Laurentian Bank of Canada (LRCDF) CEO François Desjardins on Q2 2019 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) Q2 2019 Earnings Conference Call May 30, 2019 9:00 AM ET

Company Participants

Susan Cohen - Director, IR

François Desjardins - President & CEO

François Laurin - EVP & CFO

Liam Mason - EVP & Chief Risk Officer

Craig Backman - EVP, Personal Digital Banking

Stéphane Therrien - EVP, Personal & Commercial Banking

Conference Call Participants

Doug Young - Desjardins Securities

Marco Giurleo - CIBC

Gabriel Dechaine - National Bank Financial

Sohrab Movahedi - BMO Capital Markets

Scott Chan - Canaccord Genuity

Meny Grauman - Cormark Securities

Sumit Malhotra - Scotiabank

Richard Roth - TD Securities

Operator

Good day, bonjour, and welcome to the Laurentian Bank Financial Group Second Quarter Results 2019 Laurentian Bank Financial Group 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, and thank you for joining us. Today's review of the second quarter of 2019 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 Laurentian Bank Financial Group's news release, investor presentation and financial supplement, can be found on our website 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 is possible that actual results may differ materially from those projected in such statements. For the complete cautionary note regarding forward-looking statements, please refer to our press release or to Slide 2 of the presentation.

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

François Desjardins

Thank you, Susan, and good morning, everyone. The road to becoming a better and different bank, one that is relevant to today's customers and one that delivers higher performance than historically, is an exciting and challenging one. I'm pleased to report that during the last quarter, we made significant progress on key initiatives in our strategic plan, as we propel our organization in the coming months and years. There is no doubt, in my mind, that the most significant achievement in the second quarter was signing a new collective agreement for our Québec-based retail operations, where 81% of members voted in favor; this strategically changes the business going forward.

In the last three years, we made great strides towards advancing strategic initiatives such as simplifying our products and services, offers -- operating our branches, optimizing our branch network, implementing a new core banking platform and acquiring two operations, Northpoint Commercial Finance and the Canadian activities of CIT, which are generating excellent growth and profitability. But as we have previously mentioned, to continue to evolve and be successful in our transformation, we needed to address the efficiency and relevance. And to do that, we needed a renewed collective agreement that would support performance, efficiency and growth, be relevant to market conditions and adapt to our evolving industry. We identified two goals that were critical, and we achieved both of them.

First, the Canadian Investor Relations board understood the importance of this organization's transformation to move forward, and therefore accepted the redefinition of the bargaining unit so that it is limited to specific existing conditions, mainly client-facing position in our branch network in the grounds of Québec. This is important as the previous bargaining unit had a much broader reach in terms of logistics. Second, working conditions and the new agreement promote a modern culture of performance. We now have working conditions that are comparable to those offered by our competition, and this is key in being able to attract new talent who want to be hired, assessed and promoted based on the qualifications and performance. This also means that it gives us a lot more flexibility to carry out our activities in the most efficient and scalable manner. For example, in the new collective agreement, job security was eliminated and consequently, we have gained the ability to outsource or automate our administrative activities. As a result, we have begun to put in place the staff reductions that we mentioned in February.

We have also gained the ability to streamline our internal operations, eliminate duplication of activities, sometime -- something that we could not do before the new collective agreement. For example, in April, we optimized Retail Services back office, credit and collections functions internally and through outsourcing agreements to generate efficiencies of scale. Although the total number of unionized employees is lower today than when we started our strategic plan, the percentage of client-facing professional positions is increasing. It is our wish as we have stated all along that we see growth in a number of financial advisers and other revenue-generating positions. Let there be no mistake, negotiating this agreement was difficult as it required time, energy and most importantly, result as it impacted organization strategy, growth and financial results in the last several quarters.

This quarter's performance continues to be impacted by transformation-related investments and costs related to labor relations, which can now be reduced. But this new-found flexibility will not only drive efficiencies, but also reset how this organization can move forward. The immediate positive impact is that we no longer have to incur the incremental expenses associated with the potential work complex. This means that we are reducing liquidity to more normal levels, reducing the expenses on legal matters and other labor-related costs and recasting members to more productive priorities. Last quarter, we indicated that on an annual basis, carrying the appropriate level of liquidity would improve net interest income by $7 million, reducing legal and labor-related expenses with non-interest expenses by $3 million and lowering the headcount or reduce expenses by $15 million to $20 million. We remain on-track to deliver these results gradually over the next nine months.

With this milestone behind us, retail operations in Québec can turn its complete attention to growth and performance as our branch network is streamlined and staff are engaged and eager to succeed in the pursuit of our mission. Moreover, the entire organization can resume its full focus on priorities of growth and performance. To this end, we have begun the process of resetting the strategic plan implementation schedule, and I would like to provide update on four key elements.

First, we had previously stated that we would postpone core banking stage 2 which converts all remaining assets liabilities from the old core banking system to the new one. With the current momentum in our retail operations, we intend to accelerate the implementation of the core banking initiative relating to branch operations. The target completion is December 2020, at which time, 100% of all products will have been migrated from the old banking platform to our new core banking platform. As of 2021, the extra cost associated with operating two parallel core-banking systems should be gradually eliminated, contributing to an improving efficiency ratio.

Second, we've said from day one that our new core banking platform would broaden opportunities in digital space. On that front, we are making progress towards the launch of our digital banking products. Our digital offer is now in pilot mode, and we are planning to launch these hassle-free banking products to independent advisers and brokers in the fall and direct to customers across Canada at the end of the year. These digital products are expected to be available to new customers in our branches early 2020.

Third, from a growth perspective, we are continuing to focus on most of business customers with an emphasis on equipment and inventory financing as well as real estate financing as we work closely with our partners and build stronger client relationships. With respect to retail activities conducted through our branches, independent advisers and our digital offering, we will be focusing on improving the overall customer experience and helping our clients improve their financial health. Providing some financial advice to our clients should result in growth in basic banking accounts, deposits, mutual funds, mortgages, personal loans and credit cards.

Fourth, with a sharp focus on core banking, our digital offer, balance sheet growth and efficiency gains, we will be slowing down the AIRB initiatives by 12 to 18 months. Correspondingly, we're now planning the AIRB implementation between the end of 2021 and the first half of 2022, subject to regulatory approval, with benefits to be realized in 2022 and beyond. We are still strongly behind this initiative and its positive impacts on the organization but wish to prioritize growth and efficiency initiatives that have a more immediate impact on results. I would be remiss if I did not mention that in the quarter, the group achieved strong growth in most of business customers, maintain solid credit quality and increased its revenues from capital markets-related activities. We are looking forward to that results. This has been an important quarter for us from a foundational perspective.

We delivered a new collective agreement which strategically changes the business for us moving forward. I would like to express my gratitude to the team that made this happen and sincerely thank our customers and shareholders for their patience and commitment to our brand and to our bank. I have said before that the road to becoming a better and different bank is sometimes a bumpy one and as I look forward, I do see a clearer road ahead. With the progress we are making towards reaching our strategic objectives, the Board has reaffirmed it's confidence and has approved an increase in the quarterly common share dividend of $0.01 to $0.66 per share.

I will now turn the floor over to François Laurin, to provide a more in-depth review of our financial results for the second quarter of 2019. François?

François Laurin

Thank you, François. Good morning, everyone. I would like to begin by turning to Slide 11, which highlights the bank's financial performance. Adjusted net income of $48.7 million, EPS of $1.08 and ROE of 8.3% in the second quarter of 2019, were lower year-over-year but improved sequentially.

Reported earnings for the first quarter as of -- for the second quarter as I turn on Slide 12 were affected by adjusting items totaling $5.4 million after tax or $0.13 per share and are related to restructuring charges and business combinations.

As shown on Slide 13, costs related to restructuring measures totaled $11.7 million and mainly included severance charges to optimize the Retail Services operation and streamline certain back office and corporate functions that were announced last quarter. These charges were partly offset by a $4.8 million curtailment gain convention plans, and other post-employment benefit obligations and reversal of other provisions amounting to $3.5 million, resulting in a net restructuring charges of $3.4 million.

The drivers of our performance begin on Slide 14. Total revenue in the second quarter of 2019 amounted to $239.9 million, a decrease of 8% compared to a year earlier and 1% compared to the first quarter of 2019. Net interest income decreased by $12.5 million compared to a year earlier and was impacted by lower year-over-year loan volumes and higher liquidity levels, partly offset by higher margins on loans to business customers. As previously mentioned, $800 million of non-strategic commercial loans were sold over the past year in order to optimize capital allocation. As well during most of the quarter, we were carrying higher levels of liquidity given the potential for work conflict. While this was a prudent thing to do, it negatively impacted net interest income and margins.

With the new collective agreement signed at the very end of March, we have begun to gradually decrease the liquid -- the level of liquid assets, which as mentioned last quarter, is expected to increase net interest income by $7 million annually, with benefits starting in the third quarter 2019. Sequentially, the decline in net interest income was mainly due to the negative impact of three fewer days in the quarter.

As shown on Slide 15, NIM decreased to 1.77% in the second quarter of 2019, down five basis points year-over-year. The higher level of these lower-yielding assets accounted for three basis points on most of the decline. Sequentially, NIM declined by three basis points mainly as a result of a higher liquidity and lower volumes. As we reduce liquidity to normal levels and continue to implement our strategic plan to evolve the bank mix towards higher margin commercial loans, we expect NIM to gradually increase over the remainder of the year.

As of April 30, 2019, commercial loans accounted for 37% of our loan portfolio compared to 34% a year earlier. Residential mortgage loans accounted for 48% compared to 50%, and personal loans accounted for 15% compared to 16%.

Other income as presented on Slide 16 totaled $75.3 million and decreased by $7.5 million from a year ago. Of note is that in the second quarter of 2018, other income included a $5.3 million gain on the sale of our agricultural commercial loan portfolio. Sequentially, other income increased by $5.6 million. The second quarter of 2019 benefited from stronger capital market-related revenues, which was mostly driven by higher gains on inventory held for brokerage activity, and to a lesser extent, higher revenues from trading activities.

Slide 17 highlights adjusted non-interest expenses of $176.3 million, which rose by $7.2 million year-over-year. Salaries and employee benefits decreased by $1.1 million compared to a year ago, mainly as a result of lower salaries from a reduced headcount. Higher share-based compensation was more than offset by lower salaries, in addition to fewer days in the second quarter, which resulted in a $1.6 million quarter-over-quarter improvement. As we continue to streamline operations over the next few quarters, we expect to gradually attain the $15 million to $20 million cost savings that we indicated in February. These savings should be fully realized towards the end of the first quarter of 2020 once we've completed the transition.

Premises and technology costs increased by $2.6 million year-over-year as higher technology costs to run concurrent core-banking platforms into enhanced IT service levels and security as well as higher amortization expense from the completed Phase 1 of the core-banking system were only partly offset by lower rent expenses following the move to our new Montréal corporate office. Similar factors explain the $1.5 million sequential increase. By the second quarter of 2021, the extra cost associated with operating two parallel core-banking system should be eliminated. Other adjusted and non-interest expenses of $35.2 million increased by $5.6 million compared to the second quarter of 2018.

Higher regulatory expenses, including cost related to deposit insurance, new IFRS standard implementation, anti-money laundering, regulatory compliance management as well as higher professional fees and labor relation costs related to the new collective agreement contributed to this increase. Sequentially, other adjusted non-interest expenses declined by $2.9 million due to various items including lower cost of services provided by third parties and favorable adjustments to sales taxes. The adjusted efficiency ratio of 73.5% in the second quarter of 2019 was 73.5 -- sorry.

As mentioned in previous quarter -- in previous period, this ratio is expected to remain high over the next few quarters as the bank invest in its transformation. However, the investments that we're making in addition to the measures we announced last quarter are expected to contribute to improved efficiency as we work towards our objective of 63% in 2021.

Slide 18 highlights our well-diversified sources of funds. In the second quarter of 2019, deposits declined by 4% quarter-over-quarter driven by lower broker-sourced deposits. This was in line with the reduced level of liquid assets given that the new collective agreement was signed which eliminated the risk of a potential work conflict. Retail branch deposits were relatively unchanged. Year-over-year, deposits fell by 8% mainly due to the lower broker-sourced deposits and were in line with the reductions in liquidity and loans. I would like to add that our liquidity position continues to be strong and well above our internal and regulatory requirements, and our liquidity portfolio is largely highly-rated government securities.

Slide 19 presents the CET1 ratio under the standardized approach of 9% at April 30, 2019 and highlights our strong capital position, which provides flexibility for the bank to continue to invest in its transformation and to support growth.

Turning to Slide 21; while total loans were essentially unchanged sequentially and stood at $34.1 billion, the mix continues to evolve. Residential mortgages loan declined 2% quarter-over-quarter as we focused on higher-yielding loans to business customers, which increased by 3% over the same period. We remain on-track to -- for double-digit growth in loans to business customers in 2019. Growth in residential mortgages is expected to gradually resume over the next three quarters as Québec Retail Services and the organization as a whole refocuses on this priority.

Slide 22 provides a deep dive into our residential mortgage loan portfolio where we have slowed down growth as we refocus on loans to business service customers. We're maintaining our strategy to seek profitable niches such as NII and Alt-A business. As of April 30, 2019, our Alt-A portfolio totaled $1.3 billion and continues to represent 8% of our total mortgage book and 4% of the total loan portfolio. Within the overall residential mortgage portfolio, mortgages in the GTA represent about 21% at the portfolio and the GVA accounts for 4%. Overall, this portfolio is highly -- is high quality, as evidenced by very low loss ratios and low LTVs as well as high credit scores.

Slide 23 highlights our commercial loan portfolio which is pan-Canadian with a U.S. presence. It is well diversified, has a track record of strong credit quality and is positioned for sustainable profitable growth.

Turning to Slide 24; credit quality remained good. The provision for credit losses amounted to $9.2 million and was $0.3 million lower than a year ago and $1.3 million lower than in the first quarter of 2019 when the $4.5 million provision was taken against the single syndicated commercial exposure. At this point, we believe the provision against that exposure is adequate. The loss ratio of 11 basis points in the second quarter of 2019 continues to reflect a good underlying credit quality of the portfolio.

Impaired loans are shown on Slide 25. Gross impaired loans increased by 1% sequentially, and the net impaired loan ratio stood at 42 basis points, unchanged from the previous quarter. We remain well 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, conservative provisioning in a portfolio that is 97% collateralized, we expect that the loss ratio will remain below other Canadian banks.

Turning to Slide 26; we continue to work towards our 2021 medium-term growth targets and financial objectives. To conclude, we're confident that our transformation plan and the strategic initiatives that we're implementing, along with the renewed collective agreement will lead to sustainable profitability and create long-term value for our shareholders.

Thank you for 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 the conference call operator for the question-and-answer session. Patrick?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Doug Young with Desjardins Capital.

Doug Young

Just on expenses, I think you've been crystal clear on the expense saves from the headcount and lower legal costs. But I just want to be clear. Is this expected -- and you've been clear on when they're going to come through, is this expected to hit the bottom line or is this going to be invested? Because you've also talked about investing back in the business. So that's question one.

François Desjardins

I'll ask François to answer that.

François Laurin

Good morning, Doug. It would hit the bottom line, those numbers are pre-tax on the bottom line.

Doug Young

Okay, so hit the bottom-line. Second, just on the AIRB conversion process being slowed down, and I think you've talked about why. Is this -- was this all internally-driven or was this at all a pushback from the regulator? I guess that's my question.

François Desjardins

Completely internally-driven.

Doug Young

And then, third -- and this might serve to be best discussed offline, but I was just flipping through your notes to the financial statements in note seven, in particular, and it shows the reconciliation of allowances for IFRS 9 by the stages. Just one item caught my eye. And it would -- it appear you're setting up allowances for newly originated loans under stage 2, which I guess just seems odd to me. But maybe there's a terminology differential that I've -- between you and other banks because it doesn't seem like other -- any of the other banks are doing so. So anyway, this just was one item that kind of caught my eye. I don't know if there's any explanation and again, if it easier to take these offline, we can do so.

François Desjardins

Yes. Maybe we could. I'll ask Liam Mason to maybe say one word or two, and we can take it offline and get back to you with details.

Liam Mason

Yes, Doug. And in terms of the technical aspects, happy to follow-up offline. I would say the following with regard to our ECL stage changes on commercial side, no trend or major change there. It's just normal variation, relatively small numbers. But [indiscernible] the personal loan ECL changes, there are two offsetting factors. One is we had some loan repayment where we're releasing provisions from those stages, and the other is that we've had a slight uptick in -- again, within variation. So minor changes in ECL stages. I wouldn't have any concern there.

Doug Young

Just more to origination side; but again, we can kind of take that offline. And then maybe just lastly, just if you can, François, if you can talk a little bit about just taxes. Because I mean it was abnormally low. Can you kind of dig through I think it was 8%, I think you've guided to 20%. Like what should we think -- be thinking about from a tax perspective?

François Laurin

Yes. Going forward for the rest of the year, we should expect mid- to high-teens and 20% starting 2020. It's just a combination of the mix of the profitable businesses origination of the profit and the structure. And we have -- yes, go ahead.

Doug Young

No, that's okay. Is there anything like was there any gains in the quarter that came through? Like -- it's just the quantum difference between 8% and the high teens or 20% just seems pretty...

François Laurin

There's a $1.5 million positive adjustment that accounts for maybe 3% of the tax rate there, Doug. So on top of -- so adjusted 12.7% to 12.5%, roughly 3% added for that one adjustment.

Doug Young

So just more mid to high-teens going forward kind of range?

François Laurin

For the rest of the year.

Doug Young

For the rest of the year, okay.

Operator

[Operator Instructions] We'll take our next question from Marco Giurleo with CIBC.

Marco Giurleo

I just want to follow-up on Doug's expense question. Last quarter, you've provided guidance of about $180 million per quarter. I'm just wondering, does that still hold through the remainder of the year? And just curious on the trajectory of the expense line heading into 2020, just given the launch of the digital that you mentioned that's going to take place this fall and also the extension of your AIRB. Just a lot of moving parts there, so just wondering if you could provide some clarification.

François Desjardins

I'll ask François Laurin to answer.

François Laurin

Marco, basically, as we -- I'll recap. So the signing of the collective agreement that allow us to reduce that cost over the next months by overall, when we had the liquidity, the current administrative cost and the measures we're taking by $25 million to $30 million on an annual basis at the bottom line, that's expected to improve the efficiency ratio of 300 to 500 basis points in 2020, early 2020. So basically, till then -- in this quarter, we're at $176 million, and we should remain at that similar level for the rest of the year.

Marco Giurleo

And just on your digital offering; I was hoping -- François Desjardins, I was hoping you could just elaborate on what that offering entails. And do you see this as something that could potentially drive an inflection in your mortgage and deposit growth?

François Desjardins

I'll ask -- I'll try to give some further details. But as we said previously, direct-to-consumer deposits, this drive towards digital -- answers many things, that answers relevancy to our customer retail base, it answers cross-selling opportunities to our current B2B Bank. Customers said that they did not have access to checking accounts or transaction accounts, and credit cards, and it does also answer and open up a new funding capabilities as we're taking Laurentian Bank brand back to the Canadian space. This is importance in terms of funding growth strategies, and I'll ask Craig to give some details.

Craig Backman

Sure, thank you. So we're really excited to be launching digital. Our focus as we launch this fall will be on deposit products, and we really have three steps so they are going to be in the launch. So first one, we'll be launching through our strong relationships with independent brokers and advisers in the B2B channel, and we'll launch that this fall. The second, we're going to be taking digital across Canada under Laurentian brand name and are targeting that at the end of the year. And finally, we have some market we're going to do through retail in our branches in early 2020. And we see real advantages by focusing on deposit first and by getting out with a differentiated experience that we know our customers, and brokers and advisers are going to really love; significantly increases our top target audience and our geographical presence, and it's really important step in the transformation way.

Operator

We will take our next question from Gabriel Dechaine with National Bank Financial.

Gabriel Dechaine

Just want to ask about the -- a quick one on the union contract, just the timing. I know it mature or expires December 31, 2021, that's a 4-year contract I guess it would be.

François Desjardins

That's right, it's a 4-year contract retroactive to the expiration of the contract that was in place, yes.

Gabriel Dechaine

Yes. It's a little -- might be just a technical thing, but why is it shorter than the last one and the prior one?

François Desjardins

Typical labor contracts are three years, four years, the last one was a particularly long one. And in this environment, I would say that, going much longer than what we have in place would be nonsense. This industry is moving fast, and we need to be able to open up our contracts regularly. So if I might add on this, as I said in my prepared remarks, the contract is one thing, but also one of the wins for us is the resetting of the bargaining unit. The bargaining unit is who is unionized, the contract is, what are the conditions and what we've done on the bargaining unit is -- really curtails that specific positions in the most in-branch network, customer-facing positions, and this gives us an ability to outsource the administrative work and get some real efficiencies from that.

As I mentioned also, we've been able to eliminate job security as part of the working conditions, which also enables us to do the same thing. And more importantly, to employees, working conditions evolve. Employees want to be recognized for their performance, they want to be recognized for what they do every day, and we really need to move this contract forward and to a modern state, so we fought long and hard to get this where we needed to be so that we can attract, and retain, and measure performance and recognize unionized employees just as well as the competition would; and that's where we are now.

Gabriel Dechaine

My other question is on the business itself, the loan book. That seems like the growth is coming from commercial and Northpoint is a big part of that. But the Canadian business mortgages and personal loans, they've been -- those balances have been declining for a number of quarters now. I'm just wondering where you see that -- sorry, I'm just wondering where you see the loan balances kind of settling out considering you're making investments in digital offering and ways to stay relevant with your customer base.

François Laurin

You're right; although total loans have not have been increasing, RWA is -- has been stable. Loans to business customers are growing 3% sequentially, that is a focus of the organization, and we protected that business as we focus on higher-yield loans. And I think that we've accomplished this despite the fact that over the last 12 months, we've been optimizing that portfolio, selling non-strategic commercials loans. Loans to retail customers, both at B2B and in the branch network, have been impacted by several elements, including union negotiations. Now that this is behind us, we can focus on performance. Our teams are eager to get back to work, and we expect to stabilize these portfolios and then begin to grow specifically our mortgage portfolio in the second half of 2019.

Gabriel Dechaine

So there's no -- it might be more of a function of having allocated resources into the union situation and now that that's done, you are going to move resources back to growing a loan book, and both in the mortgages and maybe personal lending as well, you're going to start to see an increase?

François Laurin

Well, as we mentioned in the last quarter, the negotiations with the union have been difficult, and we needed to manage and put together our business continuity plan that had not only union resources dedicated to it, but also financial. We significantly increased our liquidity positions to wave off normal levels. We're holding our capital high, and we put human resources into plans to continue operations in case of the labor conflicts. This does unfocus the organization. So we're really happy that we can put this behind us finally. This has been a long haul, but I think it was worth it. Quite frankly, again, we needed to change this agreement. In other words, to be able to fix Laurentian Bank, we said from the start in 2016, to fix the bank, we need to fix retail. And fixing retail needs to have a collective agreement that's modern, and that allows us to serve the customers the way that they want us to serve them.

Eliminating things like job security and getting a collective agreement that promotes the cultural performance is not only good to the banks, it's good for the employees, it's good for the customers. And I truly believe that strategically for years to come way beyond the current collective agreement, this significantly and strategically changes the way that we operate.

Gabriel Dechaine

And then last one on the provisioning; we've seen some reversals out of stage 1 and 2, particularly in the personal loan book. I suspect that because the loan book has been declining. Correct me if I'm wrong, there. And then if that's the case, then we should see that trend reverse as growth resumes?

François Desjardins

I'll ask Liam Mason to comment on that.

Liam Mason

Gabriel, I think that's correct. And the other thing I note it in terms of ECL movement is -- obviously, insured loans are not included, and that change is also reflected in the ECL numbers. But as I mentioned to Doug's question, some loan repayment is driving that provision, but we did expect that to tick back up with the growth as you mentioned.

Operator

We will take our next question from Sohrab Movahedi with BMO Capital Markets.

Sohrab Movahedi

François, I know, obviously, lot is on the go over the last few years and especially in the last year or so, you have some financial targets out there, focus is on 2021. You've made some kind of trade-off decisions internally, one of which is to delay the AIRB implementation. And I wonder how does that factor into the ROE targets that you had set for the bank, closing the gap over there and presumably with the delay, the gap closing or narrowing to the group is going to be pushed out a little bit? And if you could just share with us what was the thought process in that regard, when you made the internal decision to delay the AIRB implementation?

François Desjardins

Sure. I think that the outcome of the negotiations with the collective agreement forces us -- gives us the opportunity to really look at the sequence of strategic initiatives. It is still very much our plan to meet the '21 targets. The 3-year targets that we set out for ourselves, I think that was a small part of that that I discussed last quarter that was AIRB-related. But I think that's -- we will make that up with efficiency and growth. It is still our plan to bridge the gap completely with the industry average, but that will happen I know a year or so later than planned. Over the past several quarters, these negotiations have been real distraction. And as I mentioned in previous questions, it had impacted growth and financials. But from where we're now, the road to better performance starts with efficiency and growth and focusing on things like core banking, getting all of possibility out of the collective agreement, having growth and higher-yield assets is really going to fuel better short-term performance.

AIRB, we still absolutely believe in this project, and its benefits, but it is a project in which it allows us to better manage our loan portfolios, and better manage ultimately our capital. What we're focusing on right now is the business, the relevant business, the efficiency of the business, the customers getting rid of old core-banking platforms. And I think that that is a better bang for the buck in the next 12 -- 24 months. And after which, the cherry on the cake will be AIRB, which will still -- our calculations today tells us that it's an improvement of about 200 basis points of capital and translated into when we deploy 200 basis points of ROE. So long -- the goal is still there, may be a year out more than we thought. But from this points, I'm thinking that is the right call to push this one out or to slow it down a little bit; so that we can really have some wins later in this year and in 2020, 2021.

Sohrab Movahedi

So then maybe just quickly for Liam. Liam, where do you see the RWA to kind of -- the total asset density kind of trending towards with the expected portfolio mix shifts under the standardized approach?

Liam Mason

In terms of the -- so in clarification on your questions of where we see RWA trending under standardized, we feel we're...

Sohrab Movahedi

Like where RWA-asset-ratios are right now? And given the portfolio mix shifts that you're talking about more commercial, maybe a little bit more higher-yielding stuff. Just trying to get kind of a fuel the next call it 12 to 18 months. Where do we see those RWA to asset trends -- trending really to try and figure out what under the standardized approach you see there capital requirements of that loan growth being?

Liam Mason

I'll make two comments. So one, as I think from a capital standpoint, we're adequately capitalized to support that growth, and we have the capital. But secondly, as François laid out, we have an issues we're undertaking right now to grow those RWAs, both in the commercial side where we kind of struggle on emphasis, but also in retail as we turn our attention to that given the success with closing the labor agreement.

Sohrab Movahedi

So where do you see the ratio going?

Liam Mason

I would see it increasing. I don't want to talk about forward-looking magnitude, but I would see improvement and increase in it.

Sohrab Movahedi

Sorry, I just want to be crystal clear. When you say an improvement, you see the business being becoming less capital-intensive from an RWA growth perspective or more capital-intensive?

Liam Mason

I expect the business to grow our RWA base and to utilize the available capital.

Operator

We'll take our next question from Scott Chan with Canaccord Genuity.

Scott Chan

Just going back to expenses; appreciate the guidance for the next two quarters of $176 million. Looking at the fiscal 2020, with your cost savings and your annualized savings, is it reasonable to assume that the run rate would be lower than the next two quarters or higher? Just trying to get a sense of looking out beyond '19.

François Desjardins

Scott, I didn't get the qualification in the next two quarters.

Scott Chan

Sorry?

François Desjardins

I didn't get the qualification you put in your question for the next two quarters.

Scott Chan

On the prior response, you talked about $176 million of adjusted non-interest expenses over the next two quarters. And I'm just wondering in fiscal 2020, how would that compare with all the initiatives offset by some of the cost savings that you kind of announced?

François Desjardins

Well, in the prepared remarks, basically we said that we would achieve a $15 million to $20 million savings that would hit the expenses on an annual basis. So overall, the expense -- the level of expenses would be reduced by that $15 million to $20 million. So that's over four quarters, so that's $8 million -- $7 million to $8 million, $5 million to -- $6 million to $7 million per quarter from the run rate we have now between we achieve $176 million to $180 million this year less the $6 million to $7 million.

Scott Chan

But for 2020, is there -- do you have any kind of guidance on that run rate total number?

François Laurin

No. At this point, we're focusing on the efficiency ratio to improve it. We said that this would improve it by 300 to 500 basis points and the target is to reach 63% by 2021, improving the existing 73 today.

Scott Chan

And then just lastly, just on the commercial growth and the guidance of 10% for this year. Maybe you can all kind of elaborate in some of the areas where you're saying -- where you're seeing good growth on that platform.

François Desjardins

I'll ask Stéphane Therrien to comment on that.

Stéphane Therrien

Yes, our guidance is still to grow by over 10% this year. Our three growth engines for this year will be equipment finance, and venture refinance within our point and real estate financing.

Scott Chan

Equipment financing, real estate financing, and I missed the second one.

Stéphane Therrien

Northpoint refinancing.

Operator

We'll take our next question from Meny Grauman with Cormark Securities.

Meny Grauman

Back to the collective agreement. I mean it sounds like a fantastic agreement for you. And just given how contentious it was, just sounds a little surprising. I'm just wondering it sounds like you got everything you wanted, so I wanted to ask what kind of concessions did the workers get? And how did you manage to after so much negotiation basically get this deal that seems like you basically came out ahead on every point?

François Desjardins

Of course, I can't go into details like that. But, let me say, just one thing. Our employees are behind this plan. Our non-unionized employees and unionized employees are behind this plan. And the people that are working our branches, the people that are financial advisers, the people that are talking to customers everyday voted for this plan, 81%, and that's a very strong focus. Negotiating with union representatives is never easy, and having people understand the need for transformation when things pretty much stayed stable for a long time took us a lot, I got to say. But I think that now this is behind us, and I think that the employees win from this just as much as the bank does, and I'll leave it at that.

Meny Grauman

Just a follow-up, if you can; in terms of just what kind of concessions did workers get. Are there any key points that you can highlight for us?

François Desjardins

The concessions that we made is to pay them adequately to support mobility, to treat them with performance, to not recognize anything else than performance when we're making decisions and ability to manage our team. The move to a core-culture performance in the modern age, employees want their colleagues and themselves to move forward. It is not something that some might think, but for the most part, I think that employees wanted that, and they voted for it.

Operator

We'll take our next question from Sumit Malhotra with Scotiabank.

Sumit Malhotra

I'll start with François Desjardins. Just with the rate of change that the bank has been demonstrating for a couple of years now, I'm kind of curious to hear from you. How do you think your market shares in your home province and some of your key products have been impacted? And maybe more than just around numbers, in terms of some of the customer service or customer perception studies that I'm sure you and third parties conduct, do you feel that the ranking or how Laurentian is regarded by its clients has been negatively impacted by the rate of change?

François Desjardins

I think there's a difference -- thanks for the question. I love talking about customers. I think that the first thing is that there is a difference between general public perception and what each customer perceives the services that they're getting from their bank. And when we poll, there was a recent poll about the adviser base in Québec, we actually polled quite favorably in the level of trust that our customers have for our branch advisers. I would say that if you visit our branches, in fact to our clients, one by one, I think that there's a pretty good response from the clients. Where we need to go though is to broadcast that and make changes for years to come. So where we need to go is to offer digital products so that we can attract a new clientele and deliver on new needs that are coming from customers. And I don't think that this is really union negotiation base, this is something that I spoke about in 2016 as something that was critical for us to move forward.

From a negotiation perspective, I would say that yes, there has been some impacts on the market not just our customers, market has sentiment in general. But you know what, I said from the start this is going to be a bumpy road. It certainly has been. But if I'm looking forward from this point, I see a better future. This going back and being able to grow our adviser base in terms of numbers, being able to deliver on promises we make, and ultimately, being able to deliver a relevant bank is what we set our sights on, and that's what we will do. And this is -- has to translate into profitability in the end and shareholder value. That's the goal. So one into the other; so a little bit of a setback, I would say a hard one in these last 12 months, but you have to have some results here, and that's what this management team has had.

Sumit Malhotra

That's a good answer. We ask a lot of questions about the bullet numbers, and I'm going to do that in a second as well, but I'm just -- it's interesting to you hear talk about where the positioning of the bank within your market has trended. Hopefully, we'll get to the numbers now because I think that's where we want to see it. There's been a few questions about efficiency and some of the comments that you provided in terms of both expenses and then how you think the liquidity will translate. I get more specifically here, so your efficiency ratio in the first half of this year is around 74%. And if you were to put some of these moving parts together, like even last year which I think you would say was not where you want to be, you were closer to a 67-number. Like as you think about this repositioning of some of the expenses that you've endured, what would be a more reasonable near-term objective for efficiencies? Getting back to 70 in short order something that you can achieve? Or is there's still too much going on from an investor perspective for that to be realistic?

François Desjardins

I think that the best answer that I can give you is really we had to relook at are we still holding our own in terms of our 3-year 2021 targets, and we are. And that's 63%. I know that's a little bit of ways away you'd like to have some more shorts at guidance, but in terms of numbers, that's where we are. I would say that if I look just at expenses in three different buckets, let's look at the cost of the labor relations alone is about $10 million, right? $7 million on liquidity, $3 million on labor-related costs, this is something that we try to incur that we can back out of, and that's what you should expect. We identified that we were going to have some cost reductions last quarter, we're moving towards that. The agreements helps us in that regard, not only from the cost perspective, but efficiency in general and processes. We're looking at $15 million to $20 million net over the next nine months, both of these buckets will hit the bottom-line. Getting the growth back and the keys back to growth is just shifting expenses, not necessarily increasing them. It's shifting expenses from people that are doing one thing to another and getting teams back and focus on growth initiatives. So we expect to get some top line impacts as we turn these portfolios around, most on retail side.

And the other bucket of course that we can't forget is that we've been running two core-banking systems and operating that pretty inefficiently as we went through this. Now that the negotiations are over, we can finish what we started, get the core banking done, move the cost out of the organization, and that should be a 2021 deliverable. So you should see gradual improvement, and that's why we believe that the 63-number, it won't be a straight line, Sumit, but you'll see improvement as the next quarters happen. You'll see quarter improvement in 2020 about what I just described and core banking, we'll see that further improvement in 2021, all things being equal, gets us to the 63 efficiency ratio. So that's as good as I can get.

Sumit Malhotra

Thank you for that and will unpack some of these afterwards. I think the last one just in and around the AIRB. I think for the standardized banking has been a long -- sorry, go ahead.

François Desjardins

No, go ahead.

Sumit Malhotra

It's been long journey to get to this, and looks like it's too late, if I got you right you're now hoping 2022 is the time you get there?

François Desjardins

Actually, the implementation, yes, and the benefits starting 2022. So the day that it's implemented 2021, and then the start of benefits, 2022 is where we are. So about 12 to 18 months delayed from the dates that we have.

Sumit Malhotra

And I think the question for -- maybe this is the last one for François Laurin would be, we've seen this from the sector broadly of late is that as more of the growth in the loan portfolio shifts to commercial or corporate lending, is clearly having a negative impact on the ability of some banks to grow capital. Your -- you communicated this going back to the Investor Day when you laid out some of these targets that the aggregate business portfolio was going to be at the bigger piece of the pie for Laurentian going forward, so to speak. So François Laurin, for capital, is it fair to think that the roughly in and around 9% is going to be a level from which we don't see much growth because of the higher density of the lending that you're moving towards? And then, that's a question right there, is it 9% the level that we probably don't see much growth from in your view?

François Laurin

In our view, we're still aiming to get to our $16 billion of commercial loans by 2021. And as we have said earlier, 9% is -- is at the -- it's outside the high-end of our ratio of a risk appetite, which we stated was at between 8.3%, 8.7; so which we have -- 8.7%. So the intent were in years of investment but with the capital ratio at that level, we don't see this as hindering our growth in the commercial loans for the foreseeable future. No, the short answer; we don't see this as an impediment. So we -- it might vary from 9%, but we always said we wanted to be at the high-end during our period of investment but that doesn't mean that necessarily staying at 9% itself. And they were between 8.7% and 9% still gives us room for growing the portfolio.

Operator

[Operator Instructions] We will take our next question from Richard Roth with TD securities.

Richard Roth

Question on liquidities. I guess is it safe to assume that by next quarter, the balance would have normalized down to back normal run rate levels or it would take longer than a quarter?

François Laurin

No, you're right. Clearly in Q3, that we're currently -- we should -- we will have -- we have, and we will keep normal liquidity balance on our books; this is by the end of Q3 publication results.

Richard Roth

So then that would sort of lead me to assume that you should -- we should see a bit of a rebound in margins in Q3 and maybe hitting run rate in Q4. What's a reasonable run rate there? I think previous guidance from you guys was that you could see margins tick up a little bit given your business mix shift towards commercial; is that still the case?

François Laurin

Well, what we see is, we were at $177 million this quarter, and it's mainly the reduction from previous quarter because of liquidity. So as liquidity returns to a lower level, we -- you should expect that we're bouncing back to the level we had in Q1 over the short-term, which was $180 million.

Richard Roth

So you're expecting no more incremental expansion versus Q1?

François Laurin

No, at this point, no. To get back to the level of Q1 would be what we're seeing in this one. We're not going to stop there, but that's what we see at this point in the short-term.

Richard Roth

Because my expectation given the difference in margins between, let's say, your retail book and your commercial book, wouldn't we have expected margins to continue an upward climb? It's like what's sort of hampering them, let me put it that way.

François Laurin

No. It's a combination of the different factors, Richard, but we're three behind in this quarter. The majority of it is the liquidity so that's why we have a target, we aim at least 1.80; obviously, the trend going forward is to move higher than 1.80 over the next few quarters -- beyond the next immediate quarters, immediate quarter is more like around 1.80.

Operator

It appears there are no further questions at this time. Mr. François Desjardins, I'd like to turn the conference back over to you for any additional or closing remarks.

François Desjardins

Thank you all. With the negotiation of the collective agreement behind us, the whole organization can resume its full focus on growth and performance. We're really eager to continue making progress on strategic initiatives, core-banking platforms and soon to be launched digital offer and transformation to advice-only branches. We're building a solid foundation for our bank and a solid foundation for creating shareholder value. I sincerely mean what I said just a few minutes ago, the road to becoming a better and different bank is exciting and challenging, but as I now look forward, I do see a clear road ahead.

Thanks, everyone and I would now turn the back -- the call back 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 the presentation. Our third quarter of 2019 conference call will be held on August 29, and we look forward to speaking with you then. Have a good day.

Operator

The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.