Laurentian Bank of Canada's (LRCDF) CEO Réjean Robitaille on Q4 2014 Results - Earnings Call Transcript

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Start Time: 14:00 January 1, 0000 2:49 PM ET

Laurentian Bank of Canada (OTCPK:LRCDF)

Q4 2014 Earnings Conference Call

December 10, 2014 2:00 AM ET

Executives

Gladys Caron - Vice President, Public Affairs, Communications and Investor Relations

Réjean Robitaille - President and Chief Executive Officer

Michel C. Lauzon - Executive Vice President and Chief Financial Officer

François Desjardins - Executive Vice President of the Bank and President and Chief Executive Officer of B2B Bank

Pierre Minville - Executive Vice President and Chief Risk Officer

Michel C. Trudeau - Executive Vice President, Capital Markets of the Bank and President and Chief Executive Officer of Laurentian Bank Securities Inc.

Louis Marquis - Senior Vice President, Credit

Analysts

Scott Chan - Canaccord Genuity

Meny Grauman - Cormark Securities Inc.

Sumit Malhotra - Scotia Capital Markets

Sohrab Movahedi - BMO Capital Markets

Bradley Romain - Desjardins Securities

Operator

Good day ladies and gentlemen and welcome to the Laurentian Bank Fourth Quarter 2014 Conference Call. As a reminder, today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Gladys Caron. Please go ahead, Ms. Caron.

Gladys Caron

Good afternoon everyone. Our press release was issued today on Canada Newswire and is posted on our website as well our 2014 financial statements and MD&A can be found on our website. This afternoon, the review of our result for the fourth quarter will be provided by our President and CEO, Réjean Robitaille, and our CFO, Michel Lauzon.

Other members of our senior management team are also present on this call to answer any questions. You will find their names and titles on Slide 21 of the presentation available on our website. Réjean and Michel will refer to that presentation throughout their speeches.

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 two of the presentation.

I will now turn the floor over to Réjean Robitaille.

Réjean Robitaille

Thank you, Gladys, and good afternoon, ladies and gentlemen. It is with enthusiasms that we announced our results this morning for 2014 with adjusted net income and earnings per share up by 5% compared with last year. 2014 has been the eighth consecutive year of record profitability for Laurentian Bank.

I am particularly proud of these results as they were obtained during a year of transition. Finalizing the integration of our two acquired businesses was one of our priority, which was completed successfully. Furthermore, I am pleased to show that we were also able at the same time to generate solid growth in our prioritized activities.

More specifically, our commercial loan MBA’s portfolio grew substantially again this year, rising by 15% over the previous year. This marks the sixth consecutive quarter where our commercial loan portfolios annual growth rate was at a mid to high double-digit level. For a part commercial mortgage loans also posted a solid increase of 11%. Mortgage loans at B2B Bank and other high potential segment grew by 3% over the previous year, and mostly in the second half of 2014.

It is only since late last spring that we reactivated our distribution strategies in a mortgage channel including our line of alternative mortgages and as such we are very satisfied with the results obtained in this short timeframe. In addition, our focus on income continues as revenue from credit cards, insurance and mutual funds were up 16% year-over-year. Thanks to our disciplined cost control, we also succeeded it in substantial improving our adjusted efficiency ratio, which dropped by 180 basis points net of integration and restructuring charges.

Furthermore, our solid track record in the area of credit management justifies of our ability to grow while maintaining sound portfolios. Our progress over the last several years has led DBRS to increase the banks deposit in senior debt ratings from BBB high to A low in 2014. This upgrade, one of the few to any Canadian Banks since 2008, is of particular interest as it improves the banks access to the institutional investors market.

As shown on Slide 4, these positive results that the bank solid capital position and our confidence in the banks business plan have led the Board to raise the quarterly dividend by 4% bringing it to $0.54 per share. This represents the ninth dividend increase in five-years and since 2010 the dividend has grown by 50%. With this performance the bank has reached all of its financial objectives and results have significantly increased from the last year as presented on Page five.

Our common equity Tier 1 capital ratio also posted significant growth during the quarter and over the course of the year to now attain to the level of 7.9%. When we announced our objectives for 2014 last year, we mentioned that we would prioritize certain number of strategies during the year and this is what we did. Completing the integration of MRS Companies and AGF Trust was certainly on the top of our priorities as planned. These integrations were finalized during the year. We also posted the very positive growth within our business services.

In addition our efforts to diversify our activities towards non-interest rate related sources of other income improved successful with for example our revenues generated from mutual funds having grown by 30%. For its part our team specialized in the area of institutional brokerage achieved a number of milestones and its development and is now covering close to 100 small-cap companies in specific sectors.

Finally from a cost control standpoint we succeeded in reducing our expenses compared to last year through disciplined expense management across the organization and the other plan costs synergies at B2B Bank. Thanks to all of these initiatives the year just ended was marked by solid achievements.

I will now call up on Michel to review our 2014 financial results.

Michel C. Lauzon

Thank you, Réjean. As Réjean mentioned 2014 was a strong year for Laurentian Bank, as shown on Slide 8. Before getting into the details of our performance, I would like to highlight that the adjusted results we disclose today exclude as you usual items related to the acquisition and integration of MRS Companies and AGF Trust. As well as restructuring charges of $7.6 million pretax incurred in the fourth quarter. This restructuring initiative is aimed at further optimizing certain retail and corporate activities to bolster efficiency. The main impact was in retail services where we have changed the management structure to a lighter and more efficient one.

Net income for the 2014 financial year totaled $140.4 million or $4.50 per share representing increases of 17% and 18% year-over-year respectively. Adjusted net income for 2014 increased by 5% to $163.6 million, while diluted earnings per share increased to $5.31 also a 5% increase from last year. Adjusted ROE for 2014 stood at 11.9% while the adjusted efficiency ratio improved to 71% and 180 basis point decreased compare to last year.

On a quarterly basis our adjusted net income for the fourth quarter of 2014 totaled $42.6 million or a $1.39 per share and 11% and 10% increase respectively compared with last year. Our adjusted ROE also improved by 50 basis points to 12.2% and the adjusted efficiency ratio decreased to 70.3%.

Turning to the drivers of our performance on Page 9. Net interest income for 2014 decreased slightly to $561 million. The decrease was mainly due to the expected margin compression the reduced level of investment loans as well as lower prepayment penalties on residential mortgages, which were partly offset a better loan portfolio mix representing an overall one basis point decline in NIM.

For the fourth quarter of 2014 NIM was down four basis points sequentially owing to seasonally lower prepayment penalties saving two basis points and to a higher level of liquidity maintained during the quarter as the bank raised additional institutional funding and anticipation of stronger loan demand in upcoming quarters. While not impacting net interest income, this did compress NIM by an additional two basis points in the quarter.

Other income for 2014 rose by 6% year-over-year. Several items contributed to this increase, income from sales of mutual funds were up 30%, lending fees increased by 16%, insurance income grew by 14% our brokers operations were up by 5% largely fueled by improved underwriting activity and small cap securities. These strong improvements were partly offset by lower income from the treasury and financial market operations and income from investment accounts.

Credit quality remained solid throughout the year as shown on Slide 10, the provision for loan losses, increased by $6 million to $42 million for 2014, reflecting growth in the underlying portfolios. Loan losses in the commercial mortgage and commercial loan portfolios increased from the very low levels of 2013, which had benefited from favorable settlements and improvements. These increases were partly offset lower loan losses on personal loans and residential mortgages.

In the fourth quarter of 2014, the loan loss provision was $10.5 million unchanged sequentially and $0.5 million higher than for the fourth quarter of 2013, loan losses on personal loans decreased by $2.4 million from the fourth quarter of 2013, reflecting lower provisions on point of sale and investment loan portfolios. Loan losses on the combined commercial mortgage and commercial loan portfolios remained very low at less than $1 million in the quarter. At 15 basis points for the year 2014 one Page 11, Laurentian Bank’s ratio of loan losses as a percentage of average loans BAs continues to stand out among the major Canadian banks. Credit quality remains a strength in Laurentian Bank’s business model.

Turning to non-interest expenses, we have continued to work diligently to reduce our costs in 2014. Consequently, adjust non-interest expenses which exclude T&I costs and restructuring charges decreased by 1% year-over-year to $620.8 million in 2014. The adjusted efficiency ratio improved from 72.8% in 2013 to 71% in 2014, the significant improvement when compared to last year reflects the full impact of integration synergies B2B Bank, rigorous cost control and continuous efforts to improve efficiency. For the fourth quarter of 2014, non-interest expenses excluding T&I costs and restructuring charges decreased a $155.7 million when compared to corresponding quarter last year. Moreover, inline with our 2014 financial objectives adjusted operating leverage for the quarter continued to be positive year-over-year.

We will now turn to the performance of our business segments. Slide 13 shows a strong performance of the personal and commercial business segment, its contribution to adjusted net income was $121.9 million for 2014 an increase of 15% compared to a year earlier. A better portfolio mix combined with solid organic growth in their commercial portfolios contributed to the $8.1 million increase in net interest income, partly offset by margin compression and lower retail mortgage prepayment penalties.

Solid growth in several other income items also positively impacted results with a 6% overall increase compared to last year. Sustained efforts and strategies increased to sell mutual funds compared with higher insurance income and lending fees contributed to the increase. Loan losses increased by $11.8 million to $33.2 million from $21.4 million for 2013 as losses last year had been abnormally low especially in the business portfolios which had witnessed net recoveries.

Excluding restructuring charges, loan interest expenses decreased by 3% from a year earlier. While we continued to invest in the business services sector, lower salaries and other expenses as a result of the earlier optimization of certain retail processes as well as disciplined cost control over discretionary expenses largely accounted for this improvement.

As shown on Slide 14, B2B Banks contribution to adjusted net income was $57.6 million for 2014 compared with $59.3 million for 2013, a 3% decline mainly due to lower net interest income. Deleveraging by investors which puts pressure on the investment loan portfolio as well as margin compression of certain deposits and mortgages from the main factors contributing to the decrease.

The B2B business segments deposits declined 3% on average during 2014 as a result of the banks ongoing funding strategy which focuses on direct client deposits, increasing its access to institutional funding sources, and reducing the overall contribution of broker-sourced funding in order to minimize overall funding costs. As explained last year 2014 being a transition year focus has been on completing the integration of the MRS Companies and AGF Trust in order to maximize expense synergies. Ramping up efforts to generate revenue synergies will be the priority of next year.

The provision for loan losses improved significantly to $8.8 million compared with $14.6 million in 2013. Excluding T&I costs of $12.9 million for all in 2014, non-interest expenses decreased by 5% reflecting the full impact of integration synergies as the integration of both the MRS Companies and AGF Trust are now complete.

As shown on Slide 15, Laurentian Bank’s securities and capital markets contribution to net income reached $10.3 million in 2014 although it’s similar to the previous year. Total revenue increased to $68.4 million mainly as a result of higher underwriting fees on small-cap equity securities, while non-interest expenses rose by $0.9 million due to higher performance-based compensation, commissions and transaction fees.

Our capital ratios continues to strengthen with the CET1 ratio now at 7.9% compared to 7.6% at the end of 2013. It is however important to note that in contrast a several Canadian Banks that used the advanced internal ratings-based approach, we used a standardized methodology to calculate regulatory capital.

In order to give a better understanding of the impact of the standardized methodology versus AIRB we compare on Slide 16 the CET ratios of the six larger banks with the pro forma CET1 Laurentian Bank. Based on certain assumptions and on current Basel rules our CET1 ratio would increase by more than 200 basis points and would exceed 10%.

However, with discussions at the international level regarding these methodologies is still ongoing. It remains preferable for the time being to maintain our decision to manage the pace of the implementation of the AIRB approach until clearer rules emerge. In addition to our results we’ve published this morning our financial objectives for 2015.

Slide 17, highlights some of the key assumptions behind our financial targets. The bank expects to generate low single-digit loan growth for 2015. Continuing double-digit business loan growth should be tapered by low single-digit growth in our retail mortgage portfolio with growth stemming mostly from B2B bank. Investment loans at B2B bank should decline further as investors continue to be leverage albeit at a slower rate thanks to stronger growth sales.

We expect that the net interest margin in 2015 should be stable at approximately the 2014 level of 1.65%, with some fluctuation due to shifting liquidity levels and normal seasonal patterns in mortgage prepayment penalties. Loan losses as a percentage of average loans BAs should remain stable during 2015, while the efficiency ratio should remain below 71% on average in 2015 thanks to positive operating leverage.

However, the recently announced increase in the Québec payroll taxes will impact EPS by approximately $0.08 per share. As the result of the above we expect adjusted EPS growing at 5% to 8% from its $5.31 adjusted base earned in 2014 with adjusted ROE to reach 12% or better in 2015.

This concludes my comments, now Réjean will offer some closing remarks.

Réjean Robitaille

Well, thank you Michel and we are proud of our 2014 results and we know that we can still do better and accelerate our growth now that integration are behind us. This growth will be fueled by the multiple strengths and assets of our business activities. Laurentian Bank has a unique business model and we enjoyed the benefits of significant competitive advantages within niche markets where we are present and that enable us to continue to expand our activities and increase our profitability.

In addition to the annual objectives we have set for the year and that Michel explained earlier as presented on Slide 19. The medium-term objectives we had announced last year still stay the course. On an adjusted basis we are aiming at growing our profitability share by 5% to 10% annually and to gradually bring our efficiency ratio below 68%. We are also aiming at generating positive operational leverage year-over-year while maintaining strong capital ratios. In order to achieve these medium-term objectives, we intend to employee structuring strategies as we are confident with bear fruit in the coming years.

First of all, we will continue to concentrate on growing our business services a major asset within our strategy. In fact, we anticipate doubling the volume of our business portfolios to $10 billion in 2018 with $1 billion coming from equipment financing.

Secondly, now that the integration of the MRS Companies and AGF Trust into B2B Bank is completed, we can take full advantage of the combined strength of these entities. It is on our mortgage financing activities that we are focusing the greatest priority in this segment. Particularly, with our new line of alternative products globally we are aiming at doubling B2B Banks mortgage loans to $8 billion in the next five years.

On the investment loan sides portfolios are still impacted by deleveraging among investors. Nevertheless sales are beginning to pickup. As these activities are pan-Canadian our growth will unfold across the countries. Consequently we will continue to build the geographic diversification of our loans and profitability. With respect to our activities aimed at Quebec consumers we intended to consolidate our gains among the 500 or so clients will do business with our people in retail services.

Referring to this sector we have made some changes recently by nominating François Desjardins as the head of our retail activities. I would like thank Gilles Godbout taken the interim responsibility of the sector. As testified by the personal and commercial results mentioned by Michel. Gill did a great job at improving its efficiency. He can now concentrate on optimizing our operations. While continuing to lead the activities of B2B Bank, François will have the mandate to pursue Gilles work of increasing the efficiency and a further distinguishing the banks positioning in this market.

Given his past experience of Laurentian Bank in the retail area I am sure François contribution will be significant. When it comes to Laurentian Bank securities and capital markets we will be pursuing our developments by way of our institutional brokerage activities. Recognized over many years for expertise in the area of fixed income products we are also occupying an increasingly important position within the small-cap company market segment.

In conclusion as underlined in our annual report, Laurentian Bank is unique; we are more committed than ever to building an even more solid bank, efficient and profitable. The recent years have demonstrated our dedication to grow the bank on a sustainable basis and everyday we are all pursuing this goal.

Thank you and I will now turn things over to Gladys.

Gladys Caron

Thank you Lauzon. 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 questions in English or in French.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes Scott Chan of Canaccord Genuity. Please go ahead.

Scott Chan

Good afternoon guys. Just on the increased liquidity this quarter that affected NIM and you were talking about strong loan growth in coming quarters. What areas are you seeing strong loan growth.

Réjean Robitaille

Well mainly as Michel explained and Michel you could talk a little bit more after that on the liquidities. Mainly coming from the business services, we have the 15% growth this year and 11% growth in our commercial mortgages. We expect double-digit growth in these areas in 2015 as Michel mentioned and also on the fact that we launched our alternative mortgage capacity earlier this year, we expect to have also significant growth on that portfolio.

We already mention - I mentioned that we expect that in the next five years that portfolio should level from $4 billion to $8 billion, so in terms of the overall growth that will come mainly from B2B bank and from our commercial activities and as for the liquidity side Michel if you want to put more color on this.

Michel C. Lauzon

Okay. Thanks for the question Scott. We saw an opportunity to raise institutional funding during the quarter as pricing was favorable and so we took an opportunity to come into the market build up so liquidity and pre-fund some of the mortgage growth - and loan growth we are seeing coming, at the same time if deposit retention becomes too expensive we have the buffers to be able to manage our funding costs as a result and so we're happy that the markets were very receptive and I will reiterate, it affected NIM only because we neutralized the impact on net interest income in the quarter.

Scott Chan

Okay and Michel maybe just on the payroll tax and the 2015 EPS guidance, is that $0.08, is that included in your 5% to 8% EPS guidance target?

Michel C. Lauzon

Yes it is.

Scott Chan

It is included, okay.

Michel C. Lauzon

Yes it is.

Scott Chan

And then maybe just one last question for François just on B2B Bank, quarter was kind of lackluster revenue continues to decline. When you talk about revenue synergies and we look into 2015, can you give us some sort of sense of - are you seeing - do you expect revenue growth as a whole in B2B Bank in 2015? Are you going to continue to see revenue contract because of investment loans in another areas?

François Desjardins

Thanks for the question. The 2015 for B2B Bank will be massively important in terms of its reinvestment of organic growth and sales activities. So we are going to see some really important growth in our mortgage portfolio mostly, which will out phase negatives in its investment lending portfolio. But that to be said there is also the decision to change our funding strategies at Laurentian overall that will impact B2B Bank negatively, financially for 2015 as we’re not moving away from some of the broker raised deposits to some lower cost instruments. This is the reaction to our capacity now to raise funding on the institutional side.

So overall, the bottom line for B2B will be flat or slightly higher, but the impact of that on Laurentian overall will be positive and we’re still seeing some return organic growth and for the years to come revenue synergies.

Scott Chan

Okay. That’s very helpful, thanks guys.

François Desjardins

You are welcome.

Operator

Our next question comes from the line of Meny Grauman of Cormark Securities. Please go ahead.

Meny Grauman

Hi, good afternoon. Going back to those investments loans I’m wondering what proportion of the investment loans are still below waters, if you have any information you can share with us on that?

Réjean Robitaille

Thanks for the question. The investment loan portfolio that B2B Bank has put together including the ones that were purchased were all done based on the capacity to pay of the clients. So this is not margin accounts like you would find that securities firm, these are true personal loans that are given with a credit score and et cetera.

So the collateral that we would hold regardless of it being over water or underwater, which we have never disclosed by the way is just an additional security and we have seen so far through two crises that the losses in this portfolio are equivalent or lower than some of our mortgage portfolio. So for personal loan portfolio is excessively low and we are really proud of that.

Meny Grauman

And another question I had was - just on the lending fees a big jump up and there is some seasonality there, but even on the year-over-year basis and I am wondering if you could give us any outlook into that, is the big part of the increase something that you think is going to still moderate or is this strength something that we’ll see going forward?

Michel C. Lauzon

Thanks for the question. The increase is related to the overall increase in the activities in the business services sector. So a lot of it is sustainable and core. There are some prepayment penalties on some commercial portfolios that were earned during the quarter which helped bump up the number in the quarter, but those are clear from time-to-time and so they’re part of the normal business operations. So it’s hard to say whether or not those will recur in 2015, but the base trend in the increase is inline with the overall increase in the activities in the business services sector.

Meny Grauman

Thanks for that. And then just one final question just on your 2015 EPS growth outlook. I am wondering what’s the main reason that you see growth in 2015 sort of coming in below your medium-term target.

Réjean Robitaille

Well, in terms of the medium-term as we are 5 to 10 is when in 2015 to give you its a little bit more color on this and it was 5 to 8 and as Michel mentioned mainly because that’s including the Québec tax, salary tax that we just that was - has been announced last week.

Meny Grauman

Okay, sorry for that clarification. Thank you.

Operator

Our next question comes from the line of Sumit Malhotra of Scotia Capital. Please go ahead.

Sumit Malhotra

Thanks, good afternoon.

Réjean Robitaille

Good afternoon.

Sumit Malhotra

First question is for Michel Lauzon, I want to take a little bit of a closer look at the capital ratio this quarter. So just looking at Page 7 of your supplement. So the CET1 ratio was up almost 20 basis points sequentially. When I look a the key metrics here RWA growth was consistent to the last couple of quarters and versus Q3 your reported earnings were actually lower, yes the movement in the ratio was quite a bit stronger. So on Page 7 I see here that the regulatory adjustments line seem to move down around $10 million. So just hoping you can give me some color on what drove that line if that was particularly the factor that knocked the CET1 up 20 beeps or so.

Michel C. Lauzon

That regulatory thanks for the question Sumit. That regulatory adjustment line is hodgepodge of many different factors which overall favorable this quarter, mostly favorable we had unrealized security gains which were a bit higher. And we had deduction for software which were lower because of amortization of some of the capitalized software line. And also some year-end pension adjustments which happen to be favorable which reduced the pension liabilities and net liabilities and reduced the other comprehensive income deduction from capital.

Sumit Malhotra

So the hodgepodge is really, to use your term is really the big factor here. When I look at that line in the last couple of quarters or frankly going back a couple years, you’ve been pretty flattish in the 755 to 765 range. Looking forward particularly since your targeting growth in loan portfolios that are higher in the risk-weighting side. Is it fair to say that its going to be back to where it was maybe a more slower pace of appreciation in the ratios of the right way to think about it.

Michel C. Lauzon

Now, in terms of my hodgepodge just to correct you the - we did have a significant increase in earnings because of the production in the integration costs. Albeit we didn’t have some restructuring charges that hit in the quarter. In terms of risk-weighted asset growth because of the way we are tilting our growth strategies we will see hopefully an acceleration risk-weighted assets, but that will be accompanied by the fact that we have a better retained earnings profile which should fund the increase in risk-weighted assets relatively comfortably.

I’ll remind you that we’re still under standard methodology. So one day, once we’re on AIRB we should get a pretty good list in that ratio as we mentioned in my slide. So at the same time we took several steps this year and last to improve the dynamics of our ratio.

One we’ve actively managed the volatility of our pension fund we’ve reduced some of the expenses or capitalized expenses on the software side to reduce the impact of capitalized software. We’ve had a good performance on our discretionary investment accounts and so we expect those things to continue so they should provide a lift. All in all, however we expect the CET1 ratio to remain where it is plus or minus a few basis points depending on how the earnings and RWA growth line up, but we are pretty comfortable where it is right now.

Sumit Malhotra

I am going to - have one more for you on the standardized and advanced approach. Just to be clear my comment on the net income was more quarter-over-quarter, the fact that your ratio moved a lot even though versus Q3, your net income on a reported basis was lower, so that’s what I was referring to.

Michel C. Lauzon

Okay.

Sumit Malhotra

But on the standardized and advanced, you mentioned in your prepared remarks and I think the bank has been giving us some hints on this for few quarters now, the fact that maybe you slowed the pace of some of the processes required to get you to compliant with the advanced approach. How do we read this, is that you are waiting to see what comes out of some of the regulatory body as to whether you want to continue on that process and how important has this topic in the breaks if I can use that term on the advanced approach processes been to the expense metrics of the bank?

Réjean Robitaille

I'll let Pierre Minville our CRO to answer these questions.

Pierre Minville

In fact we decided to slowdown the project because the last investments required - depends on rules that are not finalized at the Basel level, so we are expecting those rules somewhere at the end of 2015. As soon as we get those clarifications, we should be able to invest at the right spot in system or processes. That’s why we decided to slowdown.

Michel C. Lauzon

And to your follow-up question, this is Michel; we have delivered several milestones this year. So we did have significant systems investment and capitalized investments that we made this year and with deliverables whether it be on-boarding technologies or credit scoring methodologies which are lined up with the [IRB] approach and we are using those in our day-to-day risk management business and so this year has had no impact, next year it should be the pace of expenses should slow, because we're waiting to find out what Basel has inline in terms of both the standardized and advanced approaches.

Sumit Malhotra

All right. Thank you for that. This one is probably for Réjean. I know you have given us a few hints here on how the 5% o 8% target gets achieved in earnings for next year. One I wanted to focus in on specifically was revenue, and again you have given us an idea of what you are thinking about NIM and loan growth which obviously sounds more positive than we had this year. When you think about the aggregate top line for the bank, the operating leverage this year had a lot more to do with expenses than it did with revenue. Do you think that picture on the revenue side changes in 2015 for Laurentian?

Réjean Robitaille

Well the answer is yes comparing to 2014. We mentioned earlier that we expect a deposit of operating leverage that are also our expectations for next year, but in terms of the story should be I would say half and half, coming from the revenue side with the investment that we have made with the fact that this year we have to put in place several things including our equipment financing capacity, including our Alt-A mortgage capacity and on those two things we could say check we did that.

So based on this let’s say we are in a very better position in 2015 to see an increase of our topline, but at the same time, it’s always also important to look at our processes and look at the way that we do the things. So we’ll also continue to work on the expense side and both of them as I said should bring a positive operating leverage for 2015.

Sumit Malhotra

Last question from me and then maybe for you again is going to be on credit quality and maybe because you can have a conference call without talking about it in these days, so we’ll bring in the energy environment as well. So your credit quality obviously has been quite favorable for a number of years and frankly there is nothing in the numbers that looks particularly worrisome at this point.

Now, on some of the conference calls maybe we’ve talked about how energy could hurt aspects of the loan portfolio, the other side of the coin has been - there has been, there has been the view that for Central Canada lower oil prices should be somewhat positive for consumers. And I know specifically for Ontario and Québec the metrics economy wise haven’t been the strongest in the country.

So if you could just maybe tie in those two factors together on what this current energy price environment if it sustains itself means to Laurentian, and then perhaps the Québec economy and then if you could tie in your aggregate views on the credit outlook for the bank.

Réjean Robitaille

Okay, in terms of the overall oil and gas exposure of the bank we don’t have any. So in terms of loan on that side it’s not significant for us. But the fact now that we are seeing a lower gas price, I totally agree with some other comments saying that it should be beneficial for the central provinces mainly Québec and Ontario.

At the same time we are seeing well a lower Canadian dollar has more rigorous American economy and in terms of exportation which was one of the strength of the Québec economy and also the Ontario economy. We expect that we - there is a current acceleration of economy growth in those two provinces that’s taking hold.

So the 2013 real GDP was at 1% for Québec should be at 1.5% this year, should be close to 2% in 2015 and also in terms of the overall lower prices of the gas pump, well household should benefit from that and so we expect that household spending will be sustained in 2015 and mostly I would say in those two provinces.

As far the western part of the country we don’t have let’s say a lot of exposures overall in terms of loans and we do expect that our credit quality for next year will remain very, very low. Michel, already mentioned that and that’s on Page 17, but just to give you a little bit more color on this I could ask Louis Marquis of Credit to put some comments on this on the credit quality side.

Louis Marquis

It’s been a very favorable credit cycle that we’re going to and it remain the case and certainly there is no signs of deterioration of there in a portfolios. We do stress test our portfolios and any clouds on the horizon I believe that will sustain and I expect loan losses to be pretty stable in the short-term.

Operator

Thank you, we’ll now take our next question from Sohrab Movahedi of BMO Capital Markets. Please go ahead.

Sohrab Movahedi

Thank you. Just a couple of questions I wanted to just follow-up and assuming there was no chance just can you confirm there is no chance that the outcome of the Basel pronouncement that you are waiting for is going to alter this strategy of the bank, is it?

Réjean Robitaille

Well, Pierre you want to answer this one.

Pierre Minville

Is good question, in fact preliminary information that we got from Basel I indicate that models will stay and there will be some adjustment type such as floors or LGD that are regulatory monitor. So even with those adjustment we still think that the advance methodology will be beneficial to the banks. So we for now we’ll leave that, this strategy will be maintain, but we still need to wait for those clarification.

Réjean Robitaille

So for the only thing that - the only chance that we are seeing to stop this will be to bring back all financial institutions under the standard methodology.

Sohrab Movahedi

I mean what OSFI have to say?

Réjean Robitaille

Pardon me.

Sohrab Movahedi

What is OSFI have to say on that.

Réjean Robitaille

We can mention that and there is still discussions at the Basel level. So even there is still uncertainty concerning that and as Pierre mentioned, we do expect that the model approach is there to stay. So that’s why we have spent - and continue to spend in 2014 and to look at that. But the overall outcome of that is still uncertain, but our expectations and that’s why we are still continuing to talk about the AIRB, is that the model approach will stay and that should be beneficial for Laurentian Bank as we mentioned and as you could see in some of our slide in terms of the overall impact.

Sohrab Movahedi

Okay thank you. Okay just two more questions quickly. Michel did I hear correctly that the benefit if you will of the upgrade by DBRS is consumed basically by competition on the deposit side. In other words you’ve had to resort to institutional or wholesale funding because there is deposit competition.

Michel C. Lauzon

There is always been deposit competition Sohrab. It’s just that we saw opportunity to raise a little more institutional funding at favorable rates because for a certain period during the fourth quarter. We could raise institutional money on a matched funded basis cheaper than broker deposits and its not because broker deposits became more expensive its only because institutional funding became cheaper.

And so even though we are still very active on the broker deposit market we did want to bid up deposits. And in order to do that we just felt it was cheaper to do it on the institutional side. And this is something we review all the time every week in terms of what’s our funding strategy. And how we can optimize funding cost and help the business units fund themselves and grow while at the same time keeping the overall balance sheet cost of the bank at a minimum. Rating upgrade did help, but not significantly.

Sohrab Movahedi

Okay so now that you have the better rating do you think wholesale funding is going to be a more prominent part of the liability management at the bank?

Michel C. Lauzon

I would say not because of the rating but its become a more significant tool that we are using obviously the higher rating helps. But it hasn’t been the significant factor per se so far.

Sohrab Movahedi

Okay. And then just one question just on the growth prospects - EPS growth prospects next year. What would you think would be the key risks and you not being able to meet the low end of that?

Michel C. Lauzon

Well, its always part of the overall economy and that could be something let’s say mostly external. So the situation in Russia, in Europe and China or whatever that could let’s say have an impact on the overall economy, but that said, when we looked at those factors and we're looking at the rigorous U.S. economy. Sorry about that. And the fact that we are expecting an acceleration of economy growth in central provinces, I think should be just a matter of execution on our side.

Sohrab Movahedi

Okay. Thank you very much.

Operator

Our next question comes from the line of Bradley Romain from Desjardins Securities. Please go ahead.

Bradley Romain

Yes, good afternoon. I just wanted to clarify following Sumit’s question. The step one ratio, did you say we should continue to look at it building in a range of 10 to 20 basis points on a quarterly basis?

Michel C. Lauzon

Probably not, because risk weighted assets growing strongly because of our tilt towards Alt-A mortgages and commercial loans, we feel that with room to grow the dividend we’ll be able to maintain comfortable capital ratio while still funding our organic growth imperatives.

Bradley Romain

Okay and then just turning to the mutual fund as you mentioned at the start, I think you guys had realty great growth of 30% in the quarter. Can you elaborate where that growth is coming from; you know expectations for growth going forward.

Michel C. Lauzon

Thanks for the question Bradley. I don’t have hard numbers in front of me, but I would expect half comes from markets and half from net sales.

Bradley Romain

Okay. And then just finally, with regards to Laurentian Bank securities obviously with the market being hit as hard as they are at this point in time. Do you expect any impact on revenue within that business segment, so with regards to equity raises et cetera, any comments you can provide on side?

Réjean Robitaille

I'll ask Michel Trudeau of Laurentian Bank Securities to answer this question.

Michel C. Trudeau

Thank you, three questions actually, we are following the markets closely, but we've looked at last year as Michel alluded to it during his comments, during last quarter our treasury and financial markets operations were down a bit. We've had low rates, we've had low volatility, fewer accounts opportunities, but we've invested prudently to diversify our revenue and you alluded to that in your question. Our small-cap equity made up a lot of shortfall last year, as we look at it right now, we're not at oil and gas, we've not been impacted by it, of course it means more volatility, but the pipeline remains solid and as markets stabilize we expect to continue in the right path.

Bradley Romain

Great. Thank you very much.

Michel C. Trudeau

Thank you.

Operator

[Operator Instructions] and we now have a follow-up question from Sumit Malhotra of Scotia Capitals. Please go ahead.

Sumit Malhotra

Thanks very much, I actually don’t have any more questions. I had some technical problems while you were answering mine before, so I just wanted to say thanks for your time and have a great holiday.

Michel C. Lauzon

Thanks, Sumit.

Pierre Minville

Same to you.

Michel C. Lauzon

Look forward for the right up.

Réjean Robitaille

And all of you in fact.

Operator

And we have no further questions at this time. You may continue.

Gladys Caron

Well thank you all for joining us today. If you have any further questions, don’t hesitate to contact us. Thank you.

Operator

Ladies and gentlemen this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.

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