EQB Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to EQB's Earnings Call for the Q1 of 2023 being held on Wednesday, May 3, 2023. At this time, all your lines are in listen only mode. Later, we will conduct a question and answer session for analysts and instructions will be provided at that time on how to queue up. It is now my pleasure to turn the call over to Richard Gill, Vice President of Corporate Development and Investor Relations at EQB.

Operator

Please go ahead, sir.

Speaker 1

Thanks, Michelle. Good morning, everyone. Your hosts today are Andrew Moore, President and Chief Executive Officer Chadwick Westlake, Chief Financial Officer and Ron Trach, Chief Risk Officer. For those on the phone lines only, we encourage you to log on to our web to review our company's quarterly investor presentation. The presentation includes on Slide 2 EQB's caution regarding forward looking statements as well as the use of non IFRS measures on this call.

Speaker 1

All figures referenced today are adjusted where applicable or otherwise noted. It's now my pleasure to turn the call over to Andrew.

Speaker 2

Thanks, Richard, and good morning, everyone. This was a milestone quarter for EQB. Our direct customer relationships surpassed $500,000 We We achieved more than $100,000,000 in quarterly earnings for the first time. Performance allows us to see how strong we've become as a bank. We marked our Q1 results with Concentra, which is already proving to make Equitable an even better bank.

Speaker 2

We are particularly enthused by our engagements with credit union partners with whom we share a core customer service and challenger philosophy. And EQ Bank was named Best Bank in Canada by Forbes on their annual ranking of World's Best Banks for the 3rd straight year. You would expect me to attribute performance, including ROE of 16.9 percent to our differentiated value creation approach, Long term strategies and award winning digital capabilities, and I will. But these accomplishments are rooted in the hard work of our team across Canada in keeping customer service at the very forefront, while very effectively managing risks and opportunities. Thank you all.

Speaker 2

Understandably, our business outlook remains positive and I will speak to it shortly. But before that, I want to acknowledge the continued strain on some banks to help investors understand why that statement is true. On credit, I want to offer additional context on our commercial real estate lending. With approximately $26,000,000,000 in loans under management, I am proud of our commercial loan portfolio and the team driving this diversified business. Here we prioritize Lendly against multifamily rental properties, including affordable housing, where demand is strong and resilient.

Speaker 2

We're the largest securitizer of CMHC multi unit mortgages in Canada and over 2 thirds of our commercial loans under management are assured by CMHC. On uninsured commercial loans, we require strong personal and corporate guarantees and restrict LTVs. With heightened focus on the risks in the office property market, you should also take comfort that less than 1% of total bank assets are loans to office properties. Of that small portfolio, the average LTV is 59% and even more protection comes from our focus on vocational offices occupied by dentists, doctors and other service providers. These offices are vital to the delivery of patient care and the generation of income for their tenants who cannot displace physical space by working from home.

Speaker 2

Our exposure to hotel, shopping malls and big box retail is negligible, not a lending priority and far less than 1% of assets. Commercial Banking represents about half our earnings and is a proven business worthy of shareholder confidence. When it comes to liquidity management, we always operate prudently and well above regulatory guidelines and even higher than bank peers from our review of their disclosures. Great execution of our multi year strategy to diversify our sources of funding and that is further strength and stability. You're aware of the growth of EQ Bank Deposits.

Speaker 2

What you might not know is that we generally limit EQ Bank Deposits to $200,000 per account. Our approach effectively reduces concentration exposure and runoff risks, While giving us customers confidence, a large part of their money is protected by CDIC. We believe strongly in support to CDIC insured deposits and we've taken a public stand advocating for higher coverage limits. I'm pleased to see others take up this call during the past few weeks. 95% of our deposits are term or insured.

Speaker 2

I can assure you the positive trends in deposit growth and stability continue today, recognizing our quarter ended March 31 and April continue to reflect strain on some banks locally. What I'm saying is bring you out to date, you would see no deterioration on liquidity. Kadwitt will add more context on liquidity and funding in his remarks. The last point I want to touch on is interest rate risk. This has been a deep well of troubles at some U.

Speaker 2

S. Regional banks. Our advice is derived from how our treasury team manages interest rate risk in the banking book and alignment with our low appetite for market risk. We operate with a target duration of equity of approximately 1 year as a means of tightly controlling exposure to interest rate interest movements. Another way to look at it, we don't take a view on rates.

Speaker 2

We consider the sensitivity of changes in the economic value equity to be the most important measure. Table 19, our Q1 MD and A shows our sensitivity modeling to immediate and sustained interest rate increases and decreases. Here you will see that 100 basis point increase in interest rates, the EVE impact as a percentage of common shareholders' equity would only be 1%. This demonstrates very well managed interest rate exposure. Turning now to our perspective on the Canadian housing market.

Speaker 2

With the Bank of Canada holding its policy rate steady, We're already seeing signs of price stabilization and increased activity in the housing market. We expect this to continue. Fact, it was very encouraging data from the Toronto Real Estate Board just yesterday confirming this view. In Q1, uninsured single family origination volumes were $1,100,000,000 and the portfolio grew 1% over Q4 or 33 percent year over year to $19,200,000,000 assisted by lower attrition, aligned with our expectations for the first half of twenty twenty three. Certainly Alberta and British Columbia have been bright spots in the national picture.

Speaker 2

We had an excellent quarter in multiunit and continue to see stable growth within the conventional commercial. Ensure multi unit mortgages under management increased by $992,000,000 to $17,000,000,000 Although the on balance sheet amounts was lower due to higher securitization on the CMHC's programs and derecognition in the quarter. All in, we are holding to our overall commercial portfolio growth guidance. For EQ Bank, it's particularly exciting to see progress unfolding customer engagement with our EQ Bank payment card, now in the hands of more than 40,000 Customer has already been used in over 115 countries. Our successful Quebec launch and the continued success of our MakeBank campaign.

Speaker 2

Hopefully, you've had the chance to see our marketing investments at work. Our MakeBank campaign Brings to life just how fed up Canadians are with all the takes and happens in the world from surge prices to bank fees and shows how EQ Bank is here to help them make with no fees and high interest on everyday banking. It's really working. Millions of Canadians have seen it a key moment from the NHL playoffs to riding the Streetcar to work. We are building franchise value and phenomenal brand recognition, creating demand with great early payback.

Speaker 2

Forbes once again named EQ Bank Best Bank in Canada on its curated list of the world's best banks for the 3rd year running, with customers rating especially highly for digital service, driving home the point that we have something very special going on. We're consistently adding hundreds of new accounts every day, Such as EQ Bank's customer count is now approaching 350,000. This growth in customer reach and public profile has been coupled with customer engagement at a record high of 51% and transactions increasing 54% year over year. Giving customers a physical EQ Bank to hold in their hands and wallets is reassuring and provides tactile proof that we are real and substantial. This is helping us drive the effectiveness of our advertising.

Speaker 2

We're also seeing more Canadians doing direct payroll deposits, another tangible sign of growing confidence and awareness that this is the very best digital bank in Canada. Next up is the launch of our Iki Bank mobile wallet for the card, which we plan to have in customers' hands this summer. I'll profile the value of that development on our next call. I can assure you that when it comes to credit, liquidity and interest rate management, We are as prudent as they come and we have been for years. Exceeding $100,000,000 in quarterly earnings is a special milestone to me as I remember reporting earnings of $8,000,000 in Q1 of 2007 and as a newly appointed CEO thinking that was pretty darn good.

Speaker 2

What's even better is that the more we've grown, the more evident it is that the bank's approach to both managing risk and bringing new forms of value to our customers' work. We plan to keep following this philosophy. Now Chadwick.

Speaker 3

Thanks, Andrew. We set out to make 2023 our best year yet in Q1, but it's firmly on track. This quarter was another display of our return on equity value creation strategy in motion across all key earnings metrics. Before I get started, some items of note for Q1 disclosures. This quarter includes 3 months of results from Concentra versus 2 months in Q4, following our deal closing November 1.

Speaker 3

Concentra's integration plan and synergies are on track, producing earnings accretion, I'd say ahead of early targets. There was a lot less noise in our numbers than in Q4 when we booked large one time items as required under IFRS, particularly to account for credit loss provisions once we close the acquisition. Q1 adjustments included $4,800,000 related to integration costs, down from $36,900,000 in Q4, dollars 3,200,000 in net fair value related amortization and $1,500,000 for intangible asset amortization. Our integration spending is in line with guidance and the difference between reported and adjusted expenses will continue to narrow in the next couple of quarters. Effective for Q1, you will see a change in how we present our single family mortgages.

Speaker 3

The term alternative as a representation of our single family lending did not appropriately capture the high quality of our book and borrowers, and we have removed this reference. We focus on B-twenty lending to Specific higher growth segments of customers frequently underserved by the largest banks by working with thousands of deeply valued mortgage broker partners across Canada. And we invest more in underwriting and leveraging our many years of experience here. The outcome is reflected in our margins and lowest credit losses among peers. You will see 2 categories in our disclosures go forward, single family insured and single family uninsured.

Speaker 3

These adjustments will be even more relevant when we become an ARAB Bank. I want to hit 5 key themes now before we move on to questions from our analysts. 1st, margin and revenue second, our funding profile 3rd, credit risk management 4th, expense trending and finally, some points on 2023 guidance. Jumping right in, Our proven approach to pricing all lending with our ROE calculator, continued tailwind from our funding diversification, plus many other treasury considerations generated solid sequential and year over year top line growth. Net interest margin expanded 5 basis points over Q4 with growing asset yields as you see in our MD and A, better than expected prepayment income and payback on our funding strategy, including the benefit of a lower deposit beta anchored in EQ Bank Deposits.

Speaker 3

This margin expansion was ahead of expectations and also reflects strong momentum of our Concentra integration. As an outcome, net interest income increased 8% over Q4 and 45% year over year. And then non interest revenue increased 71% over Q4 to 11% of total EQB revenue for the quarter. The sequential increase in non interest revenue has a couple of key components. 1, growth in fee based revenue of 33%, reflecting the full benefit of a full 3 months contribution by Concentra and 2, gains on sale and securitization income up 55% over last quarter with momentum we believe can be sustained in 2023 and reflects both volume and margin growth.

Speaker 3

We recorded a lower loss on strategic investments The quarter sequentially, but the mark to market accounting loss of $2,600,000 compares to nearly $16,000,000 in gains in Q1 2022, which at that time reflected significant one time mark to market benefits. Combining NII and NIR, Total revenue increased 13% quarter over quarter and 40% year over year to a record $265,000,000 Now some points on funding. The diversification of our funding stack has expanded materially over the past several years across direct and wholesale options, combined with a maturing credit profile and rating. We can dial these funding stack levers based on availability and pricing. We have de risked the bank well without an over reliance Any single key funding source.

Speaker 3

As we avoid interest rate misalignment with a matched funding focus and sticking to our duration target as Andrea outlined. We're not only well covered from a liquidity perspective, but strategically, we are positioned to have more tailwind in our funding costs as we focus on additional diversification plus credit rating expansion. The most significant reminder is EQ Bank, which again is the anchor for our lower deposit beta. We continue to believe in the value of this franchise and why customers choose EQ Bank for much more than rate. This adds resilience to these Stable and growing deposits that are primarily term and or CDIC insured.

Speaker 3

Compared to last quarter, EQ Bank customers increased by another 9%, Deposits by 2%, transactions 34% and engagement up to a record 51% with an average of 2 products per customer. As a reminder, engagement includes active customers with more than 1 non zero balanced product and multiple transactions over the past 30 days. Other sources of funding continue to grow and there's much more to launch that I'll speak to in coming quarters. You could likely expect to see us in the covered bond market in Europe in the near future to expand this low cost source of wholesale funding with capacity that's expanded as an outcome of our growing assets, including Concentra. As a reminder, we're the only bank in Canada outside of the largest 6 banks with a European covered bond program.

Speaker 3

Now to credit risk. Q1 PCL was $6,200,000 while $1,500,000 lower than Q4 and higher than the net P and L benefit of $125,000 in Q1 2022, which at that time was a result of reversing provisions taken during the COVID-nineteen pandemic. Our allowance for credit losses or ACL net of cash reserves increased 1 basis point over Q4 to 19 basis points. A positive for Q1 was a $2,300,000 PCL recovery from 1 commercial loan. Other changes in PCL reflect portfolio growth, shifts in macroeconomic forecast that were more positive than anticipated and a Stage 3 provision that was $1,200,000 higher than Q4.

Speaker 3

The increase in Stage 3 is not part of a trend we're seeing in delinquency. This mainly relates to a provision on a couple of commercial loans. The outcome of the ACL change was an increase of 5% to $87,000,000 over Q4 and total net ACL net of cash reserves. The change looks larger on a year over year basis because of the addition of Concentra Bank allowances in Q4. I mentioned on our last call that we were expecting to see an increase in impaired loans, and we did.

Speaker 3

Our gross impaired loans increased $18,300,000 or 13% quarter over quarter to $156,900,000 We remain of the view that we will experience an uptick in impaired loans over the next couple of quarters, which is natural at this point in the credit cycle, but we do not expect these will result in losses because of the way we manage credit and recoveries. It's important to also remember that for single family uninsured lending in the personal bank, the average Beacon score for new originations is about 732. The average LTV on the portfolio is 65%. We only conduct B-twenty lending and we continue to focus on lending in key urban areas with favorable population and economic growth trends, where job creation opportunities are significantly diversified. An outcome of this design is our loss rate remains at the lowest of all peers, which is a function of a deeply embedded risk management culture.

Speaker 3

EQB remains well reserved for credit losses. We always actively manage to our principle of lending to not lose money. Overall, our credit book remains in good shape despite the economic backdrop. Now to non interest expenses, which increased 18% over Q4, you can attribute a lot of this to Q4 only including 2 months of Concentra expenses. The benefits from Concentra synergies are flowing through, but we expect it will take a few more quarters to return to a more normalized EQB efficiency ratio versus our 45.4 percent in Q1.

Speaker 3

As a reminder, we're integrating a near 70% efficiency bank into the most efficient bank in Canada. So that takes time per integration plan and this is great progress so far. Our efficiency ratio remains a secondary measure. Our focus will always be 1st and foremost return on equity, the true financial performance North Star. In general, year over year comparisons are difficult due to the acquisition, particularly to frame operating leverage given we report consolidated results.

Speaker 3

To help, I would expect more limited growth in FTE compared to past quarters, But with continued acceleration of EQ Bank, you will still see scaling in product, marketing and technology investments. This includes the MakeBank marketing investments, And we're so pleased that Canadians are truly responding to the less take, more make message engagement is showing in a significant rise in daily customer growth so far in 2023. In closing, we reaffirm our 2023 guidance. When we report Q2 results, we will calibrate that guidance to account for a 10 month reporting period for 2023. This reporting year change will allow us to align with our Canadian bank peers as we announced in February.

Speaker 3

Fiscal 2024 will start for us on November 1, 2023. This means We will not report a 3rd quarter and there will be 1 4 month reporting cycle to close at 2023 to be reported in early December. This is a common approach in practice when companies change reporting years. We guided to more muted portfolio growth in the first half of the year, which translated We continue to have conviction in our targets for the second half of the year on a calendar basis. We expect stability in these margin levels for the rest of 2023.

Speaker 3

For PCLs, we expect trending similar to portfolio growth in coming quarters and stable trending in ACL as a percentage of lending assets, assuming no material additional changes in forward looking indicators. Our mature and leading challenger bank approach delivered all time record earnings, And we will remain focused on executing for investors while making steps to close this remarkably large discount to fair value in our share price. Now we'd be pleased to take your questions. Michelle, if you can please open the line.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Your first question will come from Meny Grauman at Scotiabank. Please go ahead.

Speaker 4

Hi, good morning. I wanted to start off by just asking about the margin and just isolate some dynamics there. Specifically, wanted to understand what the impact of The full quarter of Concentra was on the margin and also the impact of prepayment, if you're able to isolate both of those impacts.

Speaker 3

Yes. Thanks, Manny. Good morning. So when we went into the integration, we knew we were bringing a lower margin bank. And we actually as we looked at repricing and the overall funding costs, bring them onto our stack, we've moved at a faster pace than expected.

Speaker 3

And I'd say, I'm not going to say that was 20%, 25%, 30% of it, but that certainly contributed to it plus prepayment income, you could say, was a couple of 1,000,000 higher than expected. But overall, that the lower deposit beta continue with EQ Bank. So we add all those up and you got to that expansion. And I think part of this is again is the integration moving a little bit faster and some of the uptick in housing market activity, which is what you see also translate in some of that prepayment increase. Andrew, if you'd say anything

Speaker 5

else you're saying?

Speaker 6

I think it's always a bit complicated to pull the numbers at the top of the stack, maybe to give you a good debrief, but Those are the 3 kind of key variables that I think is driving things. Certainly, the deposit beta is something I'm particularly sort of proud of, and I think that goes to this The fact that we're driving all kinds of value in EQ Bank is creating an opportunity for us. Yes.

Speaker 4

Just to understand The dynamics better around Concentra specifically, was it still an overall drag? And you're saying it was just the drag was just less than you expected? And It could explain like you're basically able to reprice that book faster than you expected. Is that the right way to think about it?

Speaker 2

I think that's right. Certainly, one of

Speaker 6

the bigger categories, our team has been quite successful in bringing the same kind of ROE discipline that As you know, it always takes time to reprice their portfolios, but they have they were a bit more, I think, organized about it as we Completed the acquisition and therefore it got traction quickly quicker than we were probably projecting to you.

Speaker 4

And Andrew, you talked about deposit betas. Do you have any sense that over time that, that We'll change for the worse. It looks like definitely the Bank of Canada is on hold here. So Could we be in a situation where asset pricing kind of levels off, but on the deposit side, you will see upward pressure here on the margin?

Speaker 6

I think you're seeing the big banks, seeing the deposit beta not being quite as attractive as they would have hoped. But of course, our gap we have a pretty big gap Between them and us, so I don't really see that. But it will be an interesting question as to how fast Some of our everyday bank accounts that pay really great rates of interest when the bank kind of starts to Ease rates how fast we can move to sort of go with them. I would expect that broadly speaking, we're going to sort of track the Bank of Canada downwards in those accounts. So I'm hopeful that, that wouldn't be an issue, but clearly the market dynamics can change.

Speaker 6

As I mentioned in my remarks, We are already seeing a lot of really great traction with the broader value of the EQ Bank platforms at great rates on U. S. Dollars, Canadian dollar exchange rates, But we've been moving the money around the world, being kind of more integrated part of your financial life. So I'm hopeful that the value you're seeing there will allow us to be Roughly good on deposit beta thresholds.

Speaker 4

Thanks for that. And then just to follow-up on Concentra. A few times you referenced sort of early positive signs and things moving faster than you expected. How do we understand that? Like what was it just Your initial estimates were overly conservative, but sort of on the ground, what is actually driving that what's better than what's actually making that better than expected happen?

Speaker 6

Well, I think it's mostly on the cost side that I'm seeing that sort of I mean, I think we all know when we took the 2 banks together, there's a lot of duplication. You can take those costs out. Let's get this is by far the biggest acquisition we've ever made. So We approached it with a sense of caution. It made sense even with a more cautious outlook.

Speaker 6

And I think it's just it's true that our teams and the Concentra team has done a HR better than I might have expected, but it's very hard to prejudge how an untested team in this kind of complexity execution would do, but I think the reality is we picked up some really great people through the great people to join the team is probably better way to say Through the acquisition, they've been incredibly constructive in making this all happen for us. We're breathing well that there are levels of value to pull and our own team have been really on top of all the detail. And there's so many moving parts, many that's one of the challenges sort of integrating that up into a message we communicate to you to more broadly the top of the house is actually a bit of a challenge. But I can tell you is every detail has been dealt with that the net net and all that is adding up to a great story.

Speaker 3

Yes, I think that's right. Even with the balance sheet both sides of the balance sheet Even more resilient with growth than expected. And remember, it's even how you think of the accounting for when you do these acquisitions, right? When you think of fair value amortization of loans and deposits and how the actual process works, that's been a little more constructive than that. All that shows through margin as well, Matt.

Speaker 4

Thanks.

Operator

Your next question will come from Mike Rysanovich at KBW. Please go ahead.

Speaker 7

Good morning. Just wanted to get some color on your outlook for commercial lending in the near term, different performance in different categories within that portfolio. But just with respect to where we are in the economic cycle, do you think you can still keep Pushing ahead with some pretty decent growth. And are you seeing or are you expecting to do any sort of runoff with the Concentra assets that might impact What your near term outlook might be?

Speaker 6

There certainly is some modest runoff. Let me just start with where you finished there. There's some modest runoff on Concentra assets as we're Repositioning the book to their book to things that are much more traditional to our way of thinking. That's pretty modest in the overall scheme of things, frankly. So yes, we continue to see opportunity.

Speaker 6

As we our commercial business, and we've tried to really Drive this home in the remarks is really about multifamily housing. I mean that's what drives it. And so the Ability to fund the construction of apartment buildings, whether CMHC insured or otherwise, people buying apartment buildings Turn them over and improve the general structure and improve rents with that It's really an interesting business. You've seen rent increases in major Canadian cities, which have been expressed as obviously A concern on the one hand around affordability, but clearly opportunity for us to support developers buying buildings, Premium buildings, expanding buildings and so on. There's some really interesting data that CMHC is putting out that shows you the difference between the rent that people are paying on average and where new rents Our individual units, when you think through the capacity of that to support the building and new buildings and improve existing infrastructure, which is really where we play.

Speaker 6

I'm pretty optimistic about how it looks.

Speaker 7

Thanks for that color. And then Chad, I just wanted to circle back on the margin real quick. Not to harp on it, but I think we were all expecting A little bit of a decline sequentially. Is it possible to just delineate between your underlying margin if you exclude Concentra? I would still imagine that you would have had the lower spread business impacting you in a negative way at least to some degree in the quarter.

Speaker 7

Can you sort of delineate between just those 2?

Speaker 3

Yes. My couple of short answers would be EQBEX Concentra would have expanded As we did expand either way, so that trend was consistent. Prepaidment income, and again, I gave a couple of million attribution of that when you break that down by margin. And then some of this well as not only the resilience of the business, but what I mentioned to many as well when you look at the actual acquisition accounting, there are certain considerations with fair value amortization of loans and deposits and how you actually Do sell this up on the balance sheet. There's some more positive tailwind there as well.

Speaker 3

So there's a the difficult part with margin is, as you know, it's not as simple as people expect. It's not just the asset The deposits, you got prepayment again as expected. And I think you're seeing some of that as well when you even look at the median seat, how some of the housing markets are up ticking and people are actually Looking again to refinance and actually take on your mortgages, you see some of that translate in prepayment. And then again, you have other variables that come in On the fair value side, that come into net interest margin. So those are a couple of the ingredients, but I'd weigh to acquisition accounting, concentra stability, prepayment and then the core EQ business continuing to expand supported by the lower EQ Bank lower deposit beta as well that's continuing Remember even that last rate hike again, we held EQ Bank steady.

Speaker 3

We're not chasing campaigns. So that stability consistency is translating all wrapped around our ROE calculator approach.

Speaker 7

Got it. And just real quick, so the $2,000,000 excess prepayments that you had in the quarter, are you expecting that To sort of linger in that elevated level going forward or do you think some of it comes back?

Speaker 6

I don't think I wouldn't describe that as elevated level frankly, The housing markets are really cool through the back end of last year. That prop below, it was one of the surprises on the negative side last year. So I think it's really a case of getting back to more normal events. So I certainly generally, of course, you see more seasonal flows in this Next couple of quarters. So I would expect this to continue for a while.

Speaker 8

That's right.

Speaker 6

Thanks for the answer.

Speaker 3

Absolutely. It's Mike. A little bit closer to how much exactly as Andrew said.

Speaker 6

Thanks very much.

Operator

Your next question comes from Lamar Persaud at Cormark. Please go

Speaker 8

ahead. Yes, thanks. I'm going to start off on margins. Just bolting on to the previous questions there. I think you answered most of what I'm about to ask, but I just want to throw it back to you guys.

Speaker 8

So what factors evolved more favorably than expected during the quarter? Was it limited to the impacts of prepayments and More positive evolution of Concentra, including some of those accounting adjustments you talked to Chadwick? Or was there any other factors that contributed to that five basis sequential increase versus kind of the slight decline we were expecting into Q1 because this is a sharply better result than we were expecting 2 months ago. So I'll put back into your quarter if there's anything else.

Speaker 3

Yes. No, I'll just repeat again, Lamar. I think as well when you look at the yield tables in You'll see some of that positive movement as well in the asset yield. So good growth in that conventional lending, which again we focus on. So some of that was as expected, a little bit better than expected.

Speaker 3

You see that even with some of our newer portfolios like consumer lending. Again, normalization of prepayment income, as Andrew and I just hit, Concentric stability in some of the repricing better than expected. And they're including some of the resilience of that some of that lower source cost of funding as well than expected. And then some of it as well is how some of the fair value amortization of loans and deposits shows up through margin and that will stay around for a while as well and that's That you can attribute to Concentra. So core business expansion plus some of these factors like prepayment normalization, amortization loan deposits and the strength of the yields All coming in a little bit better than expected.

Speaker 3

And it shows the fortitude in our execution, to be honest with you. Yes. I think

Speaker 6

the only thing that I think We were being a little bit conservative and perhaps it might relate to the surprise as well as there's not increasing rates in EQ Bank as the bank moved. So we were being a bit conservative about that deposit beta.

Speaker 8

I think

Speaker 6

where we've landed in that is it's great everyday rate for your operational accounts to be paid 2.5% on interest and we provide all the Functionality you would otherwise get from a checking account. If you are leaving money and expect to leave money in the account for a longer period of time, The move is into a term deposit, which is really easy to do off the app. So I think that's The trade and we are seeing a bit of movement into term deposits within the EQ Bank platform, which I feel very comfortable with. You lose a little bit of what you win in funding stability, you potentially lose a little bit of margin there around that deposit beta. It's a subtle thing and we're constantly tuning it.

Speaker 6

So it's even when the budgeting teams come to us to ask to sort of think about how to think about that. Think we've probably built in a bit too much conservatism there historically. Got you. And then moving on to

Speaker 8

the gains on sale, probably for Chadwick. I think I heard you suggest that You can maintain some gains throughout 2023. Is that true? And if so, at this $14,000,000 quarterly level and then kind of what gives you the confidence in that because it does seem quite elevated to me at least in Q1.

Speaker 3

Yes, absolutely, Lamar. So the we have an incredible team. Remember, we're the largest securitizer of multi residential insured lending in the country. We have great expertise In this and what so a couple of things you see is that the amount we did in volume was it's getting to the point of nearly equivalent to what we did an entire year in the And with what's happening with originations in the market, we do think we can continue that. Some of the margin expansion is there.

Speaker 3

And I think I would expect to see some consistency in The overall line in the next quarter. And then probably through to the end of the year, then we'll revisit that guidance for 2024, but this is a core expertise. This is a core we call this core earnings too, right? We didn't strategic investments is stripped out, but those core gains on sale are part of our expertise.

Speaker 6

Yes. It has to be on a structural sort of positive structural shift in this business over the last 18 months where we set up Equitable Trust, we have a trust company subsidiary that's also securitizers from multis, which has given us much more capacity using Aggregated capability and aggregated in the technology. So the volumes will continue to be higher structurally compared to where they would have been 18 months ago. So it's and We do have the benefit through our other activities of creating a pipeline of future loans to go into this part of our business. The ability to help somebody build a building through a CMHC insured construction loan, for example, and then take it through the It's really proving to be a valuable business and also going to give us more comfort in the source of business going forward.

Speaker 8

Got you. And then last one for me, just on the office exposures generally and that 59% LTV, how often do you guys revisit the valuations on these office properties? And how do you kind of manage the credit risk generally?

Speaker 6

On the sort of revisiting price, we there was revisiting value in LTV. We would each property would be revisited once a year on a kind of rolling cycle when Coming up for annual review, so it's not quite as easy to kind of capture the data as we would with single family where we use HPI to update the entire portfolio recorder. So having said that, obviously, it's a fair conservation So margin of conversation, we're going to go up of the safety, 59% LTV. So I would say There's not a lot of liquidity in the office market right now. So I think you're sort of cautioned around that.

Speaker 6

The words of caution I'm sort of hearing is entirely merited. We're very keen to sort of manage credit risk carefully These types of properties, we think we can be, if need be, a good owner of real estate. So we would we are people that would think about releasing space, Getting NOI up and then remarketing on a sensible basis as opposed to I think other banks would take the sort of remarket As is where is and get the best value and take an early loss, I don't think that is the approach. To be clear, we don't think we have any office properties under management right now, but that is the approach we would take. As you mentioned, it's less than 1% of our assets and we feel pretty comfortable with it, especially when you look at the types of tenants In these buildings, most of it's multi tenant, dental practices, doctors practices, financial planners.

Speaker 6

So fairly diversified tenants That give us much more comfort than perhaps you've had large commercial tenants that could go could have actual stresses or business model challenges or Maybe the people don't want to come to work because they don't really want the space. So we feel pretty good about the asset selection in that business. As I mentioned, it's not a preferred asset class and you can see that terms of what a very modest portfolio it is and within the overall scheme of the bank.

Speaker 8

Thanks. That's it for me guys.

Speaker 6

Thanks, Mark.

Operator

Your next question comes from Etienne Ricard at BMO Capital Markets. Please go ahead.

Speaker 8

Thank you and good morning. On funding, could you please remind us of initiatives and assumptions supporting a pickup and deposit growth at EQ Bank in order to meet the guidance for 20% to 30% growth in 2023.

Speaker 3

Gary, just curious, did the funding levers that changed or is there some of what work is happening under EQ Bank to support that growth?

Speaker 6

The assumptions around growth is what I had. I wonder if you could Reaffirm the question there.

Speaker 8

Yes, just the more broadly the initiatives and assumptions underpinning your guidance for 20% to 30% growth in deposits at E2 Bank.

Speaker 2

Yes.

Speaker 6

The initiatives are very clear. As we talked about, we launched in Quebec around the beginning of the year. We launched it in Quebec in last year, so we did have no customers until December in Quebec. And then in January, we launched our EQ card. So both of those are driving the improvement in the addressable market.

Speaker 6

And then we've been much more aggressively putting advertising Collateral to market, which you've seen with our MakeBank campaign, we have actually been putting fairly significant advertising collateral to market around the The Leafs 1st and second round playoffs. So that's really getting some traction in terms of kind of average customer Counts increasing. So our customer it is a I don't know if we revealed publicly how many customers and we're expecting to add this year, but Broadly speaking, every customer we pick up ends up with an average balance around $20,000 So As we add new customers, it's driving that deposit growth.

Speaker 8

Understood. On the topic of banking stress in the United States, I recognize this is an evolving situation and It's happening in a different jurisdiction. That being said, in Canada, how do you think about potential regulatory implications on risk weight, liquidity requirements and also insured limits at CDIC.

Speaker 2

Yes. So I think it's very important for

Speaker 6

us to think about structural differences between the Canadian banking market and the U. S. Banking market. In particular, there's been a flight of cash out of commercial banks of all types in the United States into money market funds who then turnaround and can post the money directly at the Federal Reserve. In Canada, essentially, deposits leave 1 bank, They have to go to another bank.

Speaker 6

There isn't such a facility as it enabled. So I think that makes the entire system structurally sounder. So I think that is a really, really important thing to think about. The other thing for those of us sort of banking geeks, I thought the Federal Reserve's Report on SVB that came out last Friday is sort of a primer on what how to not run a bank. And I think unfortunately A few banks that are being run this way and they were set up to be very fragile.

Speaker 6

And so when you put stress on them, it's very difficult. And I think if you could if you read that report and you compare what we've been talking about around the resilience of our bank, You'll see that it's really distinctly different, in particular, the interest rate shock and the way that certainly very high limits And then also even breaching those limits is stunning and startling and shocking. And we knew about these things coming out of financial crisis. We should not have been no bank should have been set up In terms of regulatory reform, I don't know. I think I hope they're thoughtful about it because my own view is That supervisors and the regulations deal with a lot of these things.

Speaker 6

You just need to have good supervision and good management of banks. Why that failed in this case It's disappointing, and I think but I think before we reach for changes to the rules, we really need to understand that. Frankly, obviously, he does a great job A lot of these things, including more recently putting out a draft guideline on culture in banks, which seems to me is sort of potentially at the root of the problem. CDIC insurance, though, I do think I'm optimistic that we will increase the levels of CDIC insurance. Michael Magnolia, our General Counsel, and I repend the note in the first Not the New Year, so long in advance of these challenges in the U.

Speaker 6

S. Are calling for higher CDIC insurance limits. And we do know that CDIC is now looking at that. I'm not saying, by the way, those two events are linked, but CDIC is considering its coverage limits. So I'm optimistic that over the next That's a while.

Speaker 6

We'll see increase in that.

Speaker 8

Thank you very much.

Operator

Your next question comes from Geoff Kwan at RBC Capital Markets. Please go ahead.

Speaker 8

Hi, good morning. Just wanted to go back to the multiunit residential, Your view on terms of being elevated, is that a function of just higher market activity? And is that more New apartment construction versus sales of existing properties, but also 2 is it also a function of I know you talked about also having more capacity to be able to do more through aggregators and whatnot.

Speaker 6

I think It's mostly that, frankly, that's a structural improvement in capacity. In the past, it's not been the ability to get the loans or The asset has really been the ability to find capacity to fund them that's been our binding constraint. And so Some of these moves we've opened up the capacity within the system for ourselves to allow us to support our customers with higher volumes. So yes, I think there is good activity in the market because a business that might have been done historically as conventional loans is moving more and more into the CMHC channels. But so the overall market is increasing.

Speaker 6

We're definitely increasing share within the market Becoming a much more relevant player than we ever have been.

Speaker 8

And just my other question is, as we're heading through the Spring housing season and your comment of seeing some prices and we're seeing that in the market go up. Are you seeing anything from the competitive standpoint, Whether or not in the primary of the Altay space, on rates, and to the extent in certain parts, players could probably play with

Speaker 6

I haven't really seen that frankly. The players are the same on amortization. I think for all of us in the prime market prime by the way it's almost irrelevant to your thinking about Equitable as an investment vehicle although We have a good team there and it's a nice business within our framework, but it's not particularly relevant to driving the bottom line. That's a thin margin business. I think it's been a challenge for all of us to participate in that space with the volatility and interest rates to actually be pricing properly and thinking about where margins need to be.

Speaker 6

In general, I'd say the margins have widened a little bit, but I think it's really because of broad trend to make sure we don't get caught offside with a change in interest rates. The competitive dynamic in the more traditional space of conventional single family continues to be the same. Essentially, we have 2 or 3 significant players and I'm not seeing competitive behavior that seems strange. The one thing, of course, that's overriding us and really doesn't influence us at all is some dialogue around a couple of the big banks at least having variable rate mortgages that come negative and I know causing some concern in some circles. We don't have that.

Speaker 6

We have arms that reprice or amortize still maintain a positive Amortization, yes.

Speaker 8

Great. Thank you.

Operator

Your next question comes from Stephen Boland at Raymond James. Please go ahead.

Speaker 8

Thanks guys. Andrew, you kind of just touched on what my question is going to be in terms of what are you seeing in terms of renewals? Like how are you dealing with Your customer base, especially on the single family in terms of retaining those clients with the higher rates, what's There are sticker shots still in place for some of your customers. I'm just trying to get a better sense of what that retention and Renewal looks like that process.

Speaker 6

Yes. I mean, in terms of the renewal percentages, We're increasing here. We're doing a higher percentage than we ever have. So that part is good. There's no doubt that this sticker shock on part of our customers.

Speaker 6

I mean frankly, I have a lot of empathy for them, so we have to work with them to kind of figure out how to adjust to that sticker shock. Unfortunately, as Jim already just put us putting the pricing increases pushed by through by the Bank of Canada and general rate increases So certainly, we're not trying to take advantage of this and trying to help our customers. But obviously, we've got to price in the context of the market. So that's How that's working? I think the big takeaway from all of this when I read commentary around mortgage stress and so on So the balance sheet of households are still remarkably strong in Canada, and that covers up a lot of that's why these portfolios Holding up really well.

Speaker 6

So our customers that are renewing with us, despite the payment shock increases, have resources way beyond just the Current income, the incomes are going up too because of inflation. So we're seeing remarkable resilience here. And That story about the balance sheet of Canadian consumers is one that doesn't enter enough, I think, into the mortgage Stability dialogue and I think is I believe is really important.

Speaker 8

Okay. That's all I have. Thanks guys.

Operator

Your next question will come from Graham Ryding at TD Securities. Please go ahead.

Speaker 5

Hi, good morning. Maybe similar to David, it does feel like Austin is becoming a little more sensitive to liquidity And funding stress with some of their recent commentary. Are you expecting them to bring forward any changes on that front? And or similarly, are you making or expecting any proactive changes on your part towards holding more liquidity just given the market backdrop

Speaker 6

I would certainly expect that obviously it's going to be thinking more about liquidity every time there's always a lesson To learn from banking stresses and clearly the lesson about what's happened in the U. S. That we need to think about. As I mentioned, I do think there's structural differences in Canada that Make some of those lessons less relevant. We've always maintained strong liquidity.

Speaker 6

And as I mentioned, I think many should be surprised that we, for example, in We only take deposits of $200,000 for example. It's a pretty I haven't seen other banks kind of operating with that level of caution. So liquidity holding more liquidity can be somewhat helpful. Really, the issue is the structural way you're set up to make sure you can continue to access liquidity. The work that Chadwick and his team have done on covered bonds, the strength of the EQ Bank franchise as well as access To broker deposits, really wide access to broker deposits across the country, I think puts us in great stead.

Speaker 6

So Quarter to quarter, you'll see fluctuations in liquidity. A lot of that's based on the projections over the next 6 to 12 months in terms of Funding suite our expected fundings of assets and that kind of thing. So I don't but in general, we're not Thinking that we need to move our liquidity profile or risk appetite at all because we've always been conservative, it's always been my super having Having been in this bank when we went through the financial crisis, being through the issues in 2017, it's always been a highly elevated kind of risk factor that we think about in managing and running this bank.

Speaker 5

And for us to measure that, should we be looking at your liquidity as a percentage of your assets? Or is that Too blunt, Matoel.

Speaker 6

It's definitely too blunt. It's definitely unfortunately, there are certain metrics that we We're not the culture of the industry is that we shouldn't be revealing them that would be helpful to you, but we're not allowed to do that. We don't really allow to do that.

Speaker 3

So looking at that is a

Speaker 2

useful way to talk about it, Graham, and

Speaker 6

then I think we can talk you through it as well beyond that. But That's yes, I mean that is a way, but it doesn't really reflect some of the Seasonality and other things that you might see us setting up for that could be explanations for why liquidity is moving. We can always get more liquidity than we hold on the balance sheet. It's a question of judgment of how much We think appropriate given the way the business is shaping up.

Speaker 3

Yes. And you're one side too, Graham. Remember, so even when you look at the press release and the MD and A, we say we operate well in excess 100 percent LCR. That's always a good best point for you versus where the DCS operate. And we have some other liquidity measures that come out At least once a year like we had in Q4.

Speaker 3

And that liquidity measure you could expect is a haircut version of LCR and that was over 300% in Q4 that you would have seen in February. Then Andrew's points and the other disclosures of points around the insured aspect. So there's a few good measures that we had and how we reframed it in this quarter's D and A, I

Speaker 6

think it's worth checking out. I always like the bank to be like a sponge. If you actually go looking to squeeze liquidity out, there's a lot of liquidity there Under the hood. And so that's a more complex argument than some of these blunt ratios of how much HQLA we've got in hand.

Speaker 5

Okay, great. If I could jump to just some of the commercial reusing credit, just Wondering if there's anything sizable in there that you would maybe call out or just some color on the nature of those arrears and your comfort around No potential losses on that or limited losses.

Speaker 6

Ron, maybe you can Yes.

Speaker 2

I know you've been

Speaker 6

you don't deep dive in there.

Speaker 9

Yes. So thanks for the question, Grant. The commercial again, you go back to The levels of impaired that we have, I mean, I do like to point out that we're basically just approaching pre pandemic levels. And so I And the rest of the management team look at it as things have normalized. And so we're really operating with normal levels of impaired in that business.

Speaker 9

It's a number of accounts that You can count on one hand. And so we've got a very good view into all those, very good granularity. And it all goes back to what was said earlier on the call with respect to Origination LTVs, the ability to get in and understand these and having a lot of cushion. So while you do see a nominal increase In impaired, you don't see a corresponding increase in provisions on those because the view to working through them is You'll see a similar result to what you've seen from our historical results and working through those.

Speaker 6

Yes. I just walked through, I asked the team to pull all office files over 10 minute Walk through them kind of 1 by 1 and there's always things in every asset you have, but in general feel real comfortable enough to do that.

Speaker 5

Okay, great. And maybe one more if I could just construction loans, that seems like a higher risk area right now. It looks like you have $2,700,000 in your portfolio and it has been building. Is that you just Honoring previous commitments as opposed to actively deploying capital there. Is that what we're seeing?

Speaker 5

And is there anything insured in there?

Speaker 6

Yes, yes. There's a lot of it showed in that. That's a lot of that is insured by CMHC.

Speaker 3

Yes. That's of that $2,700,000,000 over a 1,000,000,000 would be the CMHC insurer. Right.

Speaker 6

Exactly. So that's obviously that's short against credit default and generally very high quality sponsors. So you can Knock $1,000,000,000 off that before you really sort of think about the number. We agreed with you in terms of generally that's an area that in an inflationary environment seems a That's why we actually kind of dialed back on construction lending through much of last year. We are starting to see more opportunity now that we believe The inflationary pressures on construction costs, well, still the inflationary pressure, but people get more confident on construction costs.

Speaker 6

Yes, that we think we're in pretty good shape on that construction lending. Generally, a lot of the time we're operating at relatively low LTVs on completed costs with other Parties behind us as well. So again, sort of double protected on the kind of LTV in that business.

Speaker 5

And are these multi unit apartment buildings or what's the future?

Speaker 6

The vast majority will be multi unit condos with presales.

Speaker 5

Okay. That's good for me. Thank you.

Operator

Your next question comes from Jaeme Gloyn at National Bank. Please go ahead.

Speaker 2

Hi, Jamie. Yes, thanks. Good morning.

Speaker 5

Just wanted to follow on that commercial loan growth theme. Conventional commercial loans look like they've

Speaker 6

I mean nothing particularly In terms of what drives that, don't forget, in that business, they're larger lumpy loans, so you get a few loans discharging And timing on funding new loans, you can end up with a bit of noise quarter to quarter. So that's I think that's the only explanation we can really provide on that.

Speaker 3

Yes. Remember the whole book as well. We have the higher level derecognition as well in the quarter. So that was going to be part of the overall And that's where you see the off balance sheet increase. So we have about $11,500,000 or so do you recognize off

Speaker 6

the balance sheet now too? I mean, to say what Kevjoke is saying there. So we have an insured a multi that's insured by CMHC sitting on our balance sheet and we rolled it to a package and sold it to the Canada Housing Trust, That may or may not usually would get derecognized so that it then comes off the balance sheet. So you really have to look at the total loans under management rather than the size of the balance sheet as well.

Speaker 3

That's right.

Speaker 5

Yes. I was thinking more on the mortgages, like the conventional side, and it sounds like there's nothing strategic there, just some

Speaker 9

lumpiness in that business rather than anything,

Speaker 5

where you're In that business rather than anything, where you're maybe more concerned about conventional commercial loans or otherwise, something like that.

Speaker 6

Yes. And just what I mentioned, when we stopped putting out new commitments for commercial loans through much of through construction loans much of last year, That obviously, we will continue to fund into those into the existing commitments and then some of those buildings got completed, they got discharged. Yes. So you're seeing some of that. I wouldn't expect that kind of erosion to prevail.

Speaker 6

We're busier now. We're Sort of more comfortable with all these asset classes that we are feeling a bit concerned about in the middle of last year. Understood.

Speaker 5

Still in the commercial side, I'm thinking about multi units. Do you have any initial thoughts or views Any potential impacts if the federal government decides to fold in CMB funding? Are there any impacts On that gain on sale line, I'm not thinking necessarily on liquidity for commercial loans, but more on that gain on sale line. Is there any Potential knock on effects from that?

Speaker 6

We don't know, frankly. That was a line item in the budget. So Those of you who are not following all that detail on the budget, there was a proposal or some thinking around consolidating the issuance of Canada Housing Trust Bonds into the General liabilities of the government of Canada with the view that, that might reduce overall funding costs. But entirely clear to us, frankly, is that, That would even that outcome would even be achieved. But there is some work going on in the back of Canada to think about that.

Speaker 6

Presumably, The needs and the overall strategic desire of the government to continue to fund multifamily buildings In the face of a shortage of housing, we should continue to create a good program. To date, we haven't heard much detail about that, but to very Engaged in how that might flow through and whether it might create some unintended consequences that we should be engaging with. I think it's way too early to say.

Speaker 5

Okay. Understood. And then last one from me is on the OpEx. It looks like OpEx this quarter increased more or quite a bit more than what just like an Month of Concentra would have implied. So hoping you could outline what are the some of those drivers that are driving that are Resulting in that larger increase.

Speaker 5

And is there anything seasonality wise, one timing, like marketing is coming off next quarter? Like how should we think about This level of OpEx at $120,000,000 in the quarter over the next few quarters.

Speaker 3

Yes. I don't actually think it's that surprising, James, when you do the math and the consensus. Last quarter was a little bit probably where you're struggling is just the math last quarter Of course, what was reported and adjusted, because we only actually when we carve out those integration costs, it's more on a bulk basis versus the line by line items. So you're probably just not seeing the line items with that level of detail. When you consider that, the noise of Q4 plus Ad Concentra and plus what I Mentioned in terms of the launches of the EQ Bank card, the MakeBank campaign, some of those investments in our digital bank, that's what you're seeing translating.

Speaker 3

I actually think the 45% efficiency ratio, so it's pretty solid given where we're at in the integration. And notwithstanding 60.9 percent ROE would be the paramount focus. So some of those trends, I think, that's the way to think about it for the quarter.

Speaker 5

Okay. Understood. Thank you. Thanks, Jeff.

Operator

Mr. Moore, there are no further questions. So I will turn the conference back to you for any closing remarks.

Speaker 2

Thank you, Michelle. As a reminder, we are hosting our Annual Meeting of Shareholders virtually on May 17th, and

Speaker 6

we encourage you to log on, participate and vote. Details can be found in our proxy circular including on our advisory vote for executive compensation. We included this vote as part of our Board's ongoing commitment to good governance, and I'm pleased that we've Received support for our approach from the 2 most prominent proxy advisory firms. Speaking directly to our institutional owners, I remind you that we find great value in direct engagement and encourage you to reach out at any time and not just during proxy season, but In closing, we look forward to reporting Q2 progress on August 1. Thank you for participating and have a great day.

Operator

Ladies and gentlemen, this does conclude your conference call for this morning. Again, we would like to thank you for participating and ask you to please disconnect your lines.

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EQB Q1 2023
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