Laurentian Bank of Canada (LRCDF) CEO Rania Llewellyn on Q1 2022 Results – Earnings Call Transcript

Laurentian Bank of Canada. (OTCPK:LRCDF) Q1 2022 Results Conference Call March 2, 2022 9:00 AM ET

Company Participants

Susan Cohen – Director of Investor Relations

Rania Llewellyn – President, Chief Executive Officer

Yvan Deschamps – Executive Vice President, Chief Financial Officer

Éric Provost – Head of Commercial Banking

Liam Mason – Chief Risk Officer

Kelsey Gunderson – Head of Capital Markets

Karine Abgrall-Teslyk – Head of Personal Banking

Conference Call Participants

Meny Grauman – Scotia Capital

Paul Holden – CIBC

Nigel D’souza – Veritas Investment Research

Marcel McLean – TD Securities

Joe Wong – Barclays

Lemar Persaud – Cormark

Operator

Please standby. We are about to begin. Good day, and welcome to the Laurentian Bank of Canada First Quarter Results 2022 Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Miss. Susan Cohen, Head of Investor Relations for Laurentian Bank. Please go ahead, ma’am.

Susan Cohen

Thank you. Bonjour à tous. Good morning and thank you for joining us. Today’s opening remarks will be delivered by Rania Llewellyn, President and CEO and the review of first quarter financial results will be presented by Yvan Deschamps, Executive Vice President and Chief Financial Officer, after which we will invite questions from the phone. Also joining us for the question period are several members of the Bank’s executive leadership team, Liam Mason, Chief Risk Officer, Éric Provost, Head of Commercial Banking, Karine Abgrall-Teslyk, Head of Personal Banking and Kelsey Gunderson, Head of Capital Markets. All documents pertaining to the quarter can be found on our website in the Investor Centre.

I would like to 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 two of the presentation. I would also remind listeners that the bank accesses its performance on a recorded and adjusted basis and considered both to be useful in accessing underlying business performance. Rania and Yvan will be referring to adjusted results and their remarks unless otherwise noted as reported.

It is now my pleasure to turn the call over to Rania Llewellyn.

Rania Llewellyn

Bonjour à tous. Good morning and thank you for joining us today. Before I begin, I want to acknowledge the significant human toll of the current conflict in Ukraine. To help support and respond to the humanitarian needs in Ukraine and surrounding countries, we have made a donation to the Red Cross Ukraine Humanitarian crisis appeal.

Now turning to my prepared remarks. At the end of last year, we unveiled a new 3-year strategic plan for the bank to drive long-term sustainable and profitable growth. While it has only been a few short months, we have already taken action on a number of fronts. And I want to sincerely thank all of the Laurentian Bank employees who have worked together as one team to deliver on our new strategy.

The COVID-19 vaccination roll-out in developed countries continues to contribute to a robust economic recovery. In Canada, solid GDP growth was driven by robust spending intentions, the re-opening of the economy and the continuation of targeted federal government support despite high CPI inflation. However, the onset of the Omicron variant led to brief shutdowns disrupting the initial positive momentum in the quarter.

Now withstanding uncertainties related to labor shortages, global supply chain bottlenecks and the more recent geopolitical risks we continue to see positive momentum heading into Q2.

I would now like to review our Q1 2022 results. The Bank delivered a strong start to the year. Fuelled by top line revenue growth of 4%, net income for the first quarter was $59.5 million or 25% higher than a year earlier. With earnings per share of $1.26 up 22% year-over-year. ROE reached 9.2% up 170 basis points from a year ago.

Results were primarily driven by strong performance in commercial banking, our continued focus on cost management and sound credit quality. Commercial banking grew its loan portfolio by $2.2 billion or 17% year-over-year and was up $1.3 billion or 9% quarter-over-quarter.

Inventory financing exceeded our expectations with loan growth at 39% quarter-over-quarter as manufacturers delivered more equipment to our dealerships. This quarter, the dealer credit utilization rate increased to 43%, which is up from 35% last quarter, but still below the historical level in the mid-50s.

Given our success and increasing our dealer network over the past year, a 1% increase in utilization rate is currently equivalent to $60 million in assets to our balance sheet. We were encouraged by better than expected Q1 results, which will continue to have a positive impact on Q2, before projected seasonal reductions occur in the latter half of the year.

With our continued focus on cost management, the efficiency ratio improved by 190 basis points year-over-year. As the economy reopens inflation and normalization of business activities may put some pressure on costs and cause some variability in our efficiency ratio. However, our focus on disciplined expense management and structural cost optimization should set the stage for continued improvement over the medium term.

Our sound credit quality was evidenced by the declining trend in impaired loans and low provision for credit losses. While the PCL ratio came in at 11 basis points this quarter we continue to expect that the evolving business mix will lead to a PCL ratio in the mid-teens this year. The bank continues to maintain healthy liquidity levels and a strong capital position to support our strategic plan with a CET1 ratio of 9.8%.

As outlined at our investor day, our business lines play a key role in the success of our strategy. To recap, commercial banking remains our growth engine. Capital Markets provides a focused and aligned offering and personal banking is repositioning for growth. This is all underpinned by a strong culture and focus on making the better choice by living our values and integrating ESG best practices. 2022 is the year of execution, and we have already made good progress.

As I outlined in our financial results, our commercial bank continues to execute on a proven business model with robust loan growth. This quarter, our focus on our specialization, and additional relationship managers led to strong origination capacity, allowing us to grow our inventory financing credit line authorizations by 13%, quarter-over-quarter, reaching $6 billion. Expand our real estate pipeline to $4.3 billion up 9% versus last quarter, as we were able to benefit from the high volume of new construction projects in the Canadian real estate market and generate close to $200 million of new business volume and equipment financing, bringing us back to pre-pandemic origination levels.

With significant growth in inventory and equipment financing, the percent of commercial loans in the U.S. reached 17% in line with our commitment to continue to diversify our portfolio by geography. We also continue to maintain a net promoter score of over 50 or excellent, based on our latest customer survey conducted in November with both our equipment and inventory financing customers. These scores reflect the deep relationships we continue to have with our commercial customers.

In capital markets, we continue to offer a focused and aligned approach to differentiate ourselves from the competition. Q1 results remain solid, particularly in fixed income, although overall have moderated somewhat from last year’s strong tastes. In line with our strategy, we are further aligning our capabilities with a broader bank and have hired new talent in our diversified group to augment our offering and provide strategic advice to commercial clients. Hired a new real estate research team, which is a key focus area and a specialized sector for the commercial bank, allowing us to triple issuer needs under coverage and participated in multiple government green bond issuances in Canada in the first quarter, including those issued by the City of Ottawa and province of Ontario, in line with our strategy to offer value added ESG capabilities.

In Personal Banking, we are focused on closing key foundational gaps to drive customer retention and acquisition while deepening existing relationships. I would like to provide three updates related to our strategy. First, efforts related to customer retention continued, including the use of predictive analytics and the launch of a new customer loyalty team. The virtual team was launched on boarded and trained throughout November and started making proactive calls to our customers in December. This team is initially focusing on customers with mortgages coming to maturity and locking them into new terms.

Initial results are encouraging and the team is gaining momentum. While improving the performance of the mortgage business is expected to be a multi-year journey, we are confident that it should gradually yield benefits along the way. Second, following our commitment to transform our visa product suite, we announced a new strategic partnership with Brim Financial. This partnership will fuel our digital transformation and enhance the end-to-end customer journey for our suite of VISA products.

By the end of this year, we will have reduced the credit card adjudication time from 25 days to instantaneous, while also delivering a robust rewards platform aligned to our new brand purpose. In keeping with our focus on simplification, the partnership also reduces the number of vendors we use to issue a card from five to one, and reduces manual processes by 90%. This will close a key foundational gap for the bank, and will allow us to continue to grow our national presence.

Third, I am pleased to report strong customer demand for our recently launched mobile app. The app allows customers to do their most common banking transactions on the go. Using an agile approach, the bank will continue to update and enhance its app and customers will see improvements to on-going releases.

In just three months, over 25% of our active online banking customers have now downloaded the app, doubling our q1 target. Finally, our strategic plan is underpinned by a strong culture and an unwavering commitment to ESG. I will now outline key developments related to these priorities. First, as part of our focus on cost optimization and our future of work strategy, I am pleased to report that we have made significant progress on reducing our leased corporate office space and have signed an agreement for our 199 Bay Street location in Toronto. This is in line with our objective to move to a hybrid, work from home first model for all tasks that can be performed remotely.

Second, as part of our commitment to building one winning team, I am pleased to announce that Bindu Cudjoe has joined Laurentian Bank, as the new Chief Legal Officer and Corporate Secretary. Bindu brings over 20 years of experience in Legal and Regulatory Affairs, Corporate and Board Governance, Strategic Partnerships and Compliance.

Third, in line with our strategic pillar to make the better choice, I am very proud that today we published Laurentian Bank’s first ever ESG report, which highlights a number of key initiatives, including a materiality assessment to identify key ESG priorities to the bank, disclosures aligned to the TCFD recommendations, including a climate risk assessment and heatmap, and new equity, diversity and inclusion policies.

Additionally, the Bank has also joined the Partnership for Carbon Accounting Financials. They PCAP initiative enabled collaboration among the world’s financial institutions to develop standardized methods for measuring and disclosing carbon emissions from their financing and investment activities. We are in the early stages of our ESG journey, and this report represents another key step towards delivering a comprehensive sustainability program across the organization.

To conclude my opening remarks, I am pleased with the progress we have made this quarter and I will now turn the call over to Yvan.

Yvan Deschamps

Merci, Rania. Bonjour à tous. I would like to begin by turning to slide 12, which highlights the bank’s strong financial performance for the first quarter of 2022. Reported EPS was $1.17, and net income was $55.5 million. Adjusting items this quarter amounted to $5.4 million before taxes and included $3 million related to the amortization of acquisition related intangible assets and $2.3 million of impairment and restructuring charges. The latter related to the successful completion of the reduction in leased corporate office space in Toronto, which require that $2.3 million adjustment to the charges recorded in the fourth quarter of 2021. Details of adjusting items for the quarter are shown on slide 26.

The remainder of my comments will focus on adjusted results. EPS and ROE were $1.26 and 9.2%, an increase of 22% and 170 basis points respectively, compared to a year ago, and ahead of our 2022 targets. The pretax pre-provision income or PPPP was $85 million a 10% increase compared to last year, driven by both strong revenue growth and good cost discipline.

Compared to the fourth quarter of 2021, EPS and ROE increased by 19% and 170 basis points respectively, mainly due to lower PCL. Note that in the fourth quarter of 2021, a provision for investment loans of $19.3 million was taken. PPPP decreased by 2% driven by higher non-interest expenses. This increase was mainly the result of higher payroll charges due to a higher level of performance based compensation paid in January. Also noteworthy semi-annual payments on that LRCN are made in the first and third quarters. As such, we made a payment in Q1 which accounted for $0.06 per share.

Slide 13 shows the improvement in net interest margin. At 1.88% NIM was four basis points higher than a year ago, mainly due to higher inventory financing volumes and lower funding costs. Net interest margins increased by five basis points versus last quarter, mostly due to the strong growth in inventory financing volumes experienced over the past two quarters.

Other income as presented on slide 14, increased by 3% compared with a year ago, mainly due to higher commission’s on sales of mutual funds reflecting higher asset sales and net sales, as well as higher lending fees primarily driven by the strength in real estate financing. Sequentially, other income was 1% lower, impacted by lower fees and securities broker commissions as the face of capital markets activity as somewhat moderated.

Slide 15 presents non-interest expenses that’s increased by $2.2 million, or 1% compared to a year ago. This was mainly due to higher payroll charges resulting from a higher level of performance based compensation paid in January as previously mentioned, and higher professional fees to support our strategic initiatives.

Partially offsetting these increases were lower amortization charges and rent expenses stemming from our decision to reduce the footprint of our corporate offices by 50%. Sequentially, non-interest expenses increased by 5%, mainly due to higher salaries and employee benefits. The efficiency ratio stood at 67% in the first quarter of 2022, an improvement of 190 basis points year-over-year and in line with our 2022 target of less than 68%.

Operating leverage was positive 3% year-over-year. Sequentially, the efficiency ratio increased by 150 basis points. While we continue to focus on cost discipline, as well as revenue growth, there can be variability from quarter-to-quarter in this measure.

Slide 16 presents our well diversified sources of funding. Our objective is to align deposit growth and loan growth. To this end, in the first quarter, total deposits increased by $1.1 billion as loan increased by $0.7 billion. Growth in personal notice and demand deposits was particularly strong, reflecting our strategy to deepen and expand relationships with advisors and brokers.

Slide 17 highlights our healthy capital position. The CET1 capital ratio, which is presented under the standardized approach, stood at 9.8% at the end of the first quarter, compared to 10.2% at year end. During the first quarter, we deployed capital to support organic growth, which is our priority. We also repurchased 294,000 shares under the NCIB at an average price of $42.86 for a total of $12.6 million. Our capital position remains strong and supports our strategic plan towards sustainable profitable growth.

Slide 18 highlights the commercial loan portfolio, which delivered strong growth. Loans increased by 9% quarter-over-quarter, driven by growth in inventory financing of over $700 million, or 39%, and real estate financing of $400 million, or 5%.

Slide 19 presents the Pan-Canadian residential mortgage loan portfolio. Residential Mortgage loans declined by 2% sequentially. We previously mentioned that improving the performance of the mortgage business is expected to be a multiyear journey as we take actions to improve the customer experience, retain customers and renew growth. The bank’s Residential Mortgage portfolio remains relatively weighted towards insured mortgages when compared to the industry at 56%, and combined with a low LTV on the uninsured portfolio contributed to reducing the overall risk of this business.

Turning to slide 20, allowances for credit losses totaled $208.9 million, a sequential increase of $6.3 million. This quarter, the banker released $5 million in ACL for performing loans, which was offset by growth in the commercial loan portfolio, as well as the normal variation and a few commercial loans without any particular trends.

As shown on slide 21, the provisions for credit losses was $9.4 million in the first quarter of 2022, decreasing by $7.4 million from a year ago. Loan provisions on impaired loans and lower level of write-offs were partly offset by higher provisions on performing loans. Sequentially, the provision for credit losses decreased by $15.5 million as the prior period included provisions of $19.3 million for the investment loan portfolio. The PCL loan ratio stood at 11 basis points.

Slide 22 highlight the improving trend in gross impaired loans which decreased by 15% quarter-over-quarter. Impaired loans declined mainly as a result of loans returning to performance at performing status and repayments. We remain adequately provisioned. I would now like to offer some thoughts on how we see the second quarter of 2022 developing.

The shorter quarter effect is anticipated to be offset — partly offset by the impact of the solid loan growth experienced in Q1. NII and NIM are therefore expected to remain strong, although slightly lower than in Q1. We anticipate good performance from our capital markets business line, but remain cautious as market activity has moderated somewhat and uncertainty remains elevated.

Our focus on cost discipline will continue. We aim for our efficiency ratio to remain lower than 68% even though overall spending will increase gradually over the year as we invest in our growth and strategic initiatives.

Provisions for credit losses remain difficult to predict on a quarterly basis. We continue to expect that the evolving business mix will lead the PCL ratio to gradually increase towards the mid-teens. For the rest of 2022, uncertainties remain, including the developing Russia Ukraine conflict, the potential emergence of new variants and continuing supply chain challenges. Strong commercial banking loan growth over the past two quarters is expected to moderate in Q2, and then contract in Q3. That latter is a result of the seasonality of our inventory financing activities, as a large portion of our portfolio is an RV and marine products. For these verticals, our dealer base is signaling a high level of presold equipment, which is expected to lead to a reduction in credit utilization in Q3. This anticipated reduction may moderate profitability growth in the second half of 2020.

Overall, despite the uncertainties and potential quarterly fluctuations, we believe that the strong results delivered in Q1 position the bank to meet or exceed its performance targets for 2022.

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. Jeff?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].Our first question comes from Meny Grauman at Scotia Capital. Your line is open. Please go ahead.

Meny Grauman

Hi, good morning. First question is just on the inventory finance business. The growth that we saw, even outpaced the Q4, you talked about the seasonality last time around and emphasize that now as well. And I’m just wondering, is that all we’re seeing here seasonality is or is there something else going on that surprised you to the upside?

Éric Provost

Meny it’s Éric, thanks. Thanks for the question. Actually Q4 and Q1 will be impacted by this seasonality, as highlighted by Yvan, like over 50% right now of our inventory finance business is towards RV and Marine. And we saw good supply capability from mostly the RV side of the business. So right now we do expect this to continue in the beginning of Q2, but definitely with product demand still very strong out there. We feel that credit line utilization should decline end of Q2 but beginning of Q3 and for the summer period.

Rania Llewellyn

So Meny just I just want to make sure we’ve answered your question. So it’s sort of seasonality, and usually in Q4, and Q1. And then based on the presale, as Éric was saying, that’s when you start seeing the utilization rates of our credit lines going down. Usually in Q2 and Q3, however, we have strong momentum. So we’ve already started seeing the moderated pace going into Q2, but we’ll probably see the credit utilization lines going down a little bit more in Q3.

Now what the business has done under Éric’s leadership is, over the past year, we grew the number of dealer’s year-over-year. And so that’s helping with the moderation as well as starting to look at different industries outside of RV and Marine. So obviously we’re it’s going to continue to be a growth engine. But yes, this is going to be seasonally lower utilization in Q3 because of the presold inventory.

Meny Grauman

We hear a lot about that. From your perspective is there any change there for in terms of things improving that are not yet obvious to us — is are you seeing anything like that, or that’s not the case at all?

Éric Provost

Can you clarify — Meny, just to make sure?

Rania Llewellyn

Are you talking there just concerned to the matter trend?

Meny Grauman

I’m just — I’m wondering about what you’re seeing in your business in terms of like is supply chain becoming less of an issue in that business, or is that not really what’s driving these numbers at all?

Éric Provost

Well like I said like we some, some business lines, like our fee is more consolidated in terms of OEMs. So they’ve been more resilient through this supply chain situation but marine is more fragmented. So they’re still at way lower credit utilization than they were pre-pandemic situation. So right now we feel we’re moving towards a more normalized situation in some industries, but still some ending uncertainties regarding supply chain there.

Rania Llewellyn

Yes, so Meny maybe just a few additional funds, if you were to if we were to just break it down as to what happened in the inventory financing business. So this quarter alone saw an increase of $700 million in assets, that’s up 39% quarter-over-quarter. 70% of that growth came from existing dealers, 30% came from new dealers. So that was one of the key drivers. The second driver was, as Éric mentioned, we were pleasantly surprised with the supply chain kind of easing up in particular sub segments. And so that boosted the credit utilization to 43% versus 35% in the last quarter, but that is still below pre-pandemic utilization in the mid-50s, right. And so that’s why what we’re seeing now is, there will be moderation in Q2, and then liquidation or less, less inventory needed, because they’re already pre sold. But we’re trying to minimize that seasonality by adding more dealers; we’re trying to do that as well, by going into different segments.

Now, obviously, the Russia, Ukraine, as we’ve heard this morning, in terms of the number of sanctions, there’s still a lot of uncertainty. And that may have a bigger impact on the supply chain. And so this is kind of our best guesstimate at this point in time.

Meny Grauman

That’s helpful, especially the utilization numbers. The second question I had was just on capital. We see the CET1 ratio go down a little bit over 40 basis points quarter-over-quarter. And I’m wondering, given the changing business mix, and the outlook that you have, is there a risk that our RWA growth will continue to pull down or CET1 as that business mix changes? And where do you see that bottoming out?

Yvan Deschamps

Yes, thank you for your question Meny. So deploying, no deploying capital for asset growth, internal asset growth is really the priority of the bank. And that’s what happened over the last quarter. The key thing also there is that we have very strong capital base at 10.2. And that’s reflected also the reduction that we have in inventory financing. So we were anticipating that industry to come back. So it’s not a surprise. In fact, it’s a positive surprise if I can say that it came relatively quick. But the point there is that there is no issue on the capital. We were reserving and we have enough flexibility to take that going forward. And if you look at the flow chart that we have in the presentation, we do generate good internal capital growth as well. And that’s probably 15 to 20 beats [ph] going forward quarter. And we believe that that will, on a normal basis support the growth that we have in the middle.

Meny Grauman

So in terms of your outlook, could you see that CET1 ratio continuing to follow, is it likely, especially given that seasonality you’re talking about that we should see the CET1 ratio start to climb again from here?

Yvan Deschamps

Yes, at this point Meny, we definitely is going to move a little bit up or down depending on the growth we have. But we see now the level of the capital stabilize much more. And that’s been driven as we mentioned, by the big growth, we hadn’t been refinancing into real estate and Éric and Rania just mentioned that that’s going to temper in Q2 and reduce in Q3. So that may bump a little bit the capital, but overall, by the end of the year, we expect to be relatively in the same order.

Meny Grauman

Got it. Thank you very much.

Operator

We’ll go next to Paul Holden at CIBC. Your line is open. Please go ahead.

Paul Holden

Thank you. Good morning. So I do I have a couple more questions on the commercial loan growth, but maybe sort of putting seasonality aside and sort of focusing more on year-over-year growth rates. So my first question there is how should we be thinking about the ability of strong commercial loan growth to impact them and I guess, specifically as you move towards that 2024 target of over 18 billion. How are you thinking about funding mix, and funding costs associated with that loan growth?

Yvan Deschamps

Yes, thank you. A few things in there. In terms of NIM definitely, we see that the growth that we got in commercial over the last two quarters definitely improve and fuel the NIM and got 1.88% this quarter. With the mix that we see and the market is pretty competitive out there as well. So our expectation is that this is probably going to go down by a few beats, but it’s going to be sustained at a very good level.

And in terms of funding, I would say it really depends where the growth is coming from. But the good thing this quarter is we had a very strong growth in our deposits, which is definitely core for the bank. And we intend to continue pushing on the deposit growth as well, but very pleased with the growth we have this quarter, which is was an excess of the growth we had on the loan side.

Rania Llewellyn

And Paul, just to add to that, to put that in perspective as how it relates to the commercial banking growth in the business mix that Yvan was mentioning. Inventory, financing attracts around a mid-single digit margin. Now obviously because of competition, there’s a little bit of margin compression that’s happening there. But it’s, it’s a higher margin business, then you would say, our real estate business, which is in the multi resin construction. So it really depends on the makeshift growth that we’re going to be reaching on a quarterly basis. But as Yvan said, we’re very comfortable and confident in terms of what we’re forecasting for, from a guidance perspective.

Paul Holden

Got it. Okay. And then second question, again, sort of related to that commercial loan growth, and maybe also importantly, the mix. If I look at lending fees, they were down 1%, quarter-over-quarter like, does that tell me inventory finance businesses, not a driver of lending fees. Or guess more importantly, how do I think about the correlation between your commercial loan growth objectives and mending fees over time?

Yvan Deschamps

No, you’re totally right in your assumption. So the inventory financing business has a very nice margin, but does not generate fees. The fees that we’ve seen the growth that we’ve seen lending fees very strong at 8%, over last year, came in is related to the real estate business growth that we have. That business generates good fees. And that’s what we’ve seen in the result. A small reduction of 1% is almost I would call it a rounding impact because the strong as the strong sorry, the growth of commercial has been pretty strong over the last two quarters. So both of those quarters were very strong from a lending fee perspective.

Paul Holden

Okay, and then last question for me. As we’ve focused here a lot on the inventory finance businesses, maybe going back to the real estate finance business. I mean, from what I can read in terms of other banks and industry sources, it looks like the outlook there is very strong for the year ahead. So maybe you can give us your perspective on the outlook for real estate finance specifically?

Éric Provost

Yes, thank you for the question. It’s Éric. Right now, our real estate pipeline as highlighted in the opening remarks is, is very strong at 4.3 billion. So 9%, quarter-over-quarter increase. So we feel very comfortable right now with the demand level. The team is well deployed across Canada to benefit from, from that strong demand and we feel we’re very well positioned to continue originating in commercial real estate throughout 2022.

Paul Holden

Okay, I’ll leave it there. Thank you.

Operator

We’ll go next to Nigel D’souza at Veritas Investment Research. Your line is open. Please go ahead.

Nigel D’souza

Thank you. Good morning. I wanted to follow up on a line of questioning. If I look at your outlook that you’ve outlined on slide 28. Trying to dig a little deeper on your net interest margin forecast. Year-to-date you’re at 1.88 and you’re forecasting low [ph] of 1.9 and — if you could break down the factors driving that because you have a shift in loan mix towards commercial which should benefit more from rising interest rates. Anything else at play there that leads to the more conservative outlook either interest rate hedging or funding mix or anything else we should think about?

Yvan Deschamps

Yes, thank you. I’ll go back here Nigel to some comments I’ve done a few minutes ago but I’ll try to add color. And you can ask more if you want. So 188 is a pretty good result this quarter. And as mentioned, it was fueled by the growth we had in commercial. So you’re totally right about that. But specifically, as mentioned by Rania, inventory financing is a pretty good margin business mid-single digit, so movements in that portfolio does move the name as well. With the tempering of the volume in Q2, and the reduction in Q3 that will impact the NIM by a few basis points. So that’s why this year, our objective is to remain above 1.85. And at this point, we’re comfortable with that. The 1.90 that I think you’re referring is on the midterm. So as interest rates increase, depending of course, what’s happening from the competitive size and the portfolio mix, that’s more a midterm objective. But I agree that this quarter, we were getting close to 190. Next quarter, I would see the NIM probably being a few basis points lower than what we have this quarter based on the pipeline that we have and the competitive nature we see out there.

Rania Llewellyn

Yes, and just to add, the target for this year is greater than 1.85%. So we’re confident that we’re going to meet or exceed that target.

Nigel D’souza

Great. And how many [Indiscernible] assumptions are embedded in that medium term outlook for 1.9% on the NIM?

Yvan Deschamps

Yes, the 1.9% is definitely based on the portfolio mix that we anticipate having in terms of growth. So I cannot really go in much more detail than what we outlined by growing commercial about 45% in the medium term is definitely a factor there. And it does also embed some interest rate increases. So the market to be clear, did change a little bit from last week. So we’ll see how the interest rate increases play out. But we still expect for interest rate increases this quarter, two in the next — sorry this year, two in the next quarter, two towards the end of the year. So that will also help the NIM. But the main impact is going to be towards 2023, because two of those are only at the end of 2022. So the one above 190 on the medium term takes into account in the portfolio mix as well as the rate increases.

Nigel D’souza

Okay, got it. And if I could just finish on your credit outlook on PCLs the high teen number. And that’s above your PCL ratio, pre-pandemic. And is that entirely driven by a shift in mix and maybe higher inventory financing. And we also noticed that deceleration of commercial book was looked at elevated year relative to prior periods. So just any more color on why you expect higher credit loss provisioning, because then the risk adjusted NIM would actually be moving lower based on your guidance.

Liam Mason

Yes, thank you, Nigel. It’s Liam Mason. We have a very prudent disciplined approach reserve management; you saw that through the pandemic. And with our approach this quarter, the credit quality is really strong. We do expect as Rania said in her remarks, mid-teens, that that reflects the good underlying credit quality and also the business mix. You’re going to get ebbs and flows in that as the economic environment evolves. But we’re very comfortable with where we are today. I’m very comfortable with that, that target of mid-teens.

Nigel D’souza

On the high teens target for the medium term, any comments on that?

Liam Mason

It’s as the business makes evolves. And we take a very risk return based approach here at the bank. So if the PCLs were to trend up, we would expect that more than offset by additional revenues.

Yvan Deschamps

And if I can add one comment Nigel, I think you mentioned the growth of the inventory financing if it wasn’t backing this, it’s not related to inventory financing. It’s related to the change in the mix and commercial is usually a business that attracts our PCL. Yes, and that’s normal, but we’re going to get higher return and higher NIM going in that business as well. So overall, it’s positive. It’s not targeted to any single product.

Rania Llewellyn

Yes, and in the medium term as we build out our credit, credit card capabilities as well, that usually attracts a higher PCL, which is why we also are showcasing a little bit more high teens in the medium term because we’re, we’re pretty confident that once we launch our Brim solution and start marketing it out there, that portfolio will also grow.

Nigel D’souza

Okay, that’s helpful. Thanks.

Operator

We’ll go next to Marcel McLean at TD Securities. Your line is open. Please go ahead.

Marcel McLean

Okay, thank you. Most of my questions have been asked and answered already. But just looking at the credit a little bit deeper, the performing ratio was around six basis points this quarter, that is a little bit higher than it’s been, I think, in a more normalized environment. How do we think well, that’s one part is that the new mix that we’re dealing with, whether that should be a run rate I should expect in my model, or whether it was a little elevated, it could come down, sort of going for it by a few basis points anyways.

Yvan Deschamps

Yes, Marcel what’s really driving the performing ACL is the commercial loan volume increase, so it will move in tandem with that. I would note, though, that a portion of that was offset by the reserve release of 5 million that that we indicated. But it really is exactly as you said, driven by the mix.

Marcel McLean

Okay. Thanks for that. And then, I think that’s a — I have to actually. I think most mine were answered already. Thank you.

Operator

[Operator Instructions] We’ll go next to Joe Wong at Barclays. Your line is open. Please go ahead.

Joe Wong

Yes, good morning. Thank you for taking my call. Just a quick question on CET1 ratio. The 40 basis points drop in the quarter, it’s quite a step down. How should we look about the [Indiscernible] for CET1, and its evolution to the year, end of the year?

Yvan Deschamps

Yes, thank you for your question, Joe. So the 40 basis points as I mentioned, our first priority is first, in fact, off the bat. The first thing is we have a strong capital base, right. And that allow us a lot of flexibility. Second point is if you look at the flowchart that we have in the presentation, you’ll see that the reduction is coming from internal RWE [ph] deployment. And that came from the strong growth that we had in commercial.

So as previously mentioned, we have in fact that the rate or the of the CTE1 was high, with the fact that there was a reduction of that portfolio in the past, and we expected that it would get back. So we’re using that flexibility to grow the business which will benefit the profitability going forward. But as we mentioned a few minutes ago, we expect the growth of commercial to temporary in Q2 and in fact, reduce a bit in Q3. So the we would see the ratio of CET1 by the end of the year to relatively normalized level that we have right now, maybe a bit up or down. But the internal capital generation that we have on a quarterly basis now expects to feel normal growth of that business for the coming years.

Rania Llewellyn

And just as a reminder, Joe it’s calculated on a standardized approach as well. And so that’s an important distinction.

Joe Wong

Okay, so we should probably see it bounce around, call it the 10 to 9.8 level, which should be funded….

Yvan Deschamps

At this point, it’s I wouldn’t expect it to be around the same level that we have by the end of the year.

Joe Wong

Okay.

Yvan Deschamps

Joe remember, our internal capital targets are at 8.5% to 9%. That’s, that’s what we need to support the existing business. So we have a very strong capital level with adequate, more than adequate to support the business growth at this juncture.

Joe Wong

Okay, thanks for the added color.

Operator

We’ll take our next question from Lemar Persaud at Cormark. Your line is open. Please go ahead.

Lemar Persaud

Yes, thanks. I just want to come back to the line of questioning on margins and PCLs when I look at your slide 20 here. So I guess if you go from the 185 basis points and 190 on NIM, and then mid-teens to PCL ratio, it seems like seems like you’re adding additional risks of loan portfolio, but not really getting compensated for it. I suspect that you’re going to tell me that’s not the case. So maybe some helpful commentary on why this strategy makes sense would be very helpful. Thank you.

Yvan Deschamps

Thank you. You want to go? Thank you for your question. In fact, to be honest, that’s a question we get regularly. So I think we may have been a bit conservative on our expectations. That’s what the market is telling us. But we do anticipate that the growth that we have is definitely funding more than the PCL increase. So that’s, that’s definitely clear. And we expect that that’s going to grow as we move forward. So we’re going to reassess it at the end of the year and we’ll come out with new objectives.

Rania Llewellyn

Yes, so again, it’s the business mix. The key growth engines within commercial that will drive the higher potential PCL, as well as margins are really inventory financing equipment financing. We said in our strategy that we’re looking to continue to grow those assets, particularly in the U.S. And then I would say the other component is our, our credit card business as well. And so, at the time, when we were putting our strategy together, we were taking a prudent conservative approach. But that’s something that we will continuously revisit.

Lemar Persaud

Okay, then just on that line, on your answer there, what do you think is the more reasonable revision? The margin side or the PCL side? Or would it be both?

Rania Llewellyn

Lemar, I think we’d have to do some more analysis. And at this point, so we can’t we can’t provide any guidance at this point on that front.

Lemar Persaud

Okay, thanks. That’s fair.

Rania Llewellyn

All I can say is that we’re going to meet or exceed our 2022 targets.

Lemar Persaud

Okay, great, thank you.

Operator

We’ll go next to Marcel McLean at TD Securities. Your line is open. Please go ahead.

Marcel McLean

Thanks. Another follow up on the capital side. This is the first quarter you did a buyback in quite a number of years. Just wondering what the thoughts are on that going forward? Should we still have a bit of room on the NCIB? Do you anticipate completing it or how do you think about that decision?

Yvan Deschamps

Yes, thank you for your question. And you’re right. So that mentioned it. So we’ve done about 1/3 of the share buyback that we expect to do this year. And at this point, we believe we still have a strong capital and a good strategy to grow the assets in line with the capital. So we’re still comfortable with continuing the share buyback as we plan.

Marcel McLean

Okay, thanks.

Operator

And we’ll go next to Nigel D’Souza of Veritas Investment Research. Your line is open. Please go ahead.

Nigel D’Souza

Thanks for taking my follow up. I just wanted to switch to a different line of questioning on the capital markets. I believe you outlined that commissions and fees there, really the capital markets business was a bit softer. And I’m wondering, in the backdrop of your peers, posting pretty strong results for capital markets, exporters, is there something structural to that, and how do you set that performance to evolve as you action your strategic transformation for the business?

Kelsey Gunderson

Yes, thanks. Thanks for the question, Nigel, it’s Kelsey here. Yes, we had we had a solid quarter in capital markets in particular, on the fee side. I think what you’re seeing there is a bit of a normalization. Keep in mind we had a very big Q4 of last year. So we had a couple of big transactions close in the quarter. So the quarter-over-quarter comparison was a little bit challenged from that perspective, as well. But, we’re optimistic. The strategy hasn’t changed. We’re aligning our capital markets franchise, including our banking side of it with the rest of the bank under the one team approach. And so I’m optimistic that our run rate will continue through the course of the year, and we’ll finish off strong.

Nigel D’Souza

That’s helpful. And I’m going to ask a bit more faith, kind of granular question. But when I look at your balance sheet, interest bearing deposits with banks that jumped quite a bit quarter-over-quarter, I believe about 400 million or so. And that’s all in the short for duration, two to three month bucket. So any color, then what’s fighting [ph] that jump sequentially?

Yvan Deschamps

Yes, the deposits, we’re really happy with the performance, we have this quarter. It increased by $1.1 billion. And we do recognize that we have a need for a strong deposit base. And as mentioned, we – our objective in 2022 is to grow that in line with the asset base, and in fact, with the loan base, and that’s what we’ve done, in fact, a bit more in Q1. The biggest increase this quarter came from deepening and extending the relationships that we have in Advisors & Brokers. So we’re really working hard in that segment to increase and continue to build relationships and this quarter, we have pretty good results on that side. So we intend to continue doing this. And we already look forward for additional relationships.

Nigel D’Souza

Okay, that’s it for me. Thank you.

Operator

[Operator Instructions] With no other questions holding, I’ll turn the conference back to Rania Llewellyn for any closing remarks.

Rania Llewellyn

Thank you. In closing I’m pleased with our strong results this quarter and the momentum we are building as we head into Q2. Our one winning team is engaged and focussed on putting our customers first and executing against the bank’s new 3-year strategic plan to deliver profitable growth and drive shareholder value. Despite the uncertainties in the market, we are confident in our ability to continue to meet or exceed our targets this year. Thank you for joining the call today.

Operator

Ladies and gentlemen that will conclude today’s conference. We thank you for your participation. You may disconnect at this time.

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