Laurentian Bank of Canada (LRCDF) CEO Francois Desjardins on Q3 2018 Results - Earnings Call Transcript

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About: Laurentian Bank of Canada (LRCDF)
by: SA Transcripts

Laurentian Bank of Canada (OTCPK:LRCDF) Q3 2018 Earnings Conference Call September 4, 2018 11:00 AM ET

Executives

Susan Cohen - Director, Investor Relations

Francois Desjardins - President and Chief Executive Officer

Francois Laurin - Executive Vice President and Chief Financial Officer

Stephane Therrien - Executive Vice President, Personal and Commercial Banking

Denise Brisebois - Vice-President, Human Resources

Liam Mason - Chief Risk Officer and Vice President

Analysts

Richard Roth - TD Securities

Scott Chan - Canaccord Genuity

Gabriel Dechaine - National Bank

Darko Mihelic - RBC Capital Markets

Sohrab Movahedi - BMO Capital Markets

Meny Grauman - Cormark Securities

Robert Sedran - CIBC Capital Markets

Gabriel Dechaine - National Bank

Operator

Good day, bonjour. And welcome to the Laurentian Bank Financial Group Third Quarter 2018 Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Susan Cohen, Director, Investor Relations. Please go ahead, ma'am.

Susan Cohen

Thank you. Good morning and thank you for joining us. Today’s review of the third quarter of 2018 results will be presented by Francois Desjardins, President and CEO and Francois Laurin, Executive Vice President and CFO.

All documents pertaining to the quarter, including Laurentian Bank Financial Group's report to shareholders, investor presentation, and financial supplements, can be found on our Web sites in the Investors center. Following our formal comments, the senior management team will be available to answer questions. After which Francois Desjardins will offer some closing remarks.

Before we begin, let me remind you that during the conference call, forward-looking statements may be made, and it's 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 Slide 2 of the presentation.

It is now my pleasure to turn the call over to Francois Desjardins.

Francois Desjardins

Thank you, Susan and good morning everyone. My formal remarks today will focus on the four core following items; the mortgage loan portfolio review, appointments of the executive team, strategic objectives and finally, financial performance for the quarter. I am pleased to announce that we have completed the mortgage loan portfolio review and have resolved the situation with both the TPP and CMHC. A sincere thanks to the teams involved this matter was resolved within the guidance that was given last quarter.

As you know, this review garners some media attention; everyone as we mentioned it's important to put this issue behind us as quickly as possible, and allow current and potential shareholders to have the same level of confidence in our organization and our plans that the team, management and the board has. Certainly, the events of the last nine months have been hard on the team, but this has been a tremendous learning experience and in the end, makes a stronger and more determined than ever.

Turning to talent, we continue to attract experienced and seasoned executives to the team. First, we hired Liam Mason as our Chief Risk Officer. Formerly from CIBC, Liam brings extensive risk management experience to the Group; he also served as Managing Director Bank Supervision with OSFI for the last two years. To further reinforce the team that is already in place, Liam has brought on additional bench strength with John Penhale, formerly from TD, CIBC, who will serve as Senior Vice President, Integrated Risk Management. I’d also like to announce that Vania Artinian has been appointed Senior Vice President in General Audit. With a distinguished career of State Street, Royal Bank and Genworth. Vania will bring a disciplined approach to improving our effectiveness of our governance and control.

We promoted Deborah Rose to the position of COO of Laurentian Bank Financial Group, recognizing her 25 years of experience and accomplishments within the financial services industry, of which seven has been at seasoned banks. Deborah will oversee the Group activities relating to administration, acknowledging our operations and lead our largest initiatives. Craig Backman has joined the team as our new EVP of Personal Digital Banking. Craig comes to us from a long career in the consumer product and financial services industry, most recently in-charge of digital strategy across the Canadian business lines of TD Bank. At LBCFG, Craig will be responsible for digital retail banking product development and distribution across Canada, advancing the work begun by Deb.

Moving to strategic objectives, as you know, the industry continues to evolve and so are we used to move swiftly to becoming a renewed financial institution remains a priority. Our commitment to being different and better to delivering value to our customers, not later. We have made progress on several fronts, simplifying product lines, making in-roads into equipment and inventory financing, the new Montreal corporate office and the move to advance internal ratings-based approach to credit risk. We have made good progress on the implementation of the new core banking systems and are just weeks away from the implementation that we’ll see all leading banks and most of business services products on-boarded.

Our new core banking system will soon able to launch a digital product, an transactional digital banking product require mobile devices not necessarily a branch network. As you know since 2004, we have limited our direct to client development to our branches in Quebec. If this changes, we are Pan-Canadian Bank and it's time that we grow our consumer base outside of Quebec. B2B Bank will be launching transactional digital banking products through the independent advisor network and in parallel Laurentian Bank will be gradually launching the same product directly to consumers across Canada.

As for Quebec branch retail services, we continued the migration of branches towards advice-only financial centers and increased the total number of financial advisors. But as you know, unionized employees have been without a contract since December, and we are in negotiations with very slow progress. Until we know the outcome of ongoing labor discussions, we must delay investments in technology and real estate through this sector, including the migration of accounts onto the new core banking platform.

I will conclude my remarks with a word on our quarterly results. From my perspective, this quarter's results are below what we are aiming for. Obviously, I will prefer to report better financial performance, but all things considered, I am happy with the progress we are making. We have made decisions that allowed us to manage through the mortgage loan portfolio review, which is now behind us, strengthening the team and reinforce foundations. In short, we’re making investments in the right places to support future growth.

Now, let’s back to the plan. Changes to customer behaviors are either an opportunity or a challenge for all banks and we must be prepared. We are continuing to make investments to ensure competitiveness in this changing financial landscape, which in turn will improve the efficiency and profitability on a sustain basis and build long-term shareholder value. But as I have said in previous calls, management is being prudent. We’re maintaining a healthy level of liquidity and capital. We continue to manage the balance sheet conservatively and regularly review our risk profile, and have concluded that a CET1 ratio of 8.3 to 8.87 is the right level to target to withstand market volatility, continue to increase loans to customers in the bank mix and pursue our strategic objectives. All this puts pressure on short-term performance, but ultimately ensures the financial strength of this organization.

I will now invite Francois Laurin to provide a more in-depth review of the financial results for the third quarter. And following the Q&A session, I will return to offer some closing remarks. Francois?

Francois Laurin

Thank you, Francois. Good morning, everyone. At the end of May, we announced that the mortgage situation with the TPP was resolved. And as Francois mentioned, today we can say the same regarding CMHC. Specifically, in the third quarter, we identified and repurchased mortgage loans totaling $135 million that were inadvertently portfolio ensured and sold into CMHC securitization program as highlighted on Slide 12. The amount was in line with our estimate of $125 million to $150 million that we reported at the end of the second quarter.

CMHC insurance and the inadvertently portfolio insured mortgage loan was concurrently cancelled and as a result, a one-time charge of $1.5 million was included in other non-interest expenses in the third quarter of 2018. CMHC will release the $20 million cash reserve deposit previously made by the Bank in the fourth quarter. CMHC's securitization program remains available and the Bank has been securitizing mortgage loans as usual during 2018.

I would now like to discuss the Bank's core financial performance, beginning on Slide 14. Results reflect our investments in people, processes and technology and our actions to strengthen the Bank's financial foundation, including maintaining high liquidity and strong capital, which position us well to deliver our strategic objectives. Adjusted net income in the third quarter of 2018 declined by 1% compared to a year earlier. Adjusted EPS was $1.34, down 18% over the same period. Sequentially, adjusted EPS declined by 9%. Adjusted ROE was 10% and while lower than a year earlier, it reflects a strong capital base.

As I turn down on Slide 15, reported earnings for the third quarter were affected by adjusting items totaling $4.5 million after tax or $0.11 per share, and are largely related to business combination. The drivers of our performance are presented on Slide 16. Total revenue in the third quarter of 2018 increased to $260.7 million, up 5% compared to a year earlier. Net interest income rose by 12%, mainly due to strong volume growth from the acquisition of Northpoint and the higher margins earned particularly on the acquired loans. Other income decreased by 7%.

Net interest margin shown on Slide 17 was 1.77%. The main factors contributing to the 14 basis points year-over-year increase was the larger proportion of higher yielding loans to business customers, including the acquisition of Northpoint with corresponding higher margins and recent increases in the prime rate that were partly offset by the higher level of liquidity -- liquid assets. Sequentially, the margin was down by 5 basis points, largely reflecting the higher level of liquid assets. As previously mentioned, 2018 and 2019 are important years of investment in our strategic plan, and we expect to maintain the high level of liquidity over this period. Considering all these factors, we expect a modest improvement in NIM over the next few quarters.

Average earning assets rose 3% year-over-year, reflecting 14% growth in loans to business customers, and a level of residential mortgage loans through independent brokers and advisors that was relatively stable from a year earlier. Residential mortgage loans through the branch network were 10% lower than a year earlier, largely reflecting the decision last November to no longer accept referrals from the broker network. As well, personal loans were down 10% over the same period, mainly due to lower investment loan balances, reflecting consumer behavior to accelerate repayment, following strong capital market performance. Over the past six months, we have also been managing asset growth more tightly to optimize the profitability of the product mix and the related risk-weighted exposures.

Other income, as presented on Slide 18, totaled $83.7 million, down 7% from a year ago. The decline was primarily driven by lower service charges as clients continue to modify their banking behavior and as we simplify our product offering. As well, income from brokerage operations declined due to a lower level of activity. Sequentially, other income was up slightly. There was improvement in lending fees, reflecting higher activity in the commercial loan portfolio, higher income from treasury and financial markets due to better results from treasury operations and higher income from brokerage operations relating to the rebound in fixed income activities. In the second quarter of 2018, we've recognized a $5.3 million gain from the sale of the agricultural loan portfolio.

Slide 19, highlights that adjusted non-interest expenses rose by 12% year-over-year. This increase was due to the acquisition of Northpoint, regular salary increases and higher technology costs related to running two core banking platforms. As well, other non-interest expenses increased, resulting from a variety of items, which are also highlighted on Slide 19. We anticipate that the ongoing cost will remain at the similar level over the next few quarters. Our adjusted efficiency ratio of 69.7% was 410 basis points higher than a year ago. As discussed on previous conference call, we expect that over the next few quarters this ratio will remain volatile and high. However, as we make progress on the strategic initiatives, this ratio is expected to improve.

Slide 20, highlights our well diversified sources of funds; deposits stood at $29.1 billion, up 3% compared to a year earlier; total deposit sourced through independent brokers and advisors grew by 10% and amounted to $15.1 million. While we have reduced our footprint by close to a third, our branch stores deposits have been relatively stable over the past few quarters, and have experienced low attrition over the past year. Debt related to securitization at $7.8 billion decreased by $636 million compared to a year earlier, mainly due to maturities of Canada mortgage bonds and the repurchase of mortgage loans resulting from the mortgage loan portfolio review.

Slide 21 demonstrates the success of our strategy to increase our non-redeemable broker sourced GICs over the past 2.5 years, a higher quality term funding source, while reducing our exposure to more volatile broker-sourced high interest investment accounts. With respect to liquidity, our positions continue to be strong and well above our internal and regulatory requirements. Furthermore, slide 22 highlights the high quality composition of our liquidity portfolio. Almost 90% is invested in low-risk highly rated liquid assets, such as Canadian Government Prudential and Municipal Securities, as well as in cash. We expect to maintain a healthy level of liquidity over the next few quarters. Slide 23 presents the CET1 ratio under the standardized approach of 8.8% at July 31, 2018. Our capital ratios are strong and support the Bank’s strategic plan.

Our diversified loan portfolio is highlighted on Slide 25 to 27. Loans to business customers have increased to 35% of the portfolio from 31% a year ago, and residential mortgage loans remained relatively unchanged at 50%. Within the residential mortgage loan portfolio of A mortgages totaled $1.4 billion and represent 8% of the total residential mortgage loan book and 4% of the total loan portfolio. As well, residential mortgage loans and the GTA represents about 22% of the residential mortgage loan portfolio and the GVA accounts for 4% equal to last quarter. LTVs remain low and credit scores remain high.

Turning to Slide 28, credit quality remains strong; the provision for credit losses of $4.9 million compared to $6.4 million a year ago; the loss ratio was above 5 basis points in the third quarter of 2018 compared to 7 basis points a year earlier; 97% of our loan book is collateralized and the underlying credit quality of the portfolio continues to be excellent; the Bank will adopt the IFRS 9 on November 1, 2018, and we will provide more -- some insight at year end.

Impaired loans are shown on Slide 29. The gross impaired loan ratio stood at 45 basis points, 2 basis points higher than the previous quarter. However, credit quality of the underlying portfolio remains strong. The net impaired loan ratio stood at 37 basis points, and we remain adequately provisioned. We continue to expect that over the medium-term, the loss ratio will gradually move higher to reflect our changing business mix. Nonetheless, with our current portfolio mix and lending practices, we expect that the loss ratio will remain below other Canadian banks.

To conclude, we’re building a solid foundation to pursue our plan, which will allow us to deliver sustainable profitability and create long-term value for our shoulders. Thank you for your attention, and I will now turn the call back to Susan.

Susan Cohen

Thank you. At this point, I would like to turn the call over to conference call operator for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from the line of Richard Roth of TD Securities. Please go ahead.

Richard Roth

First on expenses, what does exactly tilts around that $1.5 million write off, what exactly does that relate to?

Francois Laurin

Basically, it’s related to the cancellation of insurance from the mortgage loan portfolio. So those inadvertently ensured loans, we stopped the insurance and we had an amount of ensured premiums paid not amortized in the books that we have to take as one-time charge.

Richard Roth

And then you also mentioned in your commentary that there was increase in deposit insurance. Historically, I mean these are specifically small enough not to mention. Was there a specific reason you guys mentioned this quarter?

Francois Laurin

Yes, the higher deposit insurance cost is related to an increase in premiums and deposit volume growth that we incurred starting this quarter.

Richard Roth

But I guess deposits really…

Francois Laurin

So we [Multiple Speakers]…

Richard Roth

So it's entirely driven by higher deposit levels rather than anything else?

Francois Laurin

And the premium as well…

Richard Roth

And then you mentioned in your commentary that you anticipate ongoing costs to remain at the similar level over the next few quarters. Of the cost you had this quarter, which ones are not ongoing. So the write-off is one example. Are there any others that are baked in that would not be ongoing?

Francois Laurin

No, basically that’s right. Given you now cost that $1.5 million, the rest is basically the level we expect to sustain for the next few quarters.

Richard Roth

With respect to capital, I know that you’re moving your range is fairly substantial like it's 0.4%. What -- now that the mortgage figure is concluded, what drove you to increase your comfortable capital range? What’s the catalyst for that?

Francois Desjardins

The biggest catalyst is more towards the business customers but we have indicated the fact that maintaining a strong capital position to withstand market volatility, continue to increase business customers and advance mix and to pursue our plan. I think that from the beginning of my tenure I indicated that one of our objectives is to change the mix of the bank slightly and gradually towards most of business customers and that drove the changes in CET1 range targets that we've had this quarter and previous years.

Operator

We’ll go ahead with our next question from Scott Chan, Canaccord Genuity. Please go ahead.

Scott Chan

Maybe just a follow-up on the new target ratio on the capital side. With your earnings outlook probably impacted near-term and your payout ratio at the high-end of your range right now and also the increased capital range. Is that affected or the dividend growth that, albeit as historically done every other quarter? Or how do we think about that in terms of the capital?

Francois Desjardins

I think you should think about it as we do, the Board of Directors and management review our dividend rate every quarter. We have great dividend yield that have -- this has been a key to our investors and then we’re aware of that. So as we’re making these reviews and decisions, we’re considering that 2018 to 2019 our investment use where expenses are going to be slightly higher and therefore performance is going to be under pressure. But we are thinking about rewarding the patience investors that we have and hopefully not more.

Scott Chan

And then when I think about forward looking growth on your portfolio, you scaled back mortgages personal. So how do we view the overall growth say over the next year. And how does commercial also plans that in terms of the outlook there?

Francois Desjardins

We're still working towards our 2020 growth target. And as you may recall last Q4, because we were so far in advance in our mortgage targets, we started to scale those back and really focus on loan to business customers. As effective growth is higher in most of business customers and slower through in residential mortgages and as we move forward that will continue to be the case. We want to concentrate on target niches and profitable growth. We're also reviewing our activities to determine areas in portfolios where we want to grow and maintain and those where we want to be corrected and for example, last quarter the agriculture portfolio. This should result in a net growth of low single-digits in 2019 for growth overall in home and low double-digit growth in most of businesses in same period.

Operator

And your next question will come from Gabriel Dechaine of National Bank. Please go ahead.

Gabriel Dechaine

I just want to follow-up on the rationale for the higher core tier one target range. So what I'm hearing is you're bracing yourself for market volatility and then you want to have higher capital ratios as you push further I guess into commercial lending. What else changed? I mean, you just last quarter or the quarter before were content with 7.9% to 8.2% and all of a sudden were higher than that? I mean it seems sudden, not like the commercial lending…

Francois Desjardins

I don't think that it's -- I think as we've been moving our target range slowly but steadily as the loan portfolio is moving. And of course you have to move the range before you can get the loans in as well. So if we're looking for more loans for business customers in 2019, we have to make that adjustment beforehand. But you're right, I mean, I can read the news and so can investors and I think that we've been managing the Bank and serve over the last period. And I think that investors want to be safe and secure in investing in Laurentian. And I think that’s having a high level of capital -- healthy capital position and for that matter high -- or healthy level of liquidity. The issues are out in the market that we can withstand the market volatility and continue with our plan in terms of the growth.

Gabriel Dechaine

And then speaking of these commercial borrowers, can you tell me what the organic growth was or can you talk about the Northpoint on a year-over-year basis? I want to know what the Northpoint ex that agriculture loan sell off was.

Francois Desjardins

I'll ask Stephane Therrien to comment generally on business services growth.

Stephane Therrien

Yes, year-to-date our growth has been 14% as you mentioned, including Northpoint would have been 8% organically without Northpoint.

Gabriel Dechaine

And that 8% is, I guess understated given the sale of that ag portfolio?

Unidentified Company Representative

Yes, slightly.

Gabriel Dechaine

And then if I look at the trends in the commercial -- the mortgage book, the personal loan book, which has been shrinking for quite some time now the pressure is on the fee line there from your branch transformation and then you're thinking about expenses being elevated for a few quarters. What does that implied about your efficiency ratio into 2019, not just Q4? Are we looking at maybe a similar year next year to this year and then hockey stick type 2020 when you push through to get to that 5% level, or is that the progress you have in mind now?

Francois Desjardins

I think I'd push back a little bit and to comment on how the Group is working investments to increase its competitive nature. One of the things that's important to plan is that we operate in niche markets where we can win, and try not to be everything to everyone and it's choosing -- then choose to be rates where we want to play and become experts and win the business. This has been true on the B2B side, the B2B Bank side, it has been true on the commercial side, it has been true from Laurentian Bank security side. The one sector that I'd like to see some more progress on is our retail branch network. And that we've made some great strides there in terms of managing the size of the network and managing expenses down, but you can't shrink the rate. So what we need to do is move the branch network towards financial advice and increase the number of financial advisors and other advice type jobs to generate more customers and more top line.

And towards guidance for 2019, I'll just make a general summary here, I think is probably best. We're going to see some better growth still organically from our own to business customers, specifically in inventory financing, in equipment financing, in loans to commercial customers as a whole specifically with real estate financing, infrastructure lending. So I think we're going to see a little bit better growth in this quarter on the mortgage side as we're going to be in for low-single digit growth and maybe for 2020 target. I think that we're seeing some really interesting development in terms of investments that we're making in core banking and to digital offer. I think that from a digital perspective, being able to grow deposits directly from end consumers across Canada is something that the digital is giving us an opportunity to further diversify our funding sources.

And of course, in my comments I've said for, sure security and capital are going to have -- there is some pressure on short term performance, and we expect that for the next few quarters. But really what we'd like to see some progress on is on the retail service branch network side. And we need some clarity on the labor discussions to be able to give you some more guidance there.

Gabriel Dechaine

And then actually touching on my final question here, because you do mentioned that in the Page 7 of the report to shareholders, how the union negotiations uncertainty there that’s forcing you to review the pace of the conversion to advice only branches. So what is the implication there, what are you seeing, just trying to understand what the…

Francois Desjardins

Well, from the beginning the plan, we had spoken about really making a general migration of the branch network towards advice. As you know, customers are not really going to branches as they were in 1980s or ‘70s, they’re going to branches now, great majority of transactions, 94% of them are made online, ATMs et cetera. So we have to move the physical attributes of the branches and also the people that work there and what it is. And we does -- in Quebec, a large portion of our branch network is under selective agreements, and we’ve been trying to move that from -- we’ve been trying to get some clarity on the labor front for last two and a half years. And as I said the selective agreement is passed its term now for last nine months. So we had hoped that this would be behind us by now, and it still isn’t. And so for the moment before putting more money and investments in technology and in real estate we’d like to know what the rules are.

Operator

We’ll go ahead with our next question from Darko Mihelic of RBC Capital Markets. Please go ahead.

Darko Mihelic

On that note when you accrue for expenses. Are you accruing as per the past collective bargaining agreement, or are you accruing a slightly higher amount?

Francois Desjardins

I'd like Francois Laurin to answer that…

Francois Laurin

So you mentioned, if we accrue for potential expenses or settlements?

Darko Mihelic

Well, I am just curious so right now you have -- so in essence [Multiple Speakers]. So my question is with respect to your compensation and expense that is currently -- that you’re running. Is that based on the previous collective bargaining agreement in another words the cost. And I guess where I am going with this is if you [Multiple Speakers] if you hash out a new agreement [Multiple Speakers]…

Francois Laurin

We accrue what we currently pay the employees according to the current agreement, which is still in place with the one that expired at the end of 2017.

Darko Mihelic

And if the new collective bargaining agreement is put forward, is it not retroactive to the end --- to where -- to December 2017?

Francois Laurin

Usually from a financial perspective, not.

Darko Mihelic

And my second question then is, you mentioned in your shareholders' report that you’re carrying higher liquidity for market volatility. But you're the only bank to actually mention that and other banks actually are reducing their liquidity requirements. So what specifically -- what specific volatility are you seeing in the marketplace that would require you to carry extra liquidity?

Francois Desjardins

I think that we choose market volatility those turns well in compass whatever you would like. I can’t really go -- talk to one specific. But I think that we have ongoing labor discussions, I think that I can read the news I think that some of the smaller players sometimes some incidents in 2017, all that goes to warning us and put ourselves in a stronger financial position and reassure investors that something that they didn't have some specific rate that we run Laurentian Bank in conservative fashion. And I’m just reading the environment here -- I think that it's the same thing to do. Francois, you want to add a couple of thoughts on that?

Francois Laurin

Sure, I would add to just -- the regulatory environment since over the past year or so and the execution of our plans comes with to make sure that we have strong liquidity and capital to execute our plan going forward.

Darko Mihelic

And then just one last question, if I may. When we look at deposit situation for Laurentian, I guess the question that comes to mind is now that you’ve gone through some of this branch, let’s call it, optimization. The question comes to mind is, have you lost customers? We can see that balances are barely down but what I’m interested in is understanding is whether or not your customer count on the deposit side is actually up or down.

Francois Desjardins

I think I’ll ask Stephane Therrien to comment on this.

Stephane Therrien

No, we have not experienced material client attrition, nothing major. And going forward, as Francois mentioned, we expected that the focus on advice will result in attracting new clients.

Francois Desjardins

I think I will add to that, Darko, that one of the things that we chose to do last year is to stop the referrals of mortgage broker dealers through the branch network. From a customer perspective it's -- from a profitability perspective and from a customer cross-selling perspective, we preferred that our financial advisors in the branches focus on investment deposits, financial health customers instead of being the tail end of a mono line type of commoditized product like residential mortgages has become.

Operator

Your question comes from the line of Sohrab Movahedi of BMO Capital Markets. Please go ahead.

Sohrab Movahedi

Just wanted to clarify couple of things here. To talk about higher liquidity. Are you factoring into cash collateral that's still sitting away from the Bank coming in? Like in other words, when that comes in, does the liquidity level even go back higher or deep? Will that be able to be repurposed, if I've asked the question correctly here?

Francois Desjardins

I'll ask Francois to comment on that.

Francois Laurin

The short answer is, no, Sohrab.

Sohrab Movahedi

So it will come in and be additive to the liquidity level?

Francois Laurin

No, it doesn't impact.

Sohrab Movahedi

So I mean you some liquidity that is sitting with some counterparts. When you're targeting your liquidity levels, are you assuming that money is coming back or are you excluding that? And if that money then comes back, does it put you in an excess liquidity position relative to the targets you're set for yourself, or have you factor that in? And it would continue to mean higher liquidity levels then?

Francois Laurin

No, we monitor and we proactively manage the liquidity level given our requirements, including all the requirements that we have going forward, including those ones.

Sohrab Movahedi

So those ones will be additive, when they come back by the Bank your liquidity level is going even higher?

Francois Desjardins

Are you specifically talking about the $20 million that’s coming back from CMHC?

Sohrab Movahedi

Yes.

Francois Desjardins

Yes, clearly. So $20 million it's in consequential on a $46 million bank so the target liquidity levels that we're having from a higher liquidity position is much, much higher than the $20 million.

Sohrab Movahedi

I guess, Francois the -- I guess, you've -- let's just quickly touch on ROE as well then, because one of the targets for the Bank has been to narrow the ROE gap to the Group. Certainly, by moving the capital targets higher, the hurdle becomes I guess a bit more difficult. So have you revisited your ROE aspirations for the next 12 to 18 months basically given the outlook on expenses and -- I don't know, the variety of ongoing initiatives that you have as you look to rejig the Bank?

Francois Desjardins

As I mentioned last quarter, there are some headwinds here but we have it. We're still working towards our 2020 target and growth and performance. We will review those in Q4. It will be on a year-over-year basis. But for the moment, we're still working towards those targets. These references that we're making today are going to pay off. We're making these investments on a seven year basis from just some of the investments that we're making today and have been making, for example, with IRB. So that IRB pays off because we're -- sold the maturities, strengthening our foundations, our processes, our data gathering, our models, et cetera. Of course these things -- and transfer more money in the short-term but we become a better bank. And in the end we get to -- from a financial perspective, make better credit decisions for sure and that should show up as well in how we manage RWA. And we've said to the market that this would have 200 basis points refunds from capital and about 200 basis points of increase on ROE.

When we're talking about the gap with the majors, without IRB that gap would be very difficult to get that so this is a very important initiative for us. And it accounts for 200 basis points plus of the gap, so we're looking forward to that. Other investments are -- from an efficiency perspective very important as well. So the short answer is we're on plan. This last nine months has been more difficult because this mortgage portfolio review has been distracting to us. I'm happy to say that today this is behind us so that we can fully concentrate on making the moves that we need to make to get us to the right place. But from -- and the only thing where I believe we need the more priority is on our labor relations front, because we do need to have a higher level of customers and growth coming from retail services than what we have.

We've done the work from an efficiency perspective, but as I said before, we can't extent to shrink the great [Technical Difficult] and I think that advise our customers is good. We need to increase the number of people that help our customers with their financial health. And we're hoping that we will get some priority like we do need some better guidance on that front through next quarters.

Sohrab Movahedi

And just one last one from me, Francois, when you and the management team and the board reviewed or revised up the target range for the capital ratio, notwithstanding everything you just said as far as the conversion or what have you. did you leave room for further revision upwards in short order or was that deemed to be sufficient with a, call it a -- I don't know, six quarter timeframe?

Francois Desjardins

You should expect this to be good for that timeframe, yes.

Operator

Your next question will come from the line of Meny Grauman of Cormark Securities. Please go ahead.

Meny Grauman

Just another question on the labor issue, just wondering about a timeline or some deadline or -- the real motivation here is at what point does the delay on the labor front at least push off some of your 2020 targets? Where do you have to get to in this for it to start to have a meaningful impact in terms of just not being able to reach some of those 2020 targets?

Francois Desjardins

I'll ask Denise Brisebois, our Head of Corporate Human Resources to give you the technical answer on that. I'll come back and give some comments on objectives.

Denise Brisebois

As you may know the collective agreement has expired at the end of 2017. We've had several meetings with the union starting in September of 2017, we're now at stage of meeting in presence of a consulaire, we have that several meetings in presence of consulaire. Some of the meetings are scheduled already in September. And the registration is that some changes have to be made in the collective agreement in order for the retail services to fully implement their plan and improve their performance. So that’s the fiscal level we seek and we expect both parties to negotiate in good things.

Francois Desjardins

I think from a time line perspective, what you’re looking for is that -- my answer would be, two years ago. It has got to be a prestigious year, but everybody has to get behind the plan. And I think that we have some great news in retail services that are really dedicated to making this happen. And I am not promising on this in any other fashion that just say to you that we can’t get the efficiency ratios when you have a great number of your staff that’s in transitions that most customers don’t want or need anymore and we need to be able to pick that. And right now that process is slow and we’d like to get some more clarity on it. But I would -- so I don’t know what the timeline is on this or deadline. I’ve been told to be patient.

Meny Grauman

And then if I can just ask on the margin you talked about still expecting modest increase in margin. So just wondering whether we’re already seeing the impact of the most Bank of Canada rate hike in your net interest margin? And when you present that guidance of modest increase in margins going forward, what are you assuming in terms of future rate hikes?

Francois Laurin

Short term, clearly, yes, part of the increase has already started to reflect itself and gradually will reflect itself fully. We expect over the next few quarters, a couple of points in the NIM coming from our pro-activity of managing our business and some of it coming from potential increase in interest rate in the next year that are already in mostly placed in the market as we see it today.

Operator

Your next question comes from the line of Robert Sedran of CIBC Capital Markets. Please go ahead.

Robert Sedran

Just wanted to follow-up on the question of the collective bargaining and it sounds like there's discussions, your schedules and all that. There is no prospect of work action in next little while. Is there like this is going to continue to be more of a negotiation under the old collective agreement rather than something that could create some disruption in the platform?

Francois Desjardins

Both parties have indicated that work stoppages would be -- is not the preferred goal go forward, the goal stated I think would work to avoid any more conflicts possible. Of course it’s always something that both parties have announcements too, but that is not the way we see it today.

Robert Sedran

I wanted to ask a follow-up on the margin question, I guess it’s for François, Laurin and when you think about sequentially, I gather and the explanation is a greater liquidity on the balance sheet is reason the margin was down. But with the business mix shift towards commercial, even sequentially towards commercial and away from residential mortgage a little bit, I might otherwise expected the margin to be up. So are there some other moving parts in there, or is it just all -- the answer is all about the liquidity on the balance sheet and we can just assume it going from there?

Francois Laurin

The major part would be from liquidity. As you remember, last year in Q4, we had basically for the full quarter, Northpoint, so it’s going to be like-for-like this year. So there might be a small increase as we move and shuffle our portfolio to profitable growth in the way we’re growing our lending assets. But those are the two elements but that’s why we’re saying a few basis points in the quarters to come.

Robert Sedran

And just one last point of clarification, Francois Desjardins, you mentioned that I think it was Sohrab's question for the next several quarters that range is fine. But when you think about the transition in the business, you think about the IRB world. Is it right to assume that as you think about the bank the way you want it to be that even this current range probably ends up migrating higher overtime as you become more of a loans to business rather than loans to retail?

Francois Desjardins

Well, it’s really comparing apples and oranges, right, because whatever the range is understand the methodology, which we are on today. And whatever range is required under advanced methodology is really two different types of ranges than the RWAs are calculated from different. So the best way to look at it is, all things being equal, whatever the range you are at from a standard perspective, what the shift to IRB does these does is recalculate the RWA in separate fashion downwards, because you’re doing a better job at evaluating your own risk and credit risk. And we know that Laurentian is a conservative lender. This is evident by quarter-over-quarter us telling you that provisions are low and about a third of the industry -- so that does have a quite a bit of an impact when you move to IRB. Our calculation today is about 200 basis points of capital that’s released overtime. And when we pick that in then you can use that from a growth perspective or deploy it in any way you want because your regulatory requirements are different. So the answer I gave earlier is, I think we’re good to move more towards the loan to business customers with a range that we put out. We are at the higher end of the range there. I think that we want to just get comfortable in that position but I don’t expect in the near future to have to going higher to get to 2020.

Operator

[Operator Instructions] At this time, we'll go ahead with our next question from Gabriel Dechaine of National Bank. Please go ahead.

Gabriel Dechaine

I just had a follow-up on the credit performance this quarter. We did see a pretty big reversal out of the collective, and you’ve acknowledged that thing that your PCL ratio is going to trend higher. I just want to get a sense of any of the goal posts here, where do you think we’re going to be -- what range do you have in mind for the PCL ratio?

Liam Mason

We think, going forward, we’ll be back in a range of $10 million to $12 million run rate.

Gabriel Dechaine

$10 million to $12 million?

Liam Mason

Yes, against $4.9 million…

Operator

And there are no further questions. At this time, I'd like to hand it back over to Ms. Cohen

Susan Cohen

Thank you. Francois will now offer some closing remarks.

Francois Desjardins

Thank you for your questions today and continued interest in our organization. Today, I'm very pleased to be able to say we're done with the mortgage loan portfolio reviews. But if I have one key message for you it's that we're now back on plan. From the start of my tenure, the general comment from the market was that we needed to address performance. So we developed a plan with strategic objectives and we're making those investments required to achieve them, this is what you're seeing. When we thinking about Laurentian, there is a few key takeaways.

First, the financial strength of the organization has been clearly demonstrated through conservative management of the balance sheet and with a healthy capital and liquidity profile. Second, credit quality of the organization is solid. With 97% of our loan book secured, we've been able to weather economic downturns and post provisions that are one third of the industry. Third, the dividend yield is the highest in the industry, and this combined with financial strength rewards the patient investors. Fourth, we have a strategic plan to have been delivering on key initiatives. We have done what we said we would do. This plan moves with the organization in the right direction. And last, there are new additions to the leadership team and we're attracting great, experienced talent who believes in this vision.

This is a rapidly changing financial services industry, which requires us to build a robust foundation, one that will last for the long-term, and that is exactly what we're building. We're building a better a Bank not for the next quarter, but for the next decade. Thank you.

Susan Cohen

Thank you, Francois. Should you have any further questions, our contact information is included in the end of presentation. Our fourth quarter of 2018 conference call will be held on December 5th, and we look forward to speaking with you then. Have a great day.

Operator

And this concludes today's call. We thank you for your participation. You may now disconnect your lines and have a wonderful day.