail and business-to-business, I realize or I recall that one was down. So, a good part of the success you had in increasing NIM has come from reducing your liquidities, balance sheet management those type of factors.
Where do you think we are in terms of net interest margin heading into 2008? Because your loan growth still looks very good. How about the other half of the net interest income puzzle? Do you think you're in for a period where there's large increase on margins has about to flatten out now, we are about to see more of a balanced environment in terms of where your NIM goes from here?
Réjean Robitaille
I'll let Bernard answer that question.
Bernard Piché
It's always difficult to answer a question like that. What I can say is, that we have, as you know, sustained a very sharp improvement in the margin. We've been saying for a few quarters that we thought that this should taper off. And finally it happened this quarter.
We have been, as you know impacted by the prime-BA spread by the cost of -- holding, say, with liquidities with the BA moving up. I think that impact is factored in the number that we've seen in Q4.
As we move forward, I don't expect a significant deterioration nor improvement in that margin. I think we have reached a good plateau. However, I should be prudent in saying that what we 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 and more of an adjustment in the pricing of products in the industry.
As an example, I was looking this morning at the swap rate in Canada five years, for example, and we have seen the swap rate go down about 80 basis points since late July. While the mortgage rates have stayed quite stable at 725, 730. So there is a capacity for the industry to adjust pricing on both side of the balance sheet, to make sure that the margins are going to be sustainable, which I believe is what we're having next [year].
Sumit Malhotra - Merrill Lynch
Okay. Thanks for that. Last one is a quick numbers question. The ABCP charge that went through the other income, could you just confirm what line item that went through, was it treasury financial markets, brokerage or was it other, just looking to clean that up.
Réjean Robitaille
Yeah. There are two portions for total of 2.9 million. The 2.1 million of the securities…
Robert Cardinal
Laurentian Bank securities.
Réjean Robitaille
The Laurentian Bank securities went through the brokerage [condition] line and the order the $0.8 million went into treasury and financial market.
Sumit Malhotra - Merrill Lynch
Okay. Thanks very much.
Operator
Thank you. (Operator Instructions). The next question will be from Michael Goldberg from Desjardins Securities. Please go ahead.
Michael Goldberg - Desjardins Securities
Thank you. National Bank have said that somewhere under a 100 of its commercial clients have been left holding asset-backed commercial paper and presumably they are not too happy about this. Has this created business opportunities for Laurentian Bank, and is there anything that you've been able to do to take advantage of those opportunities?
Réjean Robitaille
The answer is yes. In any, let's say, in crisis there is always opportunity and we are there to look at those opportunities, definitely.
Operator
Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to you, Ms. Caron.
Gladys Caron
Thank you all for joining us today. If you have any further questions, the phone numbers are listed on the press release. Thank you.
Operator
Thank you. The conference has now ended. Please disconnect your line at this time. We thank you for your participation and have a great day.
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