Laurentian Bank of Canada's (LRCDF) CEO François Desjardins on Q4 2018 Results - Earnings Call Transcript

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About: Laurentian Bank of Canada (LRCDF)
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Earning Call Audio

Laurentian Bank of Canada (OTCPK:LRCDF) Q4 2018 Results Earnings Conference Call December 5, 2018 11:00 AM ET

Executives

Susan Cohen - Director, IR

François Desjardins - President and CEO

François Laurin - Executive Vice President and CFO

Liam Mason - Vice President and CRO

Stéphane Therrien - Executive Vice President, Personal and Commercial Banking

Analysts

Sohrab Movahedi - BMO Capital Markets

Richard Roth - TD Securities

Sumit Malhotra - Scotia Capital

Marco Giurleo - CIBC

Gabriel Dechaine - National Bank Financial

Meny Grauman - Cormark Securities

Scott Chan - Canaccord Genuity

Operator

Good day. Bonjour. And welcome to the Laurentian Bank Financial Group Fourth Quarter Results 2018 Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Susan Cohen, Director, Investor Relations. Please go ahead, ma’am.

Susan Cohen

Good morning. Thank you for joining us. Today’s review of fourth quarter and fiscal 2018 results will be presented by François Desjardins, President and CEO; and François Laurin, Executive Vice President and CFO.

All documents pertaining to the quarter, including the press release and investor presentation, as well as 2018 MD&A and financial statements 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 and then François Desjardins will offer some closing remarks.

Before we begin, let me remind you that during this 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 two of the presentation.

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

François Desjardins

Thank you, Susan, and good afternoon, everyone. Three years ago, we launched our seven-year plan focused on making Laurentian Bank Financial Group a renewed financial institution. Customers have shifted and continue to evolve at a rapid pace sparked by advancements in technology and the globalization of banking. In response, you can find on slide five, the mission statement we crafted, which guides us in our journey to renew our organization and set the tone for every decision and every action that we take. We help customers improve their financial health.

On slide six, we outlined three strategic objectives, putting words in motion, as a team, we are building a more robust foundation, growing our business strategically and focusing on improving our financial performance.

Building on a long track record of discipline management and conservative credit quality, in 2018 we invested in our foundation, people, processes and technology as seen on slide seven. The new core banking platform implementation is nearly 75% completed and we migrated all B2B Bank GICs at the end of the year.

As we speak, we are in the final stages of preparation for the completion of Phase 1 which will move all B2B Bank and most of business services products to the new platform. Moreover, this new core banking platform has opened opportunities for a better transition to a digital environment and sets the stage for digital product launches in 2019 and a renewed customer experience.

We completed the integration of the Canadian operations of CIT, now renamed LBC Capital and implemented a new best-in-class technology platform to support growth in leasing and equipment finance.

We joined the exchange network to allow customers greater access to their accounts through a vast network of more than 3,600 ABMs from coast-to-coast. We made an important investment in our people by completing the build of a new corporate office in Montréal and moving teams from nine separate locations across the city to one central hub.

With our new Montréal office now fully operational, a strong presence in Toronto and offices across the country, we are seeing the vision of who we are becoming come to life, an investment that is already paying dividends and supporting better teamwork, and a culture of performance.

We improved IT governance, IT security and business continuity programs. We upgraded our liquidity management software and refine processes and practices that are the backbone of a growing organization.

And lastly, we emerged from the mortgage loan portfolio review as a stronger organization as we build enhanced mortgage processes, implemented new controls and refined our oversight and governance. We are now more ready than ever to focus on profitable growth.

You can find on slide eight that since 2016 we have been evolving the Bank mix by increasing loans to business customers. We saw positive results in higher margin commercial loans, including equipment and inventory financing through LBC Capital and Northpoint Commercial Finance and we fully intend to continue to grow these portfolios.

We have also been expanding our geographic footprint. Growth is being generated across Canada and since 2017 in the U.S. Over the past year competition in the mortgage market intensified and house prices softened in part due to changes in regulation, including the B-20. These factors contributed to slower growth in residential mortgages, as we expected. This is aligned with our strategy to evolve towards higher commercial loans and confirms that it is the right approach for us.

We recently took a step towards advice focused approach in our retail branch customers by opening the first advice lounge in Montréal. So far, a few weeks after our grand opening, feedback from customers has been very positive. We are confident that our new model will be successful and are eager to expand it, which we expect will result in an increase in total deposits from clients, as well as in assets under administration.

In 2018, market volatility, combined with a commitment to pursue our plan motivated us to maintain healthy capital and liquidity levels, which strengthen the financial position of organization. In fact, as you see on slide nine, with the CET1 of 9% and a healthy liquidity profile, this organization has never been in as good a position as it is now. This puts pressure on short-term performance, but ensures the financial strength of the organization and in the current environment is the right thing to do.

Revenue grew and for the first time Laurentian Bank Financial Group reached $1 billion a milestone. With the progress that we’re making towards reaching our strategic objectives, the Board has reaffirmed its confidence and has approved an increase in the quarterly common share dividend of $0.01 per share to $0.65 per share.

Three years ago, we said that we would accomplish 10 critical elements and as you can see on slide 10, we are making progress on many fronts. We said that we would invest in core banking. We did. And the implementation is almost 75% complete.

We said that we would move the balance sheet towards business services. We are, with organic growth in acquisitions and by slowing our residential mortgage loan origination. We said that we would develop a competitive product offering. We are, by reducing the number of products, by making bold decisions to exit product or markets where we don’t see value and by focusing in 2019 on launching digital banking products across Canada, opening new direct-to-customer opportunities and increasing funding diversification.

We said we would build best-in-class advisor and account manager teams. We are, specializing work in business servicing and launching the advice lounge concept in retail services. We said that we would improve capital management. We are, with continued work toward the AIRB Certification at the end of 2020, with benefits expected gradually beginning in 2021.

We also said that the road would be bumpy and that short-term performance would not follow a straight line. Well, the road is bumpy and 2018 results reflect our investments in people, processes and technology, combined with the strengthening of the Bank’s financial foundation. Nothing that is worthwhile comes easy as the saying goes and the team here at Laurentian is very much looking forward to seeing in the not-too-distant future our work create growth, performance and ultimately value for shareholders.

As you can see on slide 12, 2019 will continue to be a year of investment and looking forward one where we are putting a lot behind us. Consequently, it will be a year where we will see the delivery of improved technology and better processes to drive future customer loan and deposit growth.

It will be a year where our customers will see the first tangible benefits of new digital offers, which will grew -- be gradually launched across Canada under two brands, Laurentian Bank and B2B Bank. This new customer base will provide a new source of funding and will represent added value for our customers, including independent financial advisors and brokers.

Of course, we have said that we need more clarity on the labor relations front before making any more real estate or technology investments in REIT retail services. But you will find on slide 13 that the Laurentian Bank Financial Group is much more than just branches and all other parts of the Group the plan march is on.

In Retail Services, we will continue to right size the product line and improve processes, which will decrease the need for administrative work and allow us to increase the number of advice team members. It will also be a year where we will continue moving forward with the conversion of our traditional branches to advice centers and become 100% advice-only by the end of ‘19.

With portfolio sales behind us, 2019 should be a year of positive net growth and position us well to achieve our mid-term targets, as set out on slide 14.

You will also find on slide 15 our updated mid-term performance targets, and François Laurin, will say more on our results and targets in his prepared remarks.

We conclude on slide 16 that executing this plan will continue to require discipline. As we look forward to profitable growth and reaping the benefits of investments in business opportunities. In short, we are investing in the right places to support future growth and build a renewed financial institution, not for the next quarter, but for the next decade.

And will that -- and with that, I would like to turn the floor over to François Laurin to provide a more in-depth review of our fourth quarter and 2018 financial results. François?

François Laurin

Thank you, François, and good morning, everyone. I would like to begin by turning to slide 19, which highlights the Bank’s financial performance. Adjusted EPS in the fourth quarter of 2018 were a $1.22 and $5.51, compared to a $1.63 and $6.09 a year earlier and adjusted ROE over the same periods were 9% to 10.5%, compared to 12.7% and 12.3%. For most of 2018 the Bank operated with higher capital level -- levels which strengthen our balance sheet but impacted profitability.

As outlined on slide 20, reported earnings for the fourth quarter included adjusted items totaling $3.5 million after-tax or $0.08 per share, largely related to business combinations.

Turning to slide 21, total revenue for the fourth quarter 2018 reached $255.9 million, 5% lower than a year earlier. Net interest income declined by 2% due to lower loan volumes and higher liquid assets. Other income declined by 10% year-over-year.

In the fourth quarter of 2017, other income included a $5.9 million gain on the sale of the Bank’s investment in Verico. For 2018 revenue grew by 5% and for the first time in the Bank’s history exceeded $1 billion, reflecting the full year contribution to net interest income of the acquisition of NCF.

Net interest margin shown on slide 22 was 1.7% in the fourth quarter of 2018. This was 2 basis points higher than a year earlier due to the greater proportion of higher margin loans to business customers and increases in the prime rate that were partially -- partly offset by the higher level of liquid assets. Net interest margin for the full year was at 1.78%, 10 basis points higher than in 2017, with a full years impact of NCF being partially offset by higher liquidity.

Average earning assets were $39.7 billion in 2018 or 4% higher than in 2017, reflecting the full year impact of the NCF acquisition. However, on a quarterly basis it was a slight downward trend. This is due to managing asset growth more tightly to optimize the profitability of the product mix and the related risk-weighted exposures and included certain commercial loan sales.

Slide 23 shows the evolution of our loan portfolio over the year. Specifically, residential mortgage loans were down by 8% year-over-year. This was impacted by our decision last November to no longer accept referrals from the broker network into the branch network. As well, mortgages through independent brokers and advisers were down 10%, largely due to changes in regulations, including B-20 and our decision to focus on loans to business customers.

Personal loans declined by 3% over the same. Mainly due to lower investment loan balances, reflecting consumer behavior to accelerate repayment following strong capital market performance.

Furthermore, we rebalance the commercial loan portfolio, selling certain portfolios so we can focus on specialized niche. Specifically, in the second quarter of 2018 we divested the $380 million agricultural loan portfolio and in the second half of the year we sold $328 million of loans, mainly in the non-strategic renewable energy and infrastructure portfolio. These transactions offset organic growth, particularly in inventory financing.

Excluding these loan sales, the commercial loan portfolio grew 5% in 2018, compared to 2017. By optimizing our portfolio we are well-positioned to profitably redeploy capital in the coming months.

A year ago we indicated that we were going to review all of our portfolios to determine which ones we would maintain, grow, fix or exit. In November, we sold an additional $100 million of commercial loans and now we will have completed the exit portion of our review in the first quarter of 2019, we will now focus on resuming growth.

Looking ahead, we expect margins to trend higher in 2019. This is because we expect net loan growth to resume, the shifts in the Bank’s loan portfolio mix towards higher margin commercial loans to continue and the recent increases in interest rates to have a positive impact. In 2019, we expect low single-digit growth in residential mortgages and double-digit growth in commercial loans.

Other income as presented on slide 24, total $82.7 million in the fourth quarter of 2018 and decreased by $9 million year-over-year. Mainly as the fourth quarter of 2017 included a $5.9 million gain on the sale of the Bank’s investment in Verico. In addition, income from broker -- brokerage activities was lower, reflecting less activity. Fees and commissions were impacted by clients continuing to modify their banking behavior and by the Bank and simplifying its products. These items were partially offset by a $3.2 million higher treasury and financial market income, mainly due to net securities gains.

Slide 25 presents adjusted non-interest expenses in the fourth quarter that in the fourth quarter were relatively unchanged from a year earlier. Lower performance-based compensation and lower headcount were partly offset by higher technology costs resulting from operating concurrent core banking platforms, as well as higher regulatory expenses.

For 2018 adjusted non-interest expenses growth was 6%, while reported non-interest expenses growth was 4%. The adjusted efficiency ratio of 66.7% for 2018 is 60 basis points above the 2017 level and trended higher in the second half of the year, given additional operating costs and lower revenue.

As we continue investing in our foundation in 2019, this ratio can remain variable, but the impact of resuming our growth and leveraging our investments and acquisitions take hold, we expected that efficiency will improve towards our target.

Slide 26 presents our well diversified sources of funding. Deposits declined by 3% year-over-year were relatively in line with the level of loans and acceptances, attrition and branch deposits continues to be in line with expectations, given our branch mergers.

Personal deposits sourced through independent brokers and advisers were relatively stable from a year earlier, although down 6% sequentially. As well, debt related to securitization activities decreased by 5% compared with a year earlier and stood at 7.8% -- $7.8 billion. The decrease mostly stems from the maturity of liability, the repurchase of identified mortgages loan, mortgage loans that inadvertently insured and sold, as well as normal repayments. It was partially offset by $1.2 billion financial mortgage loans that were securitized during the year.

Turning to slide 27, the CET1 ratio of 9% is presented under the standardized approach and highlights our strong capital position.

Our diversified loan portfolio is shown on slide 29, loans to business customers have increased to 35% of the portfolio from 33% a year ago and residential mortgages stand at 49%, compared to 50%.

Within the residential mortgage portfolio, all A mortgages totaled $1.4 billion and represent 8% of the total mortgage book and 4% of the total loan portfolio. As well, mortgages and the GTA represents 20% of the portfolio and the GVA accounts for 4%, LTVs remain low and credit scores remain high.

Turning to slide 32. In the fourth quarter of 2018, the provision for credit losses was $17.6 million and included a loss of $10 million related to a single syndicated commercial loan in which we are a small participant.

The loss ratio for the fourth quarter and for the full year was 20 basis points and 12 basis points, respectively. On an annual basis we continue to expect the loss ratio to trend higher as the loan portfolio mix evolves. However, we expect increases to be more than offset by higher in net interest income.

Slide 33 highlights the net and gross impaired loans ratios increased sequentially and year-over-year, mostly due to the identified syndicated commercial loan. Overall, we continue to believe that the underlying credit quality of the portfolio will remain good and that the Bank remained comfortably provision considering that the loan portfolio is well collateralized.

This quarter as presented on slide 34, we are providing, sorry, this quarter as presented on slide 34 we are providing an initial view of the impact of IFRS 9 and IFRS 15, which are being implemented effective November 1, 2018. Based on current estimates, the negative impact on shareholders’ equity in transitioning -- of transitioning for both standards is not expected to exceed $20 million or 10 basis points on the CET1 ratio.

Finally, I would like to return to our updated mid-term objectives that François mentioned earlier that can be found on slides 14 and 15. We are focusing on the three growth drivers that are most meaningful and -- global corporate review.

Business Services has been and will continue to be a growth engine for the Bank, with the resumption of profitable growth in 2019 as we redeploy capital, we expect loans to business customers to reach $16 billion in 2021. This reflects our decision to evolve the portfolio towards higher margin commercial loans, as we leverage our investments.

Furthermore, we are managing -- as we are managing the Bank more holistically, we are introducing a target for growth in total residential -- resident -- in total residential mortgage loans at $19 billion.

Lastly, we are increasing our objective for growth in deposit from clients to $28 billion. We will no longer track publicly assets under administration for Laurentian Bank Securities and Retail Services, and put more emphasis on growing our deposits from clients and focusing on our key strategies.

Our 2021 ROE objective is to narrow the gap with the major Canadian banks to 260 basis points. As we plan to adopt the AIRB approach to credit risk in late 2020, this gap reflects the initial benefit as we gradually redeploy capital. We are also targeting an efficiency ratio of below 63% and positive operating leverage.

Lastly, we continue to work towards an adjusted EPS growth rate of 5% to 10% annually over the medium-term. We remain as committed as ever to execute our strategic plan and work towards our ultimate goal to improve the Bank’s performance and achieve a profitability level similar to that of the other Canadian banks in 2022 as we reap increasing benefits from the adoption of the AIRB approach.

Thank you for your attention and I will now turn the call back to Susan.

Susan Cohen

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take the first question from the line of Richard Roth with TD Securities. Pardon me we will take the first question from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Sohrab Movahedi

Hey. A couple of questions, maybe François, I could start off with you. I am just a little bit confused with the medium-term objectives and the 2021 timeline. Are you -- like are you saying that for example 5% to 10% annual EPS growth starting from 2021 you have a medium-term objective of 5% to 10%. Is that how we should be thinking about it?

François Desjardins

I’ll let François Laurin answer that question and then I’ll come back and give you some comments on the objectives as a whole.

François Laurin

Yeah. Okay. Excuse me, sorry, the idea -- our intent is to have an annual target up to 2021 of 5% to 10% a year on an annual basis over that period of time. Knowing that ‘19 we have as we mentioned would be a softer year in terms of EPS growth, given our level of expenses and investments that we under -- we have undertaken and to be implemented in 2019.

Sohrab Movahedi

Okay. So, François, just to clarify, I guess, what you -- what -- just interpret the 2021 day job out there, I guess, you’re saying these will be the performance targets until 2021 and then maybe you’ll revisit them then. Is that maybe the fair way to think about it?

François Laurin

That is fair. So between today and 2021 we expect on an annual basis to grow the EPS by 5% to 10% a year over that period of time. Knowing that ‘19 is a softer year.

Sohrab Movahedi

But thank you for the clarification.

François Desjardins

It’s François Desjardins here, again. We are trying to follow the industries guidance here, in terms of mid-term objectives, there -- the Banks have all kind of settled on mid-term objectives that are three years out. I think it’s useful for you to get, what we are working towards on that same basis. You’ll notice, obviously, that compared to last year’s mid-term objectives that were for 2020, growth targets are increasing after 2021 and performance slightly as well. We are confident that we will be able to achieve those targets in the next three years.

Before you asked, where do I think the -- we would land in 2020? Well, from a growth perspective, we believe that loans to business customers and assets under administration from LBS would be surpassed based on last year’s three-year guidance. Deposits grow from customers would be at as expected. Mortgages from independent advisors and brokers would be slightly below but not very much and assets under admin in Retail Services would be a mess.

From a performance perspective, the ROE gap target would be slightly lower than expected based on current analysts expectation of the market for 2020, so the ROE gap would be slightly lower than the 300 basis points that we had indicated by maybe 50 or maybe a little more in terms of gap, of course, the EPS would follow that. But that’s mostly driven by the higher levels of capital that we are having and liquidity levels. But the efficiency ratio would be as expected below 65 for 2020.

Sohrab Movahedi

Okay. Thank you. And can I just ask a very quickly on the one-off syndicated commercial credit that you called out. What was the -- which geography was that in?

François Desjardins

I will let Liam Mason, our CRO answer that question.

Liam Mason

Good morning and thanks for question. So in terms of geography it is a Canadian based customer of syndicated loan customer that’s about $27 million in size. We have been involved in the syndicate for the past sort of six years, relatively small player for us. This is somewhat of a new news to us and we were advised earlier this week that the syndicate agent the Bank had uncovered or been advised by the borrower there were irregularities in their accounts related to really some of the collateral underpinning the borrowing base.

So in looking at this and the initial assessment of the revised value of that borrowing of the collateral we therefore booked a provision based on the best information that we have at this point from this bank agent.

Sohrab Movahedi

Thanks, Liam. And Liam…

François Desjardins

I think…

Sohrab Movahedi

… would you have a kind of ballpark indication of what percentage of your commercial loan book would be in syndicated type credits.

Liam Mason

Sure. What if I get Stéphane just to talk about syndicated loan business.

Stéphane Therrien

Yeah. The syndicated debt in commercial represents roughly 10% to 12% of our overall Business Services portfolio. So it’s a very -- it’s a small portfolio for us, we are performing very well. Obviously like other banks it allows us to participate in strong deals with major banks, where our participation is lower i.e. in line with our size. It is a very diversified portfolio in terms of industry and it’s across Canada.

Sohrab Movahedi

And Stéphane, is like a $27 million size at the upper end, at the lower and about an average for that size -- for your syndicate portfolio?

Stéphane Therrien

Would be at the upper end.

Sohrab Movahedi

Thank you.

Operator

We will now take the next question from line of Richard Roth with TD Securities. Please go ahead.

Richard Roth

Hi. Looking at your NIE line, we saw a pretty big sequential drop. Am I correct in assuming that a large factor for the drop is capitalization of some of those incremental expenses?

François Desjardins

I’ll ask François Laurin to answer that question, Richard.

François Laurin

Thank you, Richard. Clearly, quarter-over-quarter sequentially because of the massive investments we have. We have a bit more capital of labor between Q4 and Q3. The other one was -- would be as well, remember Q3 we had a one-time off because of the cancellation of insurance mortgages with the CMHC following their review of over $1.5 million, so that was a Q3 event that does not happen in Q4. So those would be the two major items from Q3 to Q4.

Richard Roth

Okay. And so, I guess, it’s one of the big pieces that fell was on the comp lines. So are these the same employees but instead of going -- running them through the cost to the P&L they are being capitalized because you can argue or justify that the higher percentage of their time or whatever is being allocated towards capitalizable activities?

François Laurin

Obviously, with our two major projects being core banking and IRB, there’s a higher proportion of the employees that efforts are being put in capitalizing into the projects. But as we move forward we should have the efficiency in the process, in the -- and also in the reduction of maintenance costs from lower number of platforms to maintain and as well improve our efficiency ratio going forward once that period is over.

Richard Roth

Okay. On that note when I look in your financial statements and I look at the intangibles note, you have the other intangibles line and there was $82 million --$81.6 million of additions. Is that where those employee costs are going on your balance sheet?

François Laurin

That other intangible represents the bulk of it of the two major projects, you’re right and…

Richard Roth

Yeah.

François Laurin

… the capitalization of labor with fit into that line, yes.

Richard Roth

And am I correct in understanding that the amortization of that will occur as the systems come online?

François Laurin

You are right.

Richard Roth

And what sort of the amortization rate, like what I am trying to get at is sort of, okay, a lot of these expenses have moved into the balance sheet, but if amortization is maybe elevated in the next few years, that’s offset a bit, so what sort of, how should I look that?

François Laurin

Basically the, sorry, Richard, basically the major project like core banking.

Richard Roth

Yes.

François Laurin

You could assume a 20-year period amortization. So once we’re done. The cost accumulated would be amortized over 15 years, but most likely 20 years in the case of core banking. So once we are done with the most, we are 75% through it, so once we do the next step of the Phase 1 with the B2B products and the remain -- as some of the Business Services then the bulk of the amortization would start, so basically…

Richard Roth

Okay.

François Laurin

… we could assume somewhere in 2019.

Richard Roth

Okay. And last question on this front, so on the run rate basis thinking over the next few quarters maybe the entirety of 2019. Do you expect to change the proportion or allocation of employee costs that are now capitalized? Or is what you’re currently at as of October 31st the numbers you book this quarter a reasonable expectation, because we saw a trends…

François Laurin

I would…

Richard Roth

… this year move from Q3 to Q4.

François Laurin

Yeah.

Richard Roth

I am wondering, are we going to see move back or move further in the same direction or just run rate?

François Laurin

Overall the expenses -- overall the expenses in ‘19 of non-interest expenses will stay relatively in line with what we have at the moment, because we still have the -- part of the AIRB project to keep going -- that keeps going and the one thing that reduce this year in terms year-over-year was the variable based compensation, Richard, so that’s based on the results of ours.

Richard Roth

Yeah.

François Laurin

Going forward.

Richard Roth

Yeah. I am looking more…

François Laurin

Going forward, yes, you don’t see the gross, you don’t -- you just see the net in salary expenses of what capitalized. Some of these employees are people are resources come with the projects and once the projects are gone they don’t stay necessarily as employees of the Bank. So you wouldn’t necessarily see a major shift in the salary expenses because of the stopping the capitalization moving forward.

Richard Roth

Okay. Yeah. Understand. Thank you.

François Laurin

You are welcome.

François Desjardins

If I may add to that. This is François Desjardins speaking. Just for clarity sake, when you are doing core banking investments and we have, obviously, we said this before people from a Temenos that are working on this, people from Deloitte that are working on this and some of our own people that would normally be in operations jobs, but not that many that are dedicated to this, then we have a slew of people that have been hired specifically for the project that are released once the projects are done, that gives you an overall of the workforce. Of course, everything that that is done for the project gets put on the balance sheet and then gets amortized, as François indicated before. That answers Richard. Operator?

Operator

We will now take the next question from Sumit Malhotra from Scotia Capital. Please go ahead.

Sumit Malhotra

Thanks and good morning. Just a couple of clarification questions here, maybe starting with the quarter and then going a little bigger picture. So the two items that really seem to help in the quarter were expenses which you will get back to and then the tax rate? You guys have indicated earlier this year that if anything the tax rate would be moving higher as we go forward, almost spend too much time on this. But versus the 18-ish percent level we see today, like what is the run rate. I thought it was supposed to be materially higher and maybe just quickly like what’s causing this move below 20%?

François Desjardins

I will ask François Laurin to answer.

François Laurin

Yes. In Q4 it’s clearly the business -- the current business mix of the results of Q4. Going forward we had explained that because of some of the government new budget measures our taxes would grow we would be higher going forward that’s ‘19 and up. So from ‘19 on we should see a roughly 21% to 22% based on our projections.

Sumit Malhotra

Sorry, 21% to 22% or I had a higher -- I thought it was 21% to 24%.

François Laurin

Yeah. But I am giving you a bit of tighter range now.

Sumit Malhotra

Okay. That’s good. And sorry, I said, I wouldn’t go too long with this, but when you say business, the bulk of -- I know you have some operations in the U.S. now, but the bulk of your operation is under the Canadian statutory rate I would think. What -- when you say business mix what specifically are you relating or referring to?

François Laurin

Well, clearly, from a lower rate perspective you have the U.S. businesses that we acquired last year. You also have the -- what we call insurance -- we have a bit of insurance, reinsurance business that’s taxed outside Canada. And then we also have depending on our investment income dividends -- dividend component of our revenue, which is not taxed at the high rate, not taxed at all. So when you take this plus the -- we had lower volume, proportionately our Canadian businesses been lower in this quarter compared to previous quarter. So hence lower tax rate.

Sumit Malhotra

Okay. Thanks for that. And then maybe on expenses, I will stay away from the capitalization versus expense and just kind of think about this more broadly since you’ve indicated you expect your efficiency ratio to improve next year. You did -- you do some reference in the release to some severance charges that were taken in the quarter and we do see your headcount has moved lower by about 3% sequentially. Is whatever was reflected in severance this quarter indicative of where the headcount is going to be going forward or is this severance charge still making its way through? And I think this question is more broadly for François Desjardins. You have indicated that there’s more investments to come. So when we look in aggregate at the Q4 expense base, do you see this is more reflective of what the run rate is or was this a particularly good quarter from a cost perspective for Laurentian?

François Desjardins

I think it was a fair quarter, but I’m hesitant to give you guidance a little bit on this, because of -- more the labors a situation. All along since 2015, ‘16 now, our goal is to convert, retrain administrative workers into more advice jobs. We’ve done some of that when that people have applied, but not on the large scale proportion like we would have want it. So we had -- we also -- we have the option to reduce the number of administrative workers as we implement a better processes and automation, so that’s what we are doing. When we are talking about going to 100% advice-only in our branches, that means that there’s no tellers by the end of the year. So, of course, the headcount is going down.

I think the unfortunate part is, I think, that some of these folks could have made it to advice jobs and right now we are not yet where we need to be on the labor front to be able to move forward as planned. So how that’s going to pan out in headcount is a little bit hard to say at this point. But I would not say that the headcount is heading north. I would say that, if I was a betting man, I would say that the headcount is heading south.

Sumit Malhotra

All right. Thank you for that. Last one for me…

François Laurin

Sumit.

Sumit Malhotra

Yeah.

François Laurin

Sumit, can I just clarify something. I think I understood that you think the efficiency ratio will be improving next year. I just want clarify. 2019 we still believe the efficiency ratio was to kind of be variable and we will start to improve past ‘19, not…

Sumit Malhotra

Past ‘19. Okay. Thanks. Thank you for that clarification. Last one for me I’ll pass it off. I appreciate the disclosure on IFRS 9 and the day one impact if you will. I also want to think about the impact on your provisioning levels more on a go-forward basis. So in the last three years, if my numbers are right here in the model your provisioning ratio has been around 11 basis points as you point out lowest in the industry. Of course, your gross impaired loans and your overall credit quality has been very good. But as your portfolio shifts to products that historically have had higher loss rates than residential mortgages. Under the expected loss methodology what do you think your loan loss ratio, your provisioning ratio will look like under IFRS 9, just given the changes in the mix of your book?

François Desjardins

I will ask Liam Mason to comment on that.

Liam Mason

Yeah. Sumit, thank you for your question. I mean, obviously, yeah, as well familiar the IFRS 9 methodology depends not only on the current year’s forecast, but how responsive the out years are over the life of the exposure. So to some extent it depends on the macroeconomic environment.

As you rightly point out, we’ve been averaging 11 basis points. I think we have indicated to the marketplace we expect that to trend up to about 20 basis points. But we believe that as we change our business mix, any increase in our loan loss rate will be more than offset with higher net interest income and margin. So we remain in terms of our forecast consistent with what we have released. That said, as you know, the IFRS 9 methodology has been released by many other banks is a little bit more volatile and we do expect potential higher impact from the mix.

Sumit Malhotra

Liam is that 20 basis points as soon as 2019 or is it more gradual depending on changes in the economic environment?

Liam Mason

No. That’s a more gradual impact over as we grow, and obviously, we are going to be tracking closely with the business growth. It’s not a step function.

Sumit Malhotra

Thanks for your time.

François Desjardins

Thanks, Sumit.

Operator

We will now take the question from Marco Giurleo with CIBC. Please go ahead.

Marco Giurleo

Hi. Good morning. My first…

François Desjardins

Good morning.

Marco Giurleo

My first question is for François Laurin, I just want to touch again on expenses and just get a clarification. I think, François, you said, you expect adjusted expenses to be lack to 2018 levels? So that implied about a quarterly run rate of about $174 million, so not far off from where we were this quarter, so I just want to make sure that’s the -- is that indeed what you foresee going forward zero percent growth of these levels?

François Laurin

All thing consider, yeah, that’s a fair assumption.

Marco Giurleo

Okay. Thank you for that. And then, François Desjardins, you mentioned, 100% advice-only branches by the end of 2019. Just wondering where are you right now in that process and could the union negotiations that are currently underway be an impediment to achieving that goal?

François Desjardins

I’ll answer and then I’ll ask Stéphane Therrien to give you a little bit more color on the progress that we are making. And so your question is, where are we now? I think we are at about third of the branches, of the network that are advice-only and what that means, right, is that the four basic transactions that are already available at the ATM, withdrawal, deposit, pay bills and have your account balance. You can’t go to a cashier anymore to do that and so the human service inside the branch is all about advice. That’s what the model is. We are about a third of the way there.

From a perspective of the union, no. We’ve -- the current collective agreement allows us to reduce the services that and focus our service on advice. The issue I guess we’ve been having is that trying to train and redeploy some of these people and what we’ve been doing is as people are leaving, just not replacing them and there’s about 40% to 50% turnover rate in cashiers. So that process is relatively fast. And that’s how we have been working all along. To give you a little bit more excitement about what’s happening in Retail Services. Let me turn it over to Stéphane Therrien.

Stéphane Therrien

Yeah. I think, François, did the good job at explaining exactly where we were, where we are right now. The excitement part is that we feel that a lot of our other employees are really excited to move to 100% advise-only in the branches so that’s one thing. And the customer feedback that we are receiving so far is very positive. This change in model is in line with their new behavior. Remind everyone that 95% of the transaction that we are doing with our customer in Retail are already done electronically. So they are really excited about the new model and the, obviously, we follow the progress of the branches that are already 100% advise and therefore performing better than the other right now.

Marco Giurleo

All right. Great. Thank you. And just one last question on loan growth, we saw further contraction in both mortgages and personal loans this quarter and on the slides, you speak to a gradual decrease in mortgage originations as you focus on higher margin commercial. So just curious, what would you see is driving the inflection in residential?

François Desjardins

Well, it’s a little bit voluntary and a little bit involuntary, François Desjardins here. Our comment on volume growth as a whole, of course, loans to business customers was higher than expected at Northpoint and LBC Capital and really good in Real Estate Financing. But we didn’t show up in the net gross numbers this year, because we did some portfolio repositioning. We had said last year that we would review our portfolio to decide what to maintain grow fix and exit, and that’s exactly what we did. So we sold about the equivalent amount of loans, the agriculture business as a whole and some non-strategic low margin loans in other areas and optimized balance sheet. So one offset the other.

But now that that those sales are behind us, growth in Business Services should be well-positioned for double-digit growth in 2019. That’s really the focus of our growth and is a strategic objective of ours. Growth in mortgages was lower and we expect -- we expected a large part of it. Two of the objectives that we had was to shift away towards the business mix, which I just talked about. But the second one was to reposition the branch network towards advice. So we made the decision to stop accepting referrals from brokers directly into the branches. We only accept mortgage broker referrals to B2B Bank now and Retail Services is really focusing on financial advice, investments and deposits.

In parallel, as you know changes in regulation, including the impact of B-20 had some effects on market events during the 2018, as well as the competitive backdrop, all contributed to a no growth in mortgages through the year at B2B Bank. However, we are seeing pipeline return. We are focusing both on prime mortgages on the insurance side and on all day, and we do expect to be able to meet our 2019 targets of $19 billion overall.

It is one of the reasons why we are moving towards, giving you a target for mortgages for the Bank overall, because we do expect B2B Bank mortgages to be very positive and but from a mortgage growth perspective Retail Services to be still negative, as some of the customers that were mono line exit. So giving you a better representation of the whole mortgage book was important to us. But still we continue to believe we are going to see single-digit growth in mortgages starting this year and if there’s any indication the pipeline is saying that that is underway.

Marco Giurleo

All right. Perfect. Thanks. That’s all for me.

Operator

We will take the next question from the line of Gabriel Dechaine with National Bank Financial. Please go ahead.

Gabriel Dechaine

Hi. Good morning. I got a couple of quick ones here running out of time. The $100 million commercial portfolio sale, you said that, I think, that’s going to hit in Q1?

François Laurin

Yes.

François Desjardins

Correct. That was the last part…

Gabriel Dechaine

Okay.

François Desjardins

… of our sales, yeah.

Gabriel Dechaine

Okay. You mentioned the $27 million commercial loan that went -- that became impaired this quarter and you took provision. What is your single lane limit anyhow in consumer…

François Desjardins

I will ask Liam to answer that.

Liam Mason

Sure. Gabriel, thank you for your question. In the commercial space our average -- our single lane limited is 40, but our typical average is in and around as Stéphane said in and around $20 million to $25 million.

Gabriel Dechaine

Okay. And the syndicate, was that other banks that I would know in that syndicate or other one…

Liam Mason

Yes. Absolutely, you would know.

Gabriel Dechaine

All right. Then I guess the shift to the commercial growth emphasis now, if I look, let’s talk about the drivers, I guess, if I look at your gross loans and the growth that we had during the year, pretty much entirely -- and if I exclude the portfolio sale, it looks like it was all driven by an inventory finance to Northpoint, everything else was kind of flat or down quite substantially. What -- that double-digit growth you want to get next year is -- where is that coming from, is it still going to be Northpoint driving the growth, what Canadian category could be may be reversing with negative trend?

François Desjardins

I’ll ask Stéphane to answer that.

Stéphane Therrien

Well, first, Northpoint will be our leader in terms of growth for sure. LBC Capital will also experience a double-digit growth, the same in the real estate for a construction lending. So this will be the three growth drivers driving he entire portfolio by double-digit. Just remind that the three-year report 2018 our overall growth was all in the double-digit for Business Services. So we feel very good about the rebalancing of our portfolio that we did and basically all teams right now in the Business Services have a mandate for growth and with the mix we will be at double-digit growth.

François Desjardins

If I can add to that.

Gabriel Dechaine

Okay.

François Desjardins

The -- we forget that LBC Cap, the acquisition of the Canadian operations of CIT, we just ended mid to end this year the integration process and that the sales pre-purchased were on the negative trend, we turn that around, flattened that out, but we still have to do integration work and that’s why in my comments I was talking about implementation of a new software. We needed to get our loans off of the CIT platform and that was completed Q3, Q4 this year. So there was quite a bit of effort from management on making sure that that integration was successful and it is, and of course, next year we don’t have that to worry about and we can focus completely on growth.

Gabriel Dechaine

What are the concentration limits by the industry here? So if I look at this picture and say, well, you gain the inventory finance that picked up 600 basis point of -- the total percentage of your commercial book. Like how big do you want that to get? How are you managing that growth to balance the growth in the risk management aspects of it, because if we are seeing growth driven by one or two categories that can be worrisome potentially?

François Desjardins

I would ask Liam Mason to ask -- to answer that.

Liam Mason

Yeah. Gabriel, I don’t find it worrisome. We had additional process around our risk appetite. We look at our aggregate concentration limits. I mean, we talked single name limit. We talk about limits, we have limits by industry and sector. I’m not worried about within the risk appetite, we don’t -- that disclose specific on it. But overall not uncomfortable with the mix at this time.

Gabriel Dechaine

Okay. Thank you for taking the question.

François Desjardins

Thank you.

François Laurin

Thank you.

Operator

We will now take the next question from line of Meny Grauman with Cormark Securities. Please go ahead.

Meny Grauman

Hi. Good afternoon. Question on the impact of union negotiations, so it sounds like the union negotiations are not really impacting the change in the rollout of the new branch model, that’s a good thing, but what is it impacting, I know, there is still reference to that is being an issue, but it doesn’t sound like it’s having -- its not preventing you from the branch rollout. I am trying to understand what it is going to -- what impact it is going to have.

François Desjardins

Thank you for the question. The -- under the current collector agreement, we can reduce headcount. But really what we cannot do is move administrative out and retrain those employees. So what is doing is that it’s -- it doesn’t stop us from removing and becoming 100% advice in the branches, but it doesn’t take us 100% of the way there. I’ll ask Stéphane to give you more color, but the true model that we have in the end is one where we have developed the device lounge model, which is here at 1360 René-Lévesque, where we have about 22 advisors, no vault, no counter, no transactions at all and everything is digital.

What we’re talking about here is, is really trying to retrain administrative workers into those advice jobs, people that are in the back office or call center or support teams as time is going by that’s really what we are looking forward to doing. It is just taking a lot more time. So not according to plan part, is not according to timeline.

Meny Grauman

Okay.

François Desjardins

Stéphane?

Stéphane Therrien

Yeah. Sorry. I would add that, so far as the information plan, we said that, we would optimize obviously the Retail and we did some of it by cutting cost here and there, optimizing our branches to 100% advise and so forth. What we have not done so far is the investment in the Retail sector. We said that we are delaying decision of technology and real estate investment. Did these two items are at the center of what we want to do to transform the retail sector. So the labor situation is definitely slowing us down right now.

Yes, we can do the advise at 100%, but with the existing branches, not so we’re transforming our branches, we are not creating what the new ones and that’s what we want to do, we want to invest, but right now we just cannot.

François Desjardins

I would add to that, of course, the last few quarters we made the announcement that we would be launching digital products at B2B Bank and at -- through Laurentian Bank brand across Canada. This portion was accelerated in the original plan, because we thought that Retail branch banking is a great source of deposits and funding for a bank, but if we want to have growth in the Business Services, the growth overall, it has to come from somewhere and if we are not able to increase the advisor base to the level that that we wanted to, it has to come from somewhere else. So going direct to customer from a digital perspective for transactional accounts, higher savings, deposits, with a great brand like Laurentian across Canada was a way to go. So we’re looking forward to launching that in the first half of the year for B2B Bank as a financial advisors can refer their customers to us and in the later part of the year direct to customer under Laurentian Bank brand.

Meny Grauman

Thanks. And then, if I can just ask a question sort of more detail, what was the growth in the branch we did -- in branch we did -- originated mortgages sequentially and year-over-year?

François Desjardins

I will ask Stéphane Therrien to answer that.

Stéphane Therrien

Year-over-year the mortgages were -- in the branches were down 13%. As François Desjardins mention, we basically exited the referral from brokerage channel, so this accounts roughly for half of that decline.

Meny Grauman

Okay. And then in terms of the portfolio sale this quarter, there was a loss on that sale, I am just hoping you could quantify that loss?

François Desjardins

I will ask François Laurin to comment.

François Laurin

Yeah. Less than $1.5 million, around $1.4 million, Meny.

Meny Grauman

And in the portfolio…

François Laurin

Okay.

Meny Grauman

And in the portfolio you talked about in Q1 that $100 million is that -- is there also a loss associated with that sale?

François Laurin

No. Not to my knowledge.

Meny Grauman

Thank you.

Operator

[Operator Instructions] We will take our next question from line of Scott Chan with Canaccord Genuity. Please go ahead.

Scott Chan

Hi. Good morning. I just want to focus on the other income for a little bit and on two specific items that has been sequentially declining, I guess, one, deposit service charges, and secondly, on the insurance side. On the insurance side you talked about lower premiums was kind of cause the year-over-year decline, but is there anything else to kind of think about within those two categories over the next two years?

François Desjardins

I will ask François Laurin to comment.

François Laurin

Thank you, Scott. Clearly, as we transform Retail to respond to the changes in customer behaviors, we expect that the service charge revenue line will decrease. But what we firmly believe is that our expenses will also decrease, so the efficiency ratio will improve over time.

In terms of risk insurance is just, there is lower activity, the lower level of volume, obviously, is the prime indicator of whether this insurance business -- insurance revenue line comes from, so it just follows the growth in the revenue and loan growth.

Scott Chan

Is that -- like is it, is the volume expected to -- continue to be low over the next year or how are you going to see that?

François Desjardins

The insurance continue to be low, yeah, insurance growth.

Scott Chan

Yeah. Okay. And just lastly, just on the personal loan side, you talked about investment loans kind of being attractive within that portfolio, is there anything else in that portfolio to comment on?

François Desjardins

Only that, normally when the markets are good, investment lending business people cash out and when the markets are lower, people have a tendency to get in. Markets have been good over the last few years, and of course, this product has lost little bit of favor since 2008. So we’ve been seeing some decline in this portfolio. We are making efforts in 2019 to re-launch this product.

We actually believe that this is a great loan for consumers to use their borrowing power to invest in assets rather than use their borrowing power to spend. So in line with our mission to improve our customer financial health, using lending to borrow to, for example, fill your unused portion of RSP’s which most Canadians have not used in terms of maximizing the returns.

The TFSA limit has been increased again this year to 6000. We are now in a total limit of I think 66 or something like that. We now offer TFSA loans for people that want to maximize that product. So these are things that we are looking at as we are shifting towards advice.

Scott Chan

Great. Thank you very much.

Operator

That’s all the time we have questions today. Mr. François Desjardins, at this time, I will turn the conference back to you for any additional or closing remarks.

François Desjardins

Well, in closing, I would like to thank you for your continued interest, our shareholders and investors for your continuous support and trust. Our team members as we finish this year with dedication is an inspiration to me, and most importantly, to our clients who motivate us every day to surpass their expectations in every way. I’ll now turn it back over to Susan.

Susan Cohen

Thank you for joining us today. Should you have any further questions, our contact information is included at the end of presentation. We look forward to speaking to you again at our first quarter 2019 conference call on February 27th. All the best for the holiday season.

Operator

Ladies and gentlemen, this concludes today’s call. Thank you for your participation. You may now disconnect your lines.